Registration No.
--------------
SECURITIES AND EXCHANGE COMMISSION
----------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
eAcceleration Corp.
(Exact name of registrant as specified in its charter)
Delaware 7319 91-2006409
(State or other jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
1223 NW Finn Hill Road, Poulsbo, Washington 98730 - (360) 697-9260
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Clint Ballard
President and Chief Executive Officer
1223 NW Finn Hill Road
Poulsbo, Washington 98730
(360) 697-9260
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Neil M. Kaufman, Esq.
Kaufman & Moomjian, LLC
50 Charles Lindbergh Boulevard - Suite 206
Mitchel Field, New York 11553
(516) 222-5100
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price per unit aggregage Amount of
to be registered registered (1) offering price registration fee
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per 3,000,000 $6.25 $18,750,000 $5,213
share
<FN>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
</FN>
</TABLE>
================================================================================
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is declared effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 1999
--------------,
PRELIMINARY PROSPECTUS
[LOGO]
eAcceleration Corp.
3,000,000 Shares of Common Stock
This is an initial public offering of up to 3,000,000 shares of our common
stock.
We will be selling our shares in a direct offering on a "best efforts,
400,000 share minimum, 3,000,000 share maximum" basis. The shares will be sold
by our officer and directors. No one has agreed to buy any of our shares, and
there is no assurance that any sales will be made. Prospective investors must
purchase the shares in increments of 100 shares. Until we have sold at least
400,000 shares, we will not accept subscriptions for any shares. All proceeds of
this offering will be deposited in a non-interest bearing escrow account. We
have the right to accept or reject any subscriptions for shares offered hereby
in whole or in part. The offering will remain open until all shares offered
hereby are sold or nine months after the date of this prospectus, unless we
decide to cease selling efforts prior to such date.
Prior to this offering, there has been no public market for the shares, and
it is possible that no such trading will commence for a substantial period of
time after the first closing of this offering. We plan to apply for the approval
of the shares for quotation on the Nasdaq SmallCap Market or Nasdaq National
Market under the symbol EACE, but there is no assurance that the shares will be
listed on Nasdaq. We estimate that the initial public offering price will be
$6.25 per share. The price of the shares has been determined solely by us, and
does not bear any direct relationship to our assets, operations, book value or
other established criteria of value.
----------------
An electronic format of this prospectus is available on our Internet World Wide
Web site at http://www.eAcceleration.com.
----------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. YOU SHOULD CAREFULLY READ AND CONSIDER THE "RISK FACTORS,"
COMMENCING ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
DETERMINING WHETHER TO PURCHASE ANY OF THE SHARES.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
Price Per Share Underwriting Discounts Proceeds to
to Public and Commissions (1) Us (2)
<S> <C> <C> <C> <C>
Minimum (3) $6.25 - $2,500,000
Maximum (4) $6.25 - $18,750,000
<FN>
(1) Our officers and directors are offering the shares for sale. If one or more
underwriters or broker-dealers are used, of which there can be no
assurance, discounts or commissions are not anticipated to exceed 10% of
the offering price.
(2) Before deducting offering expenses payable by us estimated at $300,000.
(3) Assuming the minimum number of 400,000 shares are sold in this offering.
(4) Assuming the maximum number of 3,000,000 shares are sold in this offering.
</FN>
</TABLE>
The date of this Prospectus is 1999
-------------,
<PAGE>
The following graph illustrates our Internet business model, depicting our
Internet advertising and marketing customers, our websites and our website
visitors:
[Graphic representation of the relationship between (a) Online Media Buyers
and Merchants, (b) HomepageSales.com, DownloadSales.com, HomePageware.com,
ClickSales.com and SignSales.com and (c) Internet Users]
The following graph illustrates the 1999 Internet growth of our
homepage subscribers and unique visitors to our websites:
[Graph depicting our 1999 homepage subscriber growth as follows:
February (620,000), March (957,000), April (1,636,000), May (1,315,000),
June (1,384,000), July (1,778,000) and August (2,333,000);
and graph depicting 1999 growth of unique visitors to our websites;
February (828,000), March (1,084,000), April (1,970,000),
May (1,947,000), June (2,313,000), July (3,416,000) and August (4,181,000)]
2
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS AND IN ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU
WITH DIFFERENT INFORMATION.
THE SECURITIES ARE NOT BEING OFFERED IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED.
YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF SUCH
DOCUMENTS.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form SB-2 under the
Securities Act that we filed with the Securities and Exchange Commission with
respect to the shares of common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedule filed therewith. For further information
about us and the shares offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed therewith. A copy of
the registration statement and the exhibits and schedules filed therewith may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W.,Washington, D.C. 20549, and copies of
all or any part of the registration statement may be obtained from such office
upon the payment of the fees prescribed by the SEC and at the SEC regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Please call the SEC at 1-800-SEC-0330 for further
information about its public reference room. The SEC maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the SEC. The Internet address of the website is http://www.sec.gov. Our
registration statement and the exhibits and schedules we filed electronically
with the SEC are available on this site.
As of the date of this prospectus, we will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and we will file reports and other information with the SEC. Such reports and
other information can be inspected and/or obtained at the locations and website
set forth above.
FORWARD LOOKING STATEMENTS
This prospectus includes "forward-looking statements". These statements
involve known and unknown risks, uncertainties and other factors which could
cause actual results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements not to occur or be
realized. Such forward-looking statements generally are based upon our best
estimates of future results, performance or achievement, based upon current
conditions, and the most recent results of operations. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "believe," "estimate," "anticipate," "continue," or
similar terms, variations of those terms or the negative of those terms.
Potential risks and uncertainties include among other things, such factors as:
- - the overall growth of Internet usage,
- - the growth of Internet commerce, marketing and advertising,
- - the market acceptance and amount of sales of our products and services,
- - the competitive environment within the Internet marketing and advertising
industries and the computer software industry,
- - our ability to maintain or increase our market share of Internet
advertising and marketing,
- - unforeseen operational difficulties and financial losses due to year
2000 computer problems, the cost-effectiveness of the our product
development activities,
- - the other factors and information disclosed and discussed under "Risk
Factors" and in other sections of this prospectus.
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, we do not assume responsibility
for the accuracy or completeness of the forward-looking statements after the
date of this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this prospectus. Because it is a summary, it does not contain all
of the information you should consider before making an investment decision. You
should read the entire prospectus carefully, including the sections titled "Risk
Factors," "Management Discussion and Analysis", "Management" , and "Related
Party Transactions" and the financial statements and the notes relating to the
financial statements. In this prospectus, we are assuming the effectiveness of
the merger of our operating subsidiary, Acceleration Software International
Corporation, into eAcceleration Corp., which will occur prior to the initial
closing under this offering and we have adjusted the number of outstanding
options accordingly. Unless otherwise indicated or the context otherwise
requires, we will refer to eAcceleration Corp. and Acceleration Software
International Corporation collectively as "eAcceleration", "we", "us" or "our".
eAcceleration
We are a provider of online direct marketing services, advertising
solutions and proprietary software. We combine Internet-based direct marketing
and advertising services with programs that reward consumers with free software
when they use our designated homepage as their Internet browser's starting page.
These online incentive programs are intended to provide flexible,
incentive-marketing solutions for our Internet advertising and marketing
clients. Our payment structure, in which our Internet advertising and marketing
clients are only charged when our website visitors execute specific predefined
actions, provides these clients with a known cost to achieve the desired
response to their advertising campaigns. We intend to leverage our developing
homepage subscriber base and our targeting capabilities to offer our clients
customized, targeted advertising solutions designed to improve advertisement
response rates and reduce their cost of acquiring new customers. According to
Nielsen Media Research/Net Rating, we had the number one most "clicked-on"
advertising banner on the Internet during the week of July 12 - 18, 1999.
According to PC Data Online, we were the 42nd most popular web property on the
Internet in July 1999, the 54th most popular web property on the Internet in
August 1999 and the 92nd most popular property on the Internet in September
1999.
We initially provided crisis intervention computer software programing
services in the Silicon Valley region of California. We became a leading
provider of SCSI software services and developed a library of SCSI software
solutions that we sold to the Microelectronics Products Division of NCR
Corporation in 1992. After relocating to Kitsap County, Washington, in the Puget
Sound area in 1992, we developed d-Time, a software product that accelerated the
performance of CD-ROM drives, which by 1995 became a top 100 software title in
the U.S., according to PC Data Online, and a top 20 software title in Japan. As
the need for CD-ROM performance acceleration declined in light of the rapid
increase in CD-ROM drive speed, we developed Superfassst, a hard drive
performance acceleration product. Superfassst won the Best of COMDEX finalist
award at the Fall 1996 COMDEX in the Utility Software category. As the Internet
revolution developed, we developed Webcelerator, a software product which
accelerated the performance of web browsers. We have also developed several
additional software products. See "BUSINESS-Products."
In 1996, we also began developing our Internet business model, pursuant to
which we provide certain of our software products, as well as certain third
party products, free on our websites to visitors who agree to use one of our
websites, homepageware.com, as their Internet browser's starting page. This
generates significant traffic to our homepageware websites, allowing us to sell
pay-for-performance Internet advertising to Internet advertising and marketing
clients. We allow these clients to cancel their Internet advertising programs
within a two-week trial period at no cost. Historically, over 70% of our
Internet advertising and marketing clients renew advertising commitments to us,
and less than 20% of our Internet advertising and marketing clients cancel their
Internet advertising programs within the two-week free trial period.
Our Internet business model has resulted in the increase in unique visitors
to our websites from approximately 800,000 in February 1999 to over 4 million in
August 1999, and has generated profitable operations.
We were initially incorporated in 1987 as Ballard Synergy Corporation, a
Nevada corporation, and merged with a Washington corporation in 1995 and changed
our name to Acceleration Software International Corporation in 1996. In November
1999, we formed eAcceleration, a Delaware corporation, which is our parent
company. Prior to the first closing under this offering, we plan to merge
Acceleration Software International Corporation into eAcceleration and remain a
Delaware corporation. Our principal executive offices are located at 1223 NW
Finn Hill Road, Poulsbo, Washington; telephone: (360) 697-9260; fax: (360)
598-2450; corporate website: www.eAcceleration.com.
4
<PAGE>
The Offering
Shares Offered. . . . . . . . . . . Common Stock, par value $.0001 per share.
Minimum . . . . . . . . . . . . 400,000 shares
Maximum . . . . . . . . . . . . 3,000,000 shares
Price Per Share. . . . . . . . . . . $6.25
Shares Outstanding After Offering
Minimum . . . . . . . . . . . . 34,700,000 shares
Maximum . . . . . . . . . . . . 37,300,000 shares
Use of Proceeds. . . . . . . . . . . We plan to use the proceeds from this
offering for the following purposes:
- development,
- marketing and advertising,
- additional personnel,
- insurance,
- additional facilities,
- equipment,
- software, and
- working capital and general corporate
purposes.
See "Use of Proceeds".
Proposed Symbol for Common Stock
on the Nasdaq Small Cap Market or
Nasdaq National Market(1) . . . . . EACE
Risk Factors. . . . . . . . . . . . Purchase of shares of common stock being
offered hereby involves a significant
degree of risk, including risks
associated with, but not limited to
the following:
- the majority of our Internet
advertising contracts have
month-to-month terms,
- we have intense competition,
- we depend heavily on key personnel,
- a small number of customers account
for a large percentage of our
revenues,
- we are counting on a significant
growth in the Internet advertising
industry,
- our ability to adapt to rapid changes
in the Internet Advertising industry,
- our ownership is concentrated among
insiders, and
- there will be immediate and
substantial dilution of the net
tangible book value of shares as a
result of this offering.
See "Risk Factors".
- ----------------
(1) We plan to apply for quotation of the common stock on the Nasdaq
SmallCap Market or Nasdaq National Market; however, there can be no
assurance that the common stock will be approved for quotation or that the
we will be able to continue to meet the requirements for continued
quotation, that a public trading market will develop or that if such
market develops, it will be sustained. See "Risk Factors -- We May Never
Become Listed on Nasdaq or We May Become Delisted".
5
<PAGE>
Summary Financial Information
<TABLE>
<CAPTION>
Year Ended December 31, Eight Months Ended August 31,
1997 1998 1998 1999
(unaudited)
Statements of Income Data:
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . $ 1,840,761 $1,919,149 $ 1,628,162 $2,331,610
Costs and Expenses:
Software Development and Products . . . . 1,192,728 919,895 544,911 557,965
Sales and Marketing . . . . . . . . . . . 51,459 369,336 94,934 1,016,986
General and Administrative. . . . . . . . 353,972 305,071 201,791 399,556
Reduction of Reserves for Claims. . . . . (183,554) (28,542) (28,542) -
----------- ---------- ----------- ----------
Total Expenses $ 1,414,605 $1,565,760 $ 813,094 $1,974,507
----------- ---------- ----------- ----------
Income from operations 426,156 353,389 815,068 357,103
Other Income, Net . . . . . . . . . . . . . . 625,187 (1) 43,092 41,413 3,257
----------- ---------- ----------- ----------
Net Income. . . . . . . . . . . . . . . . . . $ 1,051,343 (1) $ 396,481 $ 856,481 $ 360,360
=========== ========== =========== ==========
Basic and Diluted Earnings Per Share. . . . . $ .03 $ .01 $ .02 $ .01
=========== ========== =========== ==========
Pro Forma Financial Data (2):
Pro Forma Net Income . . . . . . . . . . $ 261,677 $ 237,838
========== ==========
Pro Forma Basic and Diluted
Earnings Per Share. . . . . . . . . . . . . . $ .01 $ .01
========== ==========
Balance Sheet Data:
At August 31, 1999 (unaudited)
Actual As Adjusted
Minimum (3) Maximum (4)
Current Assets. . . . . . . . . . . . . . . . . . . . . . . . $ 771,763 $ 2,499,839 $ 18,749,839
Property and Equipment. . . . . . . . . . . . . . . . . . . . 70,899 70,899 70,899
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . 938,639 2,666,715 18,916,715
Current Liabilities . . . . . . . . . . . . . . . . . . . . . 440,225 440,225 440,225
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . 498,414 2,226,490 18,476,490
- ---------------
<FN>
(1) Includes $616,728 gain in connection with the settlement of a legal dispute
in 1997.
(2) Reflects income tax expense of $134,804 and $122,522, assuming we were
taxed as a C-Corporation instead of as a pass-through entity as provided
under Subchapter S corporation status. See Notes to Financial Statements.
(3) Assumes (a) minimum offering of $2,500,000 completed, net of $300,000 in
costs and (b) distribution of accumulated earnings of $471,924 at
August 31, 1999 to existing shareholders immediately prior to the first
closing of this offering.
(4) Assumes (a) maximum offering of $18,750,000 completed, net of $300,000
in costs and (b) distribution of accumulated earnings. See Note (3) above.
</FN>
</TABLE>
6
<PAGE>
RISK FACTORS
The shares offered in this prospectus are speculative and involve a high
degree of risk. Only those persons able to lose their entire investment should
purchase any of the shares. Prior to making an investment decision, you should
carefully read this prospectus and consider, along with other matters referred
to herein, the following risk factors.
We Will Face Risks Encountered by Small Companies in Internet-Related
Businesses and May be Unsuccessful in Addressing these Risks
We face risks frequently encountered by small companies in new and rapidly
evolving markets, including the market for online advertising and direct
marketing. We may not succeed in addressing these risks, and our business
strategy may not be successful. These risks include uncertainties about our
ability to:
- attract a larger number of consumers to our websites;
- sign up new Internet advertising and marketing clients;
- add new and compelling content to our websites;
- manage our expanding operations;
- adapt to potential decreases in online advertising rates;
- successfully introduce new products and services;
- continue to develop and upgrade our technology and to minimize
technical difficulties and system downtime;
- create and maintain the loyalty of our Internet advertising and
marketing clients and website subscribers and visitors;
- develop new strategic relationships and alliances; and
- attract, retain and motivate qualified personnel.
It is Difficult to Predict Our Future Performance
Our operating history makes predicting our future performance difficult and
does not necessarily provide investors with a meaningful basis for evaluating an
investment in our common stock. Although we began operations in 1987, we did not
begin generating any significant revenue from Internet advertising and marketing
until 1999. As a result, our performance since January 1999 is not comparable to
prior periods. Moreover, we have never operated during a general economic
downturn in the United States, which typically adversely affects advertising and
marketing expenditures.
The Majority of Our Internet Advertising Contracts have Month-to-Month
Terms, and the Loss of a Significant Number of these Contracts in a Short Period
of Time Could Harm our Business
As of August 31, 1999, over 90% of our Internet advertising contracts could
be terminated by either party with several days notice. The loss of a
significant number of these contracts in any one period would result in an
immediate and significant decline in our revenues and cause our business to
suffer.
The Loss of the Services of any of our Executive Officers or Key Personnel
would Likely Harm Our Business
Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Clint Ballard, our President
and Chief Executive Officer, Diana T. Ballard, our Chairman of the Board, and
other key employees, including our technical and sales personnel. The loss of
the services of any of
7
<PAGE>
these individuals could harm our business. We may be unable to attract,
motivate and retain other key employees in the future. Competition for employees
in our industry is intense, and in the past we have experienced difficulty in
hiring qualified personnel.
An Increase in the Number of Visitors to Our Websites May Strain Our
Systems, and We are Vulnerable to System Malfunctions
Any serious or repeated problems with the performance of our websites could
lead to the dissatisfaction of subscribers or our Internet advertising and
marketing clients. The amount of traffic on our websites have increased over
time to approximately four million unique visitors in August 1999, and we are
seeking to further increase traffic. The systems that support our websites must
be able to accommodate an increased volume of traffic. Although we believe our
systems can currently accommodate approximately 25 million visitors monthly, our
websites could encounter a variety of systems problems, including failure of one
or more of our three Internet service providers, hardware failures and failure
of software applications. If these problems occurred during a weekend, detection
and correction could be delayed. Such problems could have a material adverse
effect on our business. See "Business -- Technology and Infrastructure."
We Face Intense Competition from Marketing-Focused Companies for Internet
Advertiser and Marketer Clients and may be Unable to Compete Successfully
We may be unable to compete successfully with current or future
competitors. We face intense competition from many companies, both traditional
and online, to provide advertising and marketing services for our Internet
advertising and marketing clients. Among the free-offer websites, our primary
competitors include Winfiles.com, Download.com, Shareware.com, Volition.com and
Free2Try.com. Among the specialty lead-generation websites, our competition
includes eNews, Cataloglink and Catalogcity. Additionally, we believe that the
primary competitors for our software products are Microsoft Corporation, Web
3000, Bonzi Software, Symantec, Network Associates, Real Networks, Nico Mak
Computing, Inc. and Aureate Software. We expect competition from online
competitors to increase significantly because there are no substantial barriers
to entry in our industry. Increased competition could result in price reductions
for online advertising space and marketing services, reduced gross margins and
loss of our market share.
Many of our existing competitors, as well as a number of potential new
competitors, have greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than us.
These advantages may allow them to respond more quickly and effectively to new
or emerging technologies and changes in customer or client requirements. It may
also allow them to engage in more extensive research and development, undertake
farther-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential employees, strategic partners and
advertisers. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products or services to address the needs of
our prospective Internet advertising and marketing clients.
Online advertising and marketing is a rapidly developing industry, and new
types of products and services may emerge that are more attractive to consumers
and Internet advertiser and marketers than the types of services we offer. As a
result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
See "Business -- Competition."
If Our Customers Request Products and Services Directly From Our Marketer
Clients Instead of Requesting the Product or Service from Us, Our Business could
Suffer
Our Internet advertiser and marketer clients may offer similar free
products or services on their own websites that we offer on our websites. Our
customers may choose to request products or services directly from our Internet
advertiser and marketer clients instead of requesting the product or service
from us, which would result in lower revenues to us and cause our business to
suffer.
8
<PAGE>
Uncertain Protection of Intellectual Property, Risks of Third-Party Licenses.
We regard our patents, copyrights, service marks, trademarks, trade dress,
trade secrets, and similar intellectual property as critical to our success, and
rely on patent, trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with employees, customers, partners
and others to protect our proprietary rights. We hold nine patents, including
one foreign patent, and have ten patent applications pending. We hold several
trademarks and service marks in the United States. We may not seek or achieve
effective trademark, service mark, copyright and trade secret protection in
every country in which the our products and services are made available online.
There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate or that third parties will not infringe or
misappropriate our patents, copyrights, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims, including patent infringement claims, in
which case we may have to defend or protect our patents at significant cost.
If Third Parties Acquire Domain Names that are Similar to our Domain Names,
they could Decrease the Value of our Trademarks and Take Customers Away from our
Website
We currently hold many Internet domain names including eAcceleration.com,
homepageware.com, clicksales.com, downloadsales.com, signupsales.com and
freebranding.com. We may be unable to prevent third parties from acquiring
similar domain names, which could reduce the value of our trademarks,
potentially weaken our brand names and take customers away from our website.
Domain names generally are regulated by Internet regulatory bodies. The
regulation of domain names in the United States and in foreign countries is
evolving. Regulatory bodies could establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for holding
domain names. The relationship between regulations governing domain names and
laws protecting trademarks and similar intellectual property rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain names
that infringe on, or otherwise decrease the value of, our trademarks and other
intellectual property rights. Additionally, there may be online companies in
other countries using domain names that potentially infringe on our trademarks.
We may be unable to prevent them from using these domain names, and this use may
decrease the value of our trademarks and our brand names.
Security and Privacy Breaches could Subject us to Litigation and Liability
and Deter Consumers from Using our Websites
Although we do not currently accept credit card information from any third
parties, we may do so in the future. In such event, we could be subject to
litigation and liability if third parties penetrate our network security or
otherwise misappropriate our users' personal or credit card information. This
liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims. It could also include
claims for other misuses of personal information, such as for unauthorized
marketing purposes. In addition, the Federal Trade Commission and other federal
and state agencies have been investigating various Internet companies in
connection with their use of personal information. We could be subject to
investigations and enforcement actions by these or other agencies.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Many marketers seek to offer their products and services on our websites because
they want to encourage people to use the Internet to purchase their goods or
services. Internet security concerns could frustrate these efforts. Also, our
relationships with consumers may be adversely affected if the security measures
we use to protect their personal information prove to be ineffective. We cannot
predict whether events or developments will result in a compromise or breach of
the technology we use to protect customers' personal information. We have no
insurance coverage for these types of claims.
Furthermore, our computer servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against
9
<PAGE>
a security breach or to alleviate problems caused by any such breaches. We
may be unable to prevent or remedy all security breaches. If any of these
breaches occur, we could lose Internet advertising and marketing clients and
visitors to our websites.
If the Acceptance of Internet Advertising and Direct Marketing does not
Continue to Increase, Our Business will Suffer
The demand for Internet advertising and marketing may not develop to a
level sufficient to support our continued operations or may develop more slowly
than we expect. We expect to derive a large percentage of revenues from
contracts with clients under which we provide Internet advertising and marketing
services through our websites, homepageware.com, downloadsales.com,
clicksales.com and signupsales.com. The Internet has not existed long enough as
a marketing medium to demonstrate its effectiveness relative to traditional
marketing methods. Marketers that have historically relied on traditional
marketing methods may be reluctant or slow to adopt Internet marketing. Many
marketers have limited or no experience using the Internet as a marketing
medium. In addition, marketers that have invested substantial resources in
traditional methods of marketing may be reluctant to reallocate these resources
to Internet marketing. Those companies that have invested a significant portion
of their marketing budgets in Internet marketing may decide after a time to
return to more traditional methods if they find that Internet marketing is a
less effective method of promoting their products and services than traditional
marketing methods.
We do not know if accepted industry standards for measuring the
effectiveness of Internet marketing will develop. An absence of accepted
standards for measuring effectiveness could discourage companies from committing
significant resources to Internet marketing. There are a variety of pricing
models for marketing on the Internet. We cannot predict which, if any, will
emerge as the industry standard. Absence of such a standard makes it difficult
to project our future pricing and revenues.
Email marketing is also vulnerable to potential negative public perception
associated with unsolicited email, known as "spam." Although we do not send
unsolicited email, public perception, press reports or governmental action
related to spam could reduce the overall demand for email.
Dependence on Increased Usage and Stability of the Internet and the Web
The usage of the Web for services such as those we offer will depend in
significant part on continued rapid growth in the number of households and
commercial, educational and government institutions with access to the Internet,
in the level of usage by individuals and in the number and quality of products
and services designed for use on the Internet. Because usage of the Internet as
a source for information, products and services is a relatively recent
phenomenon, it is difficult to predict whether the number of users drawn to the
Internet will continue to increase and whether any significant market for usage
of the Internet for such purposes will continue to develop and expand. There can
be no assurance that Internet usage patterns will not decline as the novelty of
the medium recedes or that the quality of products and services offered online
will improve sufficiently to continue to support user interest. Failure of the
Internet to stimulate user interest and be accessible to a broad audience at
moderate costs would jeopardize the markets for our services.
Moreover, issues regarding the stability of the Internet's infrastructure
remain unresolved. The rapid rise in the number of Internet users and increased
transmission of audio, video, graphical and other multimedia content over the
Internet has placed increasing strains on the Internet's communications and
transmission infrastructures. Continuation of such trends could lead to
significant deterioration in transmission speeds and reliability of the Internet
and could reduce the usage of the Internet by businesses and individuals. In
addition, to the extent that the Internet continues to experience significant
growth in the number of users and level of use without corresponding increases
and improvements in the Internet infrastructure, there can be no assurance that
the Internet will be able to support the demands placed upon it by such
continued growth. Any failure of the Internet to support such increasing number
of users due to inadequate infrastructure or otherwise would seriously limit the
development of the Internet as a viable source of local interactive content and
services, which could materially and adversely affect the
10
<PAGE>
acceptance of our services, which would, in turn, materially and adversely
affect our business, financial condition and results of operations.
If We are Unable to Adapt to Rapid Changes in the Internet
MarketingIndustry, Our Business will Suffer
Internet marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.
Short Product Life Cycles May Adversely Affect Revenues
From time to time we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. Such announcements of currently planned or
other new products may cause certain customers to defer purchasing our existing
products.
We Face Risks from Potential Government Regulation and Other Legal
Uncertainties Relating to the Internet
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in use of the Internet and reduce the demand for our services.
Recently, Congress enacted legislation regarding children's privacy on the
Internet. Additional laws and regulations may be proposed or adopted with
respect to the Internet, covering issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. The passage
of legislation regarding user privacy or direct marketing on the Internet may
reduce demand for our services or limit our ability to provide customer
information to marketers. Furthermore, the growth of electronic commerce may
prompt calls for more stringent consumer protection laws. For example, the
European Union recently adopted a directive addressing data privacy that may
result in limits on the collection and use of consumer information. The adoption
of consumer protection laws that apply to online marketing could create
uncertainty in Internet usage and reduce the demand for our services.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Our services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Our failure to qualify in any
such jurisdictions if we were required to do so could subject us to taxes and
penalties and could restrict our ability to enforce contracts in those
jurisdictions.
We Will Have Broad Discretion in the Use of the Net Proceeds from this
Offering, and there is a Risk that We Might Use them Ineffectively
We will have broad discretion over how we use the net offering proceeds,
and we could spend the proceeds in ways with which you might not agree. We
cannot assure you that we will use these proceeds effectively. We plan to use
the proceeds from this offering for development, marketing, insurance,
leaseholds, hiring and working capital and general corporate purposes. We have
not definitively determined how we will allocate proceeds among these uses,
particularly in the event that more than the minimum amount is raised in this
offering. Our business strategy includes possible growth through acquisitions,
and we may use a substantial portion of the offering proceeds to buy businesses
we have not yet identified. See "Use of Proceeds."
11
<PAGE>
We May Only Sell the Minimum Number of Shares
We can have a closing and accept subscriptions for the sale of shares to
investors if at least 400,000 shares have been sold, which is the minimum number
of shares that may be sold in this offering. In the event such minimum amount,
or any amount which is significantly less that the maximum amount of 3,000,000
shares offered in this offering are sold, we may not be able to develop our
products and services and increase our market share in markets in which we
compete as aggressively as if more shares were sold. See "Use of Proceeds".
Immediate Dilution
Purchasers of the shares being sold in the offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. See "Dilution."
The Common Stock has no Prior Market, and We Cannot Predict When or Whether
an Active Trading Market Will Develop
There has not been a public market for our common stock. We are not sure
when the common stock will start trading, and this may not occur until well
after the first closing of this offering. We could decide not to facilitate the
commencement or continuation of a trading market for the common stock for an
extended period. We cannot predict the extent to which investor interest in our
common stock will lead to the development of an active trading market or how
liquid that market might become.
The Price of our Common Stock after this Offering is likely to be Volatile and
May Fall Below the Initial Public Offering Price
The stock market has experienced significant price and volume fluctuations,
and the market prices of securities of Internet-related companies have been
particularly volatile. Investors may be unable to resell their shares at or
above the initial public offering price. In the past, companies that have
experienced volatility in the market price of their stock have been subject to
securities class action litigation. A securities class action lawsuit against us
could result in substantial costs and a diversion of management's attention and
resources.
Litigation and Potential Litigation May be Costly and/or Time-Consuming
Our competitors and potential competitors may resort to litigation as a
means of competition. Any litigation involving us, whether as plaintiff or
defendant, regardless of the outcome, may result in substantial costs and
expenses to us and significant diversion of effort by our management and
technical personnel. In the event of an adverse result in any such litigation,
we could be required to:
- expend significant resources to develop non-infringing technology,
- obtain licenses to the technology which is the subject of the
litigation on terms not advantageous to us,
- pay damages, and/or
- cease the use of any infringing technology.
There can be no assurance that we would be successful in such development,
that any such licenses would be available and/or that we would have available
funds sufficient to satisfy any cash awards.
We May Face Litigation and Liability for Information Displayed on Our Websites
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement and various other claims relating to the nature and
content of materials we publish on our websites. These types of
12
<PAGE>
claims have been brought, sometimes successfully, against online services
in the past. We could also face claims based on the content that is accessible
from our websites through links to other websites. Any litigation arising from
these claims would likely result in substantial costs and diversion of resources
and management attention, and an unsuccessful defense to one or more such claims
could result in material damages. We have no insurance coverage for these types
of claims.
Existing Shareholders Will be Able to Exercise Control of Our Common Stock
and May Make Decisions that are Not in the Best Interests of All Shareholders
Insider control of a large amount of our common stock could have an adverse
effect on the market price of our common stock. At the completion of this
offering Clint Ballard, our President and Chief Executive Officer and Diana T.
Ballard, our Chairman of the Board, will in the aggregate beneficially own
approximately 92.0% of the outstanding shares of our common stock (in the event
the maximum number of shares offered in this offering are sold), or 98.9% of the
outstanding shares of our common stock (in the event the minimum number of
shares offered in this offering are sold). Accordingly, Clint and Diana Ballard
will be able to control the election of directors and all other matters subject
to stockholder votes. This concentration of ownership may have the effect of
delaying or preventing a change of control of eAcceleration, even if this change
of control would benefit shareholders.
No Assurance of Profitability
We may experience operating losses as we develop, produce and distribute
additional products and services, de-emphasize other products and services and
continue to develop our business. As a result, we may not be able to maintain
our historical profitability.
We Cannot Ascertain the Effect of Our Profitability on Our Market Capitalization
Many capital market participants, including investors, underwriters, market
makers and other broker-dealers appear to place significant value on large
operating losses that are generated by Internet companies that are in the
process of capturing market share. Even though we have captured what we believe
is a significant market share in the Internet advertising and marketing industry
while maintaining our profitability, there is no assurance that the investment
community will appropriately recognize our value, and this may negatively affect
the price of our stock price.
Uncertainty of Additional Financings
We may be required to raise additional funds after this offering. If
additional funds are raised through the issuance of equity securities, you may
experience significant dilution. Furthermore, there can be no assurance that
additional financing will be available when needed or that if available, such
financing will include terms favorable to us or our stockholders. If such
financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our services, take advantage of
business opportunities or respond to competitive pressures, any of which could
have a material adverse effect on our business, financial condition and results
of operations. See "Management's Discussion and Analysis--Liquidity and Capital
Resources."
Low Barriers to Entry
The market for Internet-based products and services is relatively new,
intensely competitive and rapidly evolving. There are minimal barriers to entry,
and current and new competitors can launch new Internet sites at a relatively
low cost within relatively short time periods. Accordingly, we expect
competition to persist and intensify and the number of competitors to increase
significantly in the future. We cannot assure you that our websites will compete
successfully.
13
<PAGE>
Risks Associated with Offering New Business and Consumer Services
We expect to introduce new and expanded services in order to generate
additional revenues, attract more businesses, advertisers, subscribers,
consumers and respond to competition. We also may in the future offer expanded
services facilitating the purchase of goods by consumers from our business
customers or others. There can be no assurance that we will be able to offer new
products or services in a cost-effective or timely manner or that any such
efforts would be successful. Furthermore, any new service that we launch that is
not favorably received by consumers could damage our reputation or our brand
names. Expansion of our services in this manner would also require significant
additional expenses and development and may strain our management, financial and
operational resources. Our inability to generate revenues from such expanded
services sufficient to offset their cost could have a material adverse effect on
our business, financial condition and results of operations.
If We are Unable to Strengthen Our Brand Names, We May be Unable to Compete
Effectively Against Competitors with Greater Brand Name Recognition
We have not historically emphasized and have no current plans to
significantly attempt to strengthen our brand names. As competitive pressures in
the online direct marketing industry increase, brand name strength may become
increasingly important. If we do not strengthen our brand names, we may be
unable to maintain or increase traffic to our websites, which would be expected
to lead to decreased revenues from our Internet advertising and marketing
clients. We may in the future devote substantial resources to promote
"eAcceleration" or other brand names. The reputation of our brand name will
depend on our ability to produce high quality innovative software, and to
provide a high-quality online experience for consumers visiting our websites or
receiving our newsletters. Negative experiences of subscribers, consumers or
Internet advertisers and marketers with our websites or software might result in
publicity that could damage our reputation and diminish the strength of our
brand names.
If We Cannot Develop or Secure Sufficient Promotional Offers our Business
may Suffer
If we are unsuccessful in developing, acquiring and renewing a continuing
array of free promotional offers for our website, traffic on our websites would
likely decrease. The attractiveness of our websites to consumers is based in
part on our ability to provide compelling free software offers of interest to
consumers. In addition, a number of other websites give consumers access to
similar offers. We face competition for free, trial and promotional offers from
these websites as well as a variety of other online and traditional competitors.
Without sufficient variety and quality of offers, our websites will become less
attractive to consumers, and thus advertising on them would become less
attractive to Internet advertisers and marketers, and our ability to generate
revenue from Internet advertising and marketing clients would be expected to be
adversely affected.
Volatility of Stock Prices
The market for the common stock is highly volatile. The trading price of
the common stock could be subject to wide fluctuations in response to, among
other things:
- quarterly variations in operating and financial results,
- announcements of technological innovations or new products by us or
our competitors,
- changes in prices of our products and services or our competitors'
products and services,
- changes in product mix,
- changes in our revenue and revenue growth rates, and
- response to our strategies concerning software and the Internet
marketing and advertising.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market in which we do
business or relating to us could result in an immediate and adverse
14
<PAGE>
effect on the market price of the common stock. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations
which have particularly affected the market price for the securities of many
software and Internet companies and which often have been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the common stock.
Our Quarterly Operating Results are Uncertain and May Fluctuate
Significantly, Which Could Negatively Affect the Value of Your Investment
Our quarterly results of operations have varied in the past and are likely
to vary significantly from quarter to quarter. A number of factors are likely to
cause these variations, some of which are outside of our control. These factors
include:
- changes in revenue levels resulting from the advertising and marketing
budget cycles of individual advertisers and marketers;
- changes in advertising and marketing costs that we incur to attract
and retain homepage subscribers;
- changes in our pricing policies, the pricing policies of our
competitors or the pricing policies for Internet advertising and
marketing generally;
- our rate of subscriber acquisition and the level of activity of new
and existing subscribers and other visitors to our websites;
- the number and type of programs and development contracts established
with our Internet advertising and marketing clients;
- the introduction of new products and services by us or by our
competitors;
- unexpected costs and delays resulting from the expansion of our
operations; and
- the occurrence of technical difficulties or unscheduled system
downtime.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of Internet advertising and marketing, which are
typically higher during the fourth calendar quarter and lower in the following
quarter, though our results of operations are not expected to be a direct
function of these fluctuations. In addition, expenditures by Internet
advertisers and marketers tend to be cyclical, reflecting overall economic
conditions and consumer buying patterns. Consequently, our results of operations
could be harmed by a downturn in the general economy or a shift in consumer
buying patterns.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful and you should not
rely upon them as an indication of our future performance. Our operating
expenses are based on expected future revenues and are relatively fixed in the
short term. If our revenues are lower than expected, we could be adversely
affected. In addition, during certain future periods our operating results
likely will fall below the expectations of public market analysts and investors.
In this event, the market price of our common stock likely would decline. See
"Management's Discussion and Analysis."
Product Defects Could Delay or Prevent Market Acceptance of New or Upgraded
Software Products
Software products and websites as complex as those that we offer may
contain undetected errors or failures when first introduced or as new versions
are released. Despite testing internally or by current or potential customers,
errors may be found in new products after commencement of commercial delivery,
resulting in loss of or delay in market acceptance.
15
<PAGE>
Although we have a number of ongoing development projects, the following
risks still exist:
- development may not be completed successfully on time or within
our projected cost,
- projects may not include the features required to achieve
market acceptance, and
- enhancements to our products may not keep pace with
broadening market requirements.
Software Product Returns and Difficulties in the Collection of Accounts
Receivable Could Result in Reductions in Cash Flows
Some of our sales, particularly internationally, are made on credit terms
which may vary. We do not hold collateral to secure payment. Therefore, a
default in payment on a significant scale could materially adversely affect our
business, results of operations and financial condition. In addition, it is
difficult for us to ascertain future demand for our existing software products
and anticipated demand for newly introduced software products. Consistent with
industry practices, we may accept product returns or provide other credits in
the event that a retailer or distributor holds excess inventory of our software
products, even when we are not legally required to do so. Accordingly, we are
exposed to the risk of product returns from retailers and distributors. While we
believe that we have established appropriate allowances for collection problems
and anticipated returns based on our historical experience and industry norms,
actual returns and uncollectible receivables may exceed such allowances.
Defective products also may result in higher customer support costs and product
returns.
International Sales and Operations and Currency Fluctuations Could Have an
Adverse Affect
International sales are a significant source of our revenues. International
sales represented approximately 45% of our net sales for the eight months ended
August 31, 1999 and 85% of our net sales for the year ended December 31, 1998.
We believe that maintaining and increasing profitability may be facilitated by,
among other things, additional expansion of sales in foreign markets. In order
to increase international sales, we may be required to establish additional
foreign operations, hire additional personnel and recruit additional
international resellers. The introduction of the Euro may have an impact on
currency fluctuations. Although exposure to currency fluctuations to date has
not been significant, fluctuations in currency exchange rates in the future
could have a material adverse impact on us. Additional risks inherent in our
international business activities include:
- unexpected changes in regulatory requirements,
- tariffs and other trade barriers,
- costs of localizing products for foreign countries,
- lack of acceptance of localized products in foreign countries,
- longer accounts receivable payment cycles,
- difficulties in collecting payment,
- difficulties in managing international operations,
- potentially adverse tax consequences,
- reduced protection for intellectual property, and
- the burdens of complying with a wide variety of foreign laws.
Any of these factors or others that we have not yet contemplated could have
a material adverse effect on our future international operations.
16
<PAGE>
Customer Concentration.
In 1998, we had two software distribution customers, Pointe Control and
Synchronys Soft Corp., who accounted for 85% and 14% of our revenues,
respectively. For the eight months ended August 31, 1999, Pointe Control
accounted for 45% of our revenues, and one Internet advertising and marketing
client, MediaRing, Inc. accounted for 18% of our revenues. The loss of our major
distribution software customer and any of our major advertising or marketing
clients, a significant decrease in products or services sold to them, or an
inability to collect receivables from one or more of them, could adversely
affect our business, operating results and financial condition.
Dependence on Retailers, Distributors and Sales Representatives May
Adversely Affect Sales and Cash Flows
Our distributor customers are not contractually required to make future
purchases of our products and could discontinue carrying or purchasing our
products, at any time and for any reason. Distributors generally are in a strong
position to negotiate favorable terms of sale, including price discounts and
product return policies. Further, resellers may give higher priority to products
other than ours, thus reducing their efforts to sell our products. We may not be
able to increase or sustain the current amount of our retail shelf space,
primarily in Japan, and, as a result, our operating results could be adversely
affected.
Year 2000 Compliance Issues
Many older computer systems and software products currently in use are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. As a result, in less than two
months, computer systems and/or software used by many companies may need to be
upgraded to comply with such Year 2000 requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. In addition, we utilize third-party equipment and we license
software from third parties that may not be Year 2000 compliant. Failure of the
our software or internal computer systems or of third-party equipment or
software which we utilize to be Year 2000 compliant could result in a material
adverse affect on our business, financial condition and results of operations.
Furthermore, the spending patterns of business customers or potential business
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or update their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available for the Internet
advertising and marketing clients retain our services, which could have a
material adverse effect on our business, financial conditions and results of
operations. See "Management's Discussion and Analysis--Year 2000 Compliance
Issues."
Risks Associated with Potential Acquisitions
As part of our business strategy, we may make acquisitions of, or
significant investments in, complementary companies, products or technologies.
Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things:
- the difficulty of assimilating the operations and personnel of the
acquired companies,
- the potential disruption of our ongoing business,
- the diversion of resources from our existing businesses, sites
and technologies,
- the inability of management to maximize our financial and
strategic position through the successful incorporation of the
acquired technology into our products and services,
- additional expense associated with amortization of acquired
intangible assets,
- the maintenance of uniform standards, controls, procedures and
policies, and
- the impairment of relationships with employees and customers
as a result of any integration of new management personnel.
17
<PAGE>
There can be no assurance we would be successful in overcoming these risks
or any other problems encountered with such acquisitions, and our inability to
overcome such risks could have a material adverse effect on our business,
financial condition and results of operations.
General Liability and Commercial Insurance, Product Liability Insurance
Although we carry general liability, product liability and commercial
insurance, there can be no assurance that this insurance will be adequate to
protect us against any general, commercial and/or product liability claims. Any
general, commercial and/or product liability claim which is not covered by such
policy, or is in excess of the limits of liability of such policy, could have a
material adverse effect on our financial condition. There can be no assurance
that we will be able to maintain this insurance on reasonable terms.
Limited Directors' Liability Could Prevent Stockholders From Holding
Directors Responsible for a Lack of Care
Our Certificate of Incorporation provides that our directors (but not our
officers) will not be held liable to us or our stockholders for monetary damages
upon breach of a director's fiduciary duty, except to the extent otherwise
required by law.
No Dividends
We have never paid any cash dividends on the common stock (other than
S-corporation distributions) and we do not anticipate paying any dividends in
the foreseeable future.
Possible Issuance of Substantial Amounts of Additional Shares Without
Stockholder Approval Could Dilute Stockholders
As of the date of this prospectus, we have an aggregate of 34,300,000
shares of common stock outstanding. In addition, as of the date of this
prospectus, we have 5,000,000 shares of common stock issuable upon the exercise
of stock options granted or available for grant under our 1999 Stock Option Plan
and 27,500 shares of common stock issuable upon exercise of other stock options
previously granted. All of such shares may be issued without any action or
approval by our stockholders. Although there are no other material present
plans, agreements, commitments or undertakings with respect to the issuance of
additional shares of common stock or securities convertible into any such
shares, other than in connection with the exercise of outstanding stock options,
any shares issued would further dilute the percentage ownership of our common
stock held by our stockholders.
Possible Sale of Shares held by Insiders
All of the 34,300,000 outstanding shares of our common stock are
restricted, which means that they may only be sold under certain conditions.
Clint Ballard, our President and Chief Executive Officer, and Diana T. Ballard,
our Chairman of the Board, currently hold all of the shares and are not subject
to any contractual restriction on the sale of any such shares. If a large number
of such shares are sold, it may reduce the value of your shares.
Determination of Offering Price
No investment banker or appraiser has been consulted concerning this
offering or the fairness of the offering price of the shares. We have
arbitrarily determined the offering price and other terms relative to the shares
offered. The offering price may not bear any relationship to assets, earnings,
book value or any other objective criteria of value. In addition, since we do
not have a professional underwriter, we may not be able to sell shares as
quickly and we may not be able to sell as many shares.
18
<PAGE>
Utility Outages
In the past we have experienced temporary outages in our telephone service
and electric power. While such outages have never affected systems that are
critical to our operations, there is no assurance that such outages will not
occur in the future more frequently or with greater magnitude or duration. Such
outages could materially and adversely affect our business, financial condition
and results of operations.
We May Never Become Listed on Nasdaq or We May Become De-listed
We intend to apply for inclusion of the shares on the Nasdaq SmallCap
Market or the Nasdaq National Market, and we hope that the shares will trade on
Nasdaq immediately upon the initial closing of the offering. Under Nasdaq
criteria, an issuer seeking initial inclusion of its securities on Nasdaq is
required to meet certain threshold levels relating to assets, market
capitalization, net income, market value of public float, minimum bid price and
number of registered market makers, among others. There is no assurance that the
shares will ever be approved for inclusion on Nasdaq. Nasdaq also imposes
somewhat less stringent maintenance requirements. Even if the shares become
listed on Nasdaq, there is no assurance that they will not become delisted at a
future time if the Nasdaq-imposed maintenance thresholds are not satisfied at
all times. The inability to have the shares listed on Nasdaq could materially
hinder the development of a public trading market for the shares. Any delisting
could cause a material decline in the market price of the shares if a market
should develop and adversely affect the liquidity of the shares.
Penny Stock Regulation
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange or system). Prior to a
transaction in a penny stock, a broker-dealer is required to:
- deliver a standardized risk disclosure document prepared by the SEC
that provides information about penny stocks and the nature and
level of risks in the penny stock market;
- provide the customer with current bid and offer quotations for the
penny stock;
- explain the compensation of the broker-dealer and its salesperson in
the transaction;
- provide monthly account statements showing the market value of each
penny stock held in the customer's account; and
- make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction.
These requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If our shares becomes subject to the penny stock rules, investors
may find it more difficult to sell their shares in the event they becomes
otherwise freely resalable.
Inability to Attract Market Makers
There is currently no public trading market for the shares. The development
of a public trading market depends upon not only the existence of willing buyers
and sellers, but also on market makers. Following the completion of the first
closing under this offering, certain broker-dealers may become the principal
market makers for the shares. Under these circumstances, the market bid and
asked prices for the shares may be significantly influenced by decisions of the
market makers to buy or sell the shares for their own account, which may be
critical for the establishment and maintenance of a liquid public market in the
shares. Market makers are not required to maintain a continuous two-sided market
and are free to withdraw firm quotations at any time. Additionally, in order to
become listed on the Nasdaq SmallCap Market or Nasdaq National Market, we need
to have at least three registered and active market makers. We currently have no
market makers. No assurance can be given that any market making activities of
any market makers, if commenced, will be continued.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the common stock (after deducting
offering expenses) are expected to be approximately $2,200,000 if the minimum
number of 400,000 shares are sold and $18,450,000 if the maximum number of
3,000,000 shares are sold. These proceeds are intended to be utilized
substantially as follows:
<TABLE>
<CAPTION>
Application of Proceeds Minimum Maximum
<S> <C> <C>
Development $ 200,000 $ 3,000,000
Marketing and Advertising 575,000 5,000,000
Additional Personnel 200,000 3,000,000
Insurance 100,000 100,000
Additional Facilities 100,000 1,000,000
Equipment 25,000 600,000
Software - 200,000
Working Capital and General
Corporate Purposes 1,000,000 5,550,000
---------- -----------
$2,200,000 $18,450,000
========== ===========
</TABLE>
The amounts set forth above are estimates. The actual amount expended to
finance any category of expenses may be increased or decreased by our Board of
Directors, in its discretion, if a reapportionment or redirection of funds is
deemed to be in our best interests. The level and timing of expenditures
necessary for each of the intended uses described above will depend upon
numerous factors, including the progress of our product development activities,
the timing and amount of revenues resulting from our operation and changes in
competitive or technological conditions in our industry. If the minimum amount
is raised, our expansion plans will be limited. In the event that an amount
between the minimum and maximum amounts if raised hereby, we intend to allocate
such proceeds approximately proportionately to the above uses other than
insurance, but may, dependent on circumstances, allocate the use of such
proceeds in a different manner. See "Risk Factors Discretion in Use of Funds".
The expansion plans set forth in this prospectus represent our current
plans for the development and expansion of our business. We reserve the right
when and if the opportunity arises, to acquire other businesses, products and
technologies for the purpose of expanding our business, as described in this
prospectus. If such a business opportunity arises, we may use a portion of our
working capital for that purpose. We have no specific plans, arrangements,
understandings or commitments with respect to any such acquisition at the
present time, and it is uncertain as to when or if any acquisition will be made.
We are not currently involved in any negotiations for purchasing any material
business or group of assets.
The net proceeds from this offering, together with internally generated
funds, based on historical experience, are expected to be adequate to fund our
working capital needs for at least the next 12 months. See "Management's
Discussion and Analysis Liquidity and Capital Resources". Pending use of the
proceeds from this offering as set forth above, we may invest all or a portion
of such proceeds in marketable securities, short-term, interest-bearing
securities, U.S. Government securities, money market investments, marketable
securities, and short-term, interest-bearing deposits in banks.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization (i) at August 31, 1999,
and (ii) as adjusted to give effect to the sale of the minimum number of 400,000
shares of common stock offered hereby and to the sale of the maximum number of
3,000,000 shares of common stock offered hereby, at an assumed public offering
price of $6.25 per share, net of $300,000 in costs, and after the application of
the net proceeds of such sale, as described in "Use of Proceeds". See
"Description of Capital Stock".
<TABLE>
<CAPTION>
August 31, 1999 (unaudited)
---------------------------
Actual As Adjusted (1)
------ ---------------
Minimum Maximum
------- -------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value per share;
100,000,000 shares authorized; 34,300,000
shares issued and outstanding; 34,700,000
shares issued and outstanding, as adjusted
(assuming the minimum number of shares are
sold); 37,300,000 shares issued and
outstanding, as adjusted (assuming the maximum
number of shares are sold). . . . . . . . . . . . $ 3,430 $ 3,470 $ 3,730
Additional Paid-In Capital. . . . . . . . . . . . . 23,060 2,223,020 18,472,760
Retained Earnings (2) . . . . . . . . . . . . . . . 471,924 - -
-------- ---------- -----------
Total Stockholders' Equity. . . . . . . . . . . . . $498,414 $2,226,490 $18,476,490
======== ========== ===========
- -------------------
<FN>
(1) Adjusted to reflect the anticipated receipt and application of the net
proceeds of this offering.
(2) Retained earnings accumulated under Subchapter S tax status are
expected to be distributed to stockholders immediately prior to the
first closing of this offering.
</FN>
</TABLE>
21
<PAGE>
DILUTION
Our net tangible book value at August 31, 1999 is $402,437 or $.01 per
share of common stock. Net tangible book value per share represents the amount
of total tangible assets less liabilities, divided by 34,300,000, the pro forma
number of shares of common stock outstanding at August 31, 1999. See
"Description of Capital Stock". After giving effect to the sale of 400,000
shares (in the event that the minimum number of shares offered hereby are sold)
or 3,000,000 shares (in the event that the maximum number of shares offered
hereby are sold), the as adjusted net tangible book value at August 31, 1999
would be $2,130,513, or $.06 per share in the event that the minimum number of
shares offered hereby are sold, or $18,380,513, or $.49 per share in the event
that the maximum number of shares offered hereby are sold. This represents an
immediate increase in net tangible book value of $.05 per share to the existing
stockholders in the event the minimum number of shares are sold or $.48 per
share to the existing stockholders in the event the maximum number of shares are
sold, and an immediate dilution of $6.20 per share to new investors in the event
that the minimum number of shares offered hereby are sold or $5.76 per share to
new investors in the event that the maximum number of shares offered hereby are
sold. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Minimum Maximum
<S> <C> <C>
Assumed Public offering price per share of Common Stock Offered
hereby (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6.25 $6.25
----- -----
Net tangible book value per share before offering. . . . . . . . .01 .01
Increase per share attributable to new investors . . . . . . . . .04 .48
----- -----
As adjusted net tangible book value per share after offering. . . . .05 .49
----- -----
Dilution per share to new investors . . . . . . . . . . . . . . . . $6.20 $5.96
===== =====
</TABLE>
The following tables summarize the relative investments of investors
pursuant to this offering and our current stockholders, assuming a per share
offering price of $6.25, before deduction of offering expenses:
<TABLE>
<CAPTION>
Current Public
Minimum Stockholders Investors Total
------- ------------ --------- -----
<S> <C> <C> <C>
Number of Shares of Common Stock Purchased. . . . 34,300,000 400,000 34,700,000
Percentage of Outstanding Common Stock After
Offering. . . . . . . . . . . . . . . . . . . . 98.9% 1.1% 100%
Gross Consideration Paid. . . . . . . . . . . . . $26,490 $2,500,000 $2,526,490
Percentage of Consideration Paid. . . . . . . . . 1.0% 99.0% 100%
Average Consideration Per Share of Common
Stock . . . . . . . . . . . . . . . . . . . . . - $6.25 $.07%
</TABLE>
<TABLE>
<CAPTION>
Current Public
Maximum Stockholders Investors Total
------- ------------ --------- -----
<S> <C> <C> <C>
Number of Shares of Common Stock Purchased. . . . 34,300,000 3,000,000 37,300,000
Percentage of Outstanding Common Stock After
Offering. . . . . . . . . . . . . . . . . . . . 92.0% 8.0% 100%
Gross Consideration Paid. . . . . . . . . . . . . $26,490 $18,750,000 $18,776,490
Percentage of Consideration Paid. . . . . . . . . 0.1% 99.9% 100%
Average Consideration Per Share of Common
Stock . . . . . . . . . . . . . . . . . . . . . - $6.25 $.50%
- --------------------
<FN>
(1) Assumes an offering price of $6.25 per share, before deduction of offering
expenses.
</FN>
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the historical
financial statements, including the notes thereto, included elsewhere in this
prospectus.
General
From 1994 through 1998, our revenues have been primarily derived from sales
and licensing of proprietary software through distributors and retail channels.
In 1999, we began offering our software, as well as certain licensed third party
products, to users for free through a suite of websites in exchange for users'
adoption of our homepage as their Internet browser's starting page. In 1999,
this diversified our revenue stream to include Internet advertising from our
websites. We intend to increase our future revenues by concentrating on
increasing our Internet revenues.
We target advertising expenditures to generate user traffic to our
websites. We intend to continue purchasing advertising only when it has a
positive margin. We bill our customers on a performance basis, based on agreed
upon criteria. We generally provide our advertising on a month-to-month basis,
and allow Internet advertising and marketing clients to cancel their programs
within 15 days at no cost. We provide no guarantees of minimum traffic levels
nor do we usually provide advertising services under long term contracts.
Year Ended December 31, 1998 Compared to Year ended December 31, 1997
Revenues
Our revenues increased by $78,388 or 4% from $1,840,761 in 1997 to
$1,919,149 in 1998, primarily as a result of increased revenues from software
licensing, particularly a $489,588 or 43% increase in Asian licensing revenues,
which more than offset by a decline of $411,200 or 59% in domestic software
licensing revenues. Domestic revenues declined upon the discontinuation of sales
to distributors and retail chains, as we found that profit margins were not
sufficient to retain these customers. We derived no material advertising
revenues from our websites in 1998. Revenues derived in Asia during 1998 were
generated from one customer.
Revenues from software licenses are recognized when shipped. Incidental
costs are accrued at the time of sale. We do not provide technical support for
software products sold in Asia; however, we do provide technical support to
users in the United States. Software developed under fixed price contracts are
recorded on a percentage of completion basis. Gross margins and operating income
may be affected in particular periods by the timing of product introductions.
Gross margins have been, and may continue to be, adversely affected by product
demand and changes in technology. Our intention is to reduce the percentage of
our revenues represented by licensing revenues by increasing our Internet
revenues.
Software Development and Product Costs
All internally generated software development costs have been expensed in
the period incurred. Software development and product costs decreased 23% from
$1,192,728 in 1997 to $919,895 in 1998, as $181,553 of software product costs
such as CD Rom disks, packaging and freight incurred in 1997 were eliminated in
1998, as we ceased selling packaged software. We intend to continue our software
development activities for the foreseeable future, as well as development of our
Internet sites. Because of the inherent uncertainties associated with our
software development projects, there can be no assurance that our research and
development efforts will result in successful product introductions, increased
revenues or profitability.
Sales and Marketing Expenses
Sales and marketing costs increased by $317,877 or 618% from $51,459 in
1997 to $369,336 in 1998, primarily as a result of the incurrence of $367,796 of
Internet advertising costs for our software products; no amounts were incurred
in 1997 for Internet advertising. Total advertising expenses incurred in 1997
totaled
23
<PAGE>
$28,556 for retail software sales. We also expended $22,183 for marketing
brochures in 1997; no material amounts were paid in 1998 for offline marketing
materials.
We establish advertising expenditure levels based on expected net revenues.
If advertising revenues do not occur when expected, expenditure levels could be
disproportionately high compared to recognized revenues for the reported period,
and our operating results could be adversely affected. We periodically review
and adjust our variable expenditure levels based on actual revenue volumes. In
the future, our net revenues and operating results could be adversely affected
by these and other factors.
General and Administrative Expenses
General and administrative expenses decreased $48,901 or 14% from $353,972
in 1997 to $305,071 in 1998, primarily due to a decline in legal fees from
$108,564 in 1997 to $55,384 in 1998. Administrative salaries also declined by
$33,873 or 19% from $176,403 in 1997 to $142,530 in 1998, due to reduced
requirements for administrative functions. These reductions were offset by a
$78,385 increase in communications-related expenses. We believe that legal and
professional fees, salaries and wages and general office expenses will increase
significantly to provide for infrastructure necessary to administer a growing
public company.
Other Income and Expenses
Other income and expenses in 1997 include settlement gains of $616,728, net
of legal fees of $308,272, from settlement of a dispute related to the sale of
certain source code in 1991. In 1997, we also recorded a settlement gain of
$183,554 in connection with certain claims which arose in 1995 related to
cooperative advertising and marketing with certain distributors.
Eight Months Ended August 31, 1998 Compared to Eight Months Ended August
31, 1999
Revenues
Our revenues increased $703,448 or 43% from $1,628,162 during the eight
months ended August 31, 1998 to $2,331,610 during the comparable period in 1999,
primarily due to the development in 1999 of our Internet advertising and
marketing revenues of $1,360,775, which more than offset a decline of $254,467
or 19% in our revenues from software licensing in Asia. Domestic revenues were
not significant during the eight months ended August 31, 1998. We had one
license agreement that resulted in the recognition of $750,000 of revenues
during the eight months ended August 31, 1998. Revenues derived in Asia during
the eight-month periods ended August 31, 1998 and 1999 were generated from one
customer.
During the eight months ended August 31, 1998, our revenues were primarily
derived from proprietary software sales and licensing in Asia. In 1998, we began
offering certain of our software, as well as certain third party software
products, to users through a suite of websites in exchange for users' adoption
of our homepage as their Internet browser's starting page. During 1999, we
diversified our revenue stream to include Internet advertising and marketing. In
addition, proprietary software products enable us to produce Internet "ad
supported software" and, accordingly, we believe the direction of the our
products and services revenues will be Internet- based. We have also commenced
Internet revenue sharing opportunities through e-commerce transactions.
Software Development and Product Expenses
All internally generated software development costs have been expensed in
the period incurred. Software development and product costs increased $13,054 or
2% from $544,911 during the eight months ended August 31,1998 to $557,965 in the
comparable period in 1999, due to our expansion during the 1999 eight-month
period. We expect our development activities to continue to increase
significantly as we increase our emphasis on generating Internet advertising and
marketing revenues.
24
<PAGE>
Sales and Marketing Expenses
Our sales and marketing expenses increased by $922,052 or 971% from $94,934
during the eight months ended August 31, 1998 to $1,016,986 during the
comparable period in 1999. Internet advertising expenses were incurred in 1999
to promote our software products and increase traffic to our websites. Total
advertising expenses incurred in the 1998 period totaled $28,556 for retail
software sales. Total Internet advertising expenses incurred in the 1998 period
were $93,393, and increased by $777,215 or 832% to $870,608 in the 1999 period.
These expenses were incurred in order to support increased advertising revenues.
General and Administrative Expenses
General and administrative expenses increased $197,765 or 98% from $201,791
during the eight months ended August 31, 1998 to $399,556 in the comparable
period of 1999, largely due to increases in Internet communications-related
expenses and salaries and wages. We believe that legal and professional fees,
salaries and wages, and general office expenses, will increase significantly to
provide for infrastructure necessary to administer a growing public company.
On July 1, 1999, we granted certain stock options to employees at an
exercise price of $0.50 per share, substantially below the then estimated fair
value of our common stock of $1.04 per share. For these purposes, we estimated
the fair value of our common stock based on a number of factors, including
market valuations of certain comparable competitors, multiples of our trailing
and projected revenues, and multiples our trailing and projected earnings.
Generally, the stock options granted to employees vest over a period of 10 years
from the date of grant. The stock options granted to directors vest over a
period of 5 years from the date of grant. Accordingly, we recorded $9,606 of
compensation expense during the eight months ended August 31, 1999. We will
record annual compensation expense of approximately $51,500 related to these
stock options. Additionally, we granted certain stock options in late July
through August 31, 1999, at prices ranging from $1.50 to $3.00 per share, which
we believe are representative of fair value at the time of grant. We believe
that the further rapid development of our Internet business since the dates of
such grants provides a reasonable basis for the increase in the Company's value
since such dates. Accordingly, no compensation expense has been reflected in the
accompanying financial statements.
Other Income and Expenses
Other income and expenses include settlement gains from certain disputes
with a former customer. We also received interest income on our interest bearing
cash accounts.
Liquidity and Capital Resources
During the periods reported, we generated sufficient cash flows from
operations to support our business. During the eight months ended August 31,
1998 and 1999, we generated cash flows from operations of $372,884 and $429,806,
respectively. Increases in accounts receivable required the use of additional
operating cash flows in 1998 and 1999.
At August 31, 1999, we had cash and cash equivalents of $300,897 and
working capital of $331,538. We intend to continue to utilize our resources in
1999 for software and website development, marketing and advertising, to finance
the higher level of accounts receivable necessary to support our anticipated
increase in revenues and for capital expenditures, including the purchase of
computer equipment and possibly software. However, our working capital
requirements may change depending upon numerous factors, including, without
limitation, the need to expand our website traffic through free software
downloads and Internet advertising. We believe that our existing cash and cash
equivalents and cash generated from operations, if any, should be sufficient to
meet our currently anticipated liquidity and capital expenditure requirements
for at least the next 12 months. There can be no assurance, however, that we
will be successful in attaining our revenue goals, nor that attaining such goals
will have the desired effect on our cash resources. We have no long-term debt;
however, we believe that credit facilities may
25
<PAGE>
be available to us. There can be no assurances that we will be able to
obtain additional financing, if at all, or that such financing will be on terms
acceptable to us.
Foreign Currency Transactions
Our revenues from Asia are denominated in US dollars. Accordingly, we do
not incur transaction gains and losses related to foreign currencies.
Income Taxes
During the periods presented, we were not subject to federal and state
income taxes since we elected to be taxed as an S-Corporation. Accordingly, we
report income on our stockholders' personal income tax return. Immediately prior
to the initial closing of this offering, we will begin to be a taxed as a
separate legal entity. The minimum regular federal income tax rate is currently
34%. At present, the State of Washington does not impose income taxes on
corporations but does impose a business and occupation tax on corporations
conducting business in the State of Washington. The consolidated statements of
operations for the year ended December 31, 1998 and the eight months ended
August 31, 1999 included in the financial statements included herein include pro
forma net income, and basic and dilutive earnings per share, assuming we were
taxed as a C-Corporation at the 34% federal income tax rate at the beginning of
such reporting periods. We anticipate that not later than the first closing of
this offering, we will distribute to our existing stockholders substantially all
previously undistributed Subchapter S corporation earnings and profits.
Year 2000 Compliance Issues
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, in less than two months, computer
systems and software used by many companies may need to be upgraded to comply
with such Year 2000 requirements. We are in the process of conducting a review
of issues related to our Year 2000 compliance. This review is intended to
determine the effect of the turn of the century on the operability of our
products and websites, internal and external information technology ("IT")
systems, non-IT systems we utilize to conduct our business and other internal
and external processes which may impact our operations. In connection with this
evaluation, we also intend to review our vendors and suppliers for Year 2000
compliance and to effect changes where necessary.
This review process is being conducted in three phases. The first phase
encompassed a review of all of our products and websites, internal and external
systems/processes and vendors and suppliers for Year 2000 compliance. The second
phase was to correct all items identified as non-compliant and essential to our
operations. The third phase is contemplated to be a second review to ensure year
2000 compliance and interoperability of all systems/processes.
We are completing our review of the Year 2000 requirements. We believe that
we have sufficient resources to complete our review in a timely manner. We have
expended a total of approximately $3,000 in our year 2000 compliance review and
implementation efforts through August 31, 1999, and anticipate additional
expenditures of approximately $2,000 to complete the final phase of compliance.
We produce computer application software and operate several websites. We
have determined that all products that we have developed and our websites are
Year 2000 compliant. We currently believe that we have no liability concerning
any of our products with respect to Year 2000 requirements.
We do not know, at this time, of any of our products, processes or systems,
which, if found to be non-Year 2000 compliant, would have any significant impact
on us. We believe that our having 19 servers at three separate geographic
locations should minimize any risk that our Internet business would fail to
operate in 2000. We are developing a contingency plan to address any failure of
our products, vendors or IT systems to be Year 2000 compliant.
26
<PAGE>
Seasonality
The computer software and Internet advertising markets are characterized by
significant seasonal swings in demand, with the strongest demand for both
occurring in the fourth quarter of each year. We expect our net sales and
operating results to continue to be affected by these fluctuations, though our
results of operations are not expected to be a direct function of these
fluctuations. Our revenues may also experience substantial variations as a
result of a number of factors, such as consumer and business preferences and
introduction of competing products by competitors, as well as limited time
promotional pricing and other offers. There can be no assurance that we will
achieve consistent growth or profitability on a quarterly or annual basis.
Inflation
We believe that inflation has generally not had a material impact on our
operations.
27
<PAGE>
BUSINESS
Overview
We are a provider of online direct marketing services, advertising
solutions and proprietary software. We combine Internet-based direct marketing
and advertising services with programs that reward consumers with free software
when they use our designated homepage as their Internet browser's starting page.
These online incentive programs are intended to provide flexible,
incentive-marketing solutions for our Internet advertising and marketing
clients. Our payment structure, in which our Internet advertising and marketing
clients are only charged when our website visitors execute specific predefined
actions, provides these clients with a known cost to achieve the desired
response to their advertising campaigns. We intend to leverage our developing
homepage subscriber base and our targeting capabilities to offer our clients
customized, targeted advertising solutions designed to improve advertisement
response rates and reduce their cost of acquiring new customers. According to
Nielsen Media Research/Net Rating, we had the number one most "clicked-on"
advertising banner on the Internet during the week of July 1999. According to PC
Data Online, we were the 42nd most popular web property on the Internet in July
1999, the 54th most popular web property on the Internet in August 1999 and the
92nd most popular property on the Internet in September 1999.
We initially provided crisis intervention computer software programing
services in the Silicon Valley region of California. We became a leading
provider of SCSI software services and developed a library of SCSI software
solutions that we sold to the Microelectronics Products Division of NCR
Corporation in 1992. After relocating to Kitsap County, Washington, in the Puget
Sound area in 1992, we developed d-Time, a software product that accelerated the
performance of CD-ROM drives, which by 1995 became a top 100 software title in
the U.S., according to PC Data Online, and a top 20 software title in Japan. As
the need for CD-ROM performance acceleration declined in light of the rapid
increase in CD-ROM drive speed, we developed Superfassst, a hard drive
performance acceleration product. Superfassst won the Best of COMDEX finalist
award at the Fall 1996 COMDEX in the Utility Software category. As the Internet
revolution developed, we developed Webcelerator, a software product which
accelerated the performance of web browsers. We have also developed several
additional software products. See "BUSINESS-Products."
In 1996, we also began developing our Internet business model, pursuant to
which we provide certain of our software products, as well as certain third
party products, free on our websites to visitors who agree to use one of our
websites, homepageware.com, as their Internet browser's starting page. This
generates significant traffic to our homepageware websites, allowing us to sell
pay-for-performance Internet advertising to Internet advertising and marketing
clients. We allow these clients to cancel their Internet advertising programs
within a two-week trial period at no cost. Historically, over 70% of our
Internet advertising and marketing clients renew advertising commitments to us,
and less than 20% of our Internet advertising and marketing clients cancel their
Internet advertising programs within the two-week free trial period.
Our Internet business model has resulted in the increase in unique visitors
to our websites from approximately 800,000 in February 1999 to over 4 million in
August 1999, and has generated profitable operations.
We were initially incorporated in 1987 as Ballard Synergy Corporation, a
Nevada corporation, and merged with a Washington corporation in 1995 and changed
our name to Acceleration Software International Corporation in 1996. In November
1999, we formed eAcceleration, a Delaware corporation, which is our parent
company. Prior to the first closing under this offering, we plan to merge
Acceleration Software International Corporation into eAcceleration and remain a
Delaware corporation. Our principal executive offices are located at 1223 NW
Finn Hill Road, Poulsbo, Washington; telephone: (360) 697-9260; fax: (360)
598-2450; corporate website: www.eAcceleration.com.
Industry Background
Growth of the Internet and Online Commerce
Over the past several years, the Internet has emerged as a powerful and
efficient new medium, enabling people worldwide to exchange information,
communicate and conduct business electronically. The number of people using the
28
<PAGE>
Internet continues to expand rapidly. The Internet has become the fastest
growing communications medium in history, according to the eAdvertising Report,
a publication prepared by Advertising Age and eMarketer. The eAdvertising Report
states that the Internet reached the critical mass of 50 million Americans in
only five years as compared to 13 years for television, 38 years for radio and
10 years for cable television.
Businesses have recognized the online commerce opportunity and are
increasingly using the Internet to sell and distribute products and services. As
online commerce and the number of people using the Internet grow, advertisers
and direct marketers are increasingly using the Internet to locate customers,
advertise products or services and facilitate transactions. The eAdvertising
Report estimates that approximately $1.5 billion was spent by U.S. companies on
Internet advertising worldwide in 1998, and this amount is expected to grow to
approximately $2.6 billion by the end of 1999 and to approximately $8.9 billion
in 2002. According to the eAdvertising Report, Internet advertising spending
will account for approximately 1.2% of the total advertising spending in 1999
and this amount is predicted to grow to 3.4% in 2002.
Direct Marketing
Advertising expenditures can be broadly categorized as either brand
advertising or direct marketing. Brand advertising is intended to generate brand
name awareness and create a specific image for a particular company, product or
service. Direct marketing involves any direct communication to a consumer
intended to generate a specific response or action, generally the purchase of a
product or service. The Direct Marketing Association estimates total direct
marketing expenditures in the United States at $162.7 billion. By the year 2003,
it expects that this figure will exceed $221 billion.
Traditional Direct Marketing. Traditional direct marketing media
include direct mail, telemarketing and newspaper, magazine, radio and television
advertisements. Although traditional direct marketing is effective and widely
used, it presents a number of challenges for marketers and consumers alike.
Traditional direct marketers generally lack specific and timely information on a
particular consumer's immediate interests. As a result, marketers spend
considerable resources on communications most consumers don't want or need.
Given the costs associated with traditional direct marketing, which include
telecommunications, postage, printing, assembly, labor and facilities, we
believe the often low response rates make the process inefficient.
Online Direct Marketing. Online direct marketing media include banner
advertisements, targeted email solicitations and website sponsorships. We
believe online direct marketing is more attractive than traditional direct
marketing because it requires lower production costs and provides easier and
faster customer response features. In addition, online direct marketing allows
marketers to easily:
- develop one-to-one relationships with consumers;
- collect data and feedback on marketing campaigns; and
- customize marketing campaigns to broad audiences or specific groups.
Even with these advantages, direct marketers face challenges in realizing
the full potential of the Internet as a marketing medium. With millions of
websites, only a fraction of which have significant audiences, it is difficult
for marketers to decide where to spend their marketing dollars. Even leading
brand name marketers who build their own websites must find ways to attract a
sizeable audience of visitors. In addition, technological hurdles may impede
conventional direct marketers from successfully extending their activities to
the Internet. In order to participate in most online marketing efforts,
marketers must build and maintain websites as well as incorporate order-taking
capabilities and develop systems to integrate online ordering with their
traditional databases.
We believe marketers desire a solution that benefits from the effectiveness
of direct marketing while overcoming the challenges presented by both
traditional and online marketing methods.
29
<PAGE>
The eAcceleration Solution
We act as an intermediary between consumers and marketers, through which
consumers seeking to try new software products are presented with a collection
of free software in exchange for such consumers using our designated homepage as
their Internet browser's starting page. Online marketers seeking an audience of
potential customers advertise on this homepage and on our other websites. We
offer a consumer-directed process in which consumers select only those products
of immediate interest to them. In turn, advertisers pay only for performance in
the form of clickthroughs, downloads, email addresses, signups or other
objectives. We believe that our solution creates a highly effective method of
direct marketing in terms of cost, targeting, efficiency and consumer
satisfaction.
Strategy
Our objective is to attain a leading position in the global online direct
marketing and incentives-based advertising market, while maintaining historical
profit margins. Based on estimates of the total revenues in this market and our
Internet advertising revenues over the six month period from March 1999 to
August 1999, we believe that we have achieved a market share of approximately
one tenth of one percent of aggregate worldwide Internet advertising revenues.
As the overall total amount of money spent on Internet advertising increases in
the future, we believe that our Internet advertising market share will also
increase, and hope that it will increase up to one percent over the next several
years; however, no assurance can be given in this regard.
We intend to achieve our objective through the following key strategies:
Increase size of subscriber base
We intend to continue to expand our subscriber base through subscriber
acquisition activities such as co- registration programs, co-marketing programs
and advertising on third-party Internet sites. We also plan to initiate a public
relations campaign, in order to, among other things, attract new subscribers. In
addition, we intend to explore international opportunities, including potential
strategic alliances, in order to in order to continue to expand our subscriber
base.
Increase Number of Advertising and Marketing Clients
We are seeking to broaden our advertising and marketing client base by
increasing our direct and indirect sales and marketing efforts. We may increase
the size of our direct sales force. In addition, we are seeking to take
advantage of existing distribution channels, such as advertising networks, to
expand the number of advertisers using our homepage marketing system.
Increase Traffic and Transactions
Our strategy of rapidly increasing consumer traffic to our website is
focused on both new and repeat visitors. New visits are expected to be driven
primarily by our online advertising programs, enhanced software offerings, and
word-of-mouth referrals.
Expand Offers
The number and quality of offers on our site are critical to our ability to
attract visitors and increase revenues from our marketer client base. We believe
we have a significant competitive advantage in attracting additional marketer
clients due to the large number of consumers visiting our websites and our
popular software offerings, including Internet-related software. We expect to
implement content expansion through a combination of internal sales efforts,
partnerships and acquisitions.
30
<PAGE>
Continue to Develop and Use Technology to Enhance Website Capabilities and
Visits
We have designed and implemented proprietary systems that enable us to
ensure that users of our free software also use our homepage as their Internet
browser's starting page. We regularly update our websites to encourage consumers
to frequently revisit. As part of our effort to promote repeat visits, we
continue to develop features that will make our visitors' homepage experience
faster, easier and more personalized. We have spent approximately $1,000,000 and
$900,000 on research and development during 1997 and 1998, respectively.
Acquisitions
We intend to explore possible acquisitions of complimentary
Internet-related businesses. We are not currently involved in any discussions or
negotiations relating to any material acquisition.
Sales and Marketing
Our primary sales strategy is to sell our services directly to advertisers,
direct marketers, advertising agencies and other advertising-supported software
companies. We currently sell our services directly to clients in the United
States utilizing four employees located in Poulsbo, Washington, which is located
in the Puget Sound area. Our sales force is dedicated to establishing and
maintaining relationships with advertising and marketing clients. Our sales
force uses industry directories, personal contacts, industry knowledge and
Internet search engines to seek likely sales prospects. We also receive sales
leads from advertising agencies that have recommended us to clients.
Advertising and Marketing Client Benefits:
- Cost-per-action Payment Structure. We provide a cost-per-action
incentive marketing solution, in which our clients are only charged
when pre-defined actions specified by our clients are generated. In
contrast, with the commonly used cost-per-thousand impression banner
advertising, advertisers typically pay for a number of
impressions on websites, regardless of whether consumers click on,
or take any action in response to, the banner advertisement. Our
cost-per-action solution provides our clients with a known cost per
yield for each advertising and marketing campaign and a measurable
cost of acquiring new customers.
- Intended Targeting Capability. We intend to leverage our
subscriber base to customized, targeted campaigns for our clients.
This targeting capability is expected to enable our clients to
focus on specific demographic segments or groups than exhibit
desirable online behavioral patterns. We believe that by focusing
on a specific target audience, our clients should increase response
rates and reduce their customer acquisition costs.
Subscriber Benefits:
- Free Software. Our subscribers have the opportunity to obtain high
quality software that facilitates faster Internet or hard drive
performance, allows MP3 creation and playback, download management
assistance and computer games.
- Subscriber Choice. Subscribers may choose to respond only to
advertising and marketing that interests them and provides a reward
to induce their participation.
- Newsletters. Subscribers may elect to receive newsletters relating
to, among other things, finance, sports and other information.
31
<PAGE>
Products and Services
Software Products
We publish the following software products, among others:
Webcelerator is, based on our tracking, one of the most popular World Wide
Web browser performance acceleration software products, with over two million
copies having been installed. This product enhances the speed of users' browsing
by both remembering where users have browsed and anticipating where they will
browse. It operates on the Windows 95, Windows 98, and Windows NT operating
systems. We have applied for a patent with respect to this product.
Superfassst increases the speed of computers' performance in several
respects, including starting computer applications and accessing folders. It
operates on the Windows 95 and Windows 98 operating systems. We have been issued
two patents and one additional patent with respect to this product has been
allowed but not yet issued.
MP3Creator allows users to play and facilitates the creation of MP3 format
files. It operates on the Windows 95, Windows 98, and MacIntosh operating
systems.
Internet Optimizer adjusts network message transfer settings to facilitate
optimal network configuration. It operates on the Windows 95 and Windows 98
operating systems.
Net Butler manages network downloads and uploads. It operates on the
Windows 95, Windows 98, and Windows NT operating systems.
Z.E.U.S. provides an easy-to-use interface for making and extracting zip
files, and also facilitates the creation of self-extracting archives. It
operates on the Windows 95, Windows 98, and Windows NT operating systems.
d-Time speeds the performance of CD-ROM drives. First introduced in 1994,
it was our first retail computer software application product. It operates on
the Windows 95, Windows 98, and MacIntosh operating systems.
Phantom CD allows users to make a virtual copy of CD-ROMs onto their hard
drive, which enables users to eliminate the need for the CD-ROM and increase
performance speed. It operates on the Windows 95 and Windows 98 operating
systems, and is expected to operate on the Windows NT operating system shortly.
Each of the above products is offered as free homepageware, such that all
users are required to adopt our homepage as their Internet browser's starting
page. We also provide certain third party software, including online games and
entertainment software, as homepageware.
Websites
We operate numerous websites, the principal ones including the following:
Homepageware.com and several mirror websites appear as the starting page
for the Internet browser of users of our homepageware software. We estimate that
approximately 1.7 million unique users visited our homepageware.com and mirror
websites in August 1999, according to data provided by PC Data Online, a web
measuring service.
Webcelerator.com and several mirror websites provide our homepageware free
to users. We attempt to drive traffic to these websites through Internet
advertising and promotion.
Clicksales.com, Downloadsales.com, and Signupsales.com provide information
to online media buyers with respect to our pay-for-performance Internet
advertising programs. These programs typically include a two-week test
32
<PAGE>
period new customers, who have the right to cancel the program without cost
during such period if they are not satisfied with the program's results.
Freebranding.com, a newly launched website, provides an affiliate program
to other websites pursuant to which we generally share equally the starting
pages of new homepageware users provided by such other websites. We have a
patent pending with respect to certain technology used in connection with this
website.
We sell performance-based advertising on our homepageware.com,
webcelerator.com and mirror websites, which we generate from our clicksales.com,
downloadsales.com and signupsales.com websites. We have historically experienced
a relatively high rate of monthly renewals, and a relatively low rate of
cancellations of our Internet advertising programs.
Newsletters
We currently disseminate by email several free newsletters relating to
topics such as initial public offerings, sports, online shopping and free
software to an aggregate of approximately 300,000 subscribers. We attempt to
generate subscribers for these newsletters, as well as third party newsletters,
by promoting them on our websites.
Customers
Our advertising and marketing clients pay us commissions each time a member
takes an action defined by our clients in response to some online advertising or
promotion. We have approximately 75 current Internet advertising and marketing
clients. Our five largest Internet advertising and marketing clients accounted
for 49% of our Internet advertising and marketing revenues in the eight months
ending August 31, 1999. In 1997, two software customers, Pointe Control, a
Japanese distributer, and Syncronys Softcorp, a domestic distributer, accounted
for 62% and 30%, respectively, of our revenue. In 1998, these customers
accounted for 85% and 14%, respectively, of our revenue. In the eight months
ended August 31, 1999, Syncronys accounted for 45% of our revenue and Media
Ring, Inc., an Internet advertising and marketing client, accounted for 18% of
our total revenue and 34% of our Internet advertising and marketing revenue. If
one or more of our large customers cease operations or cease or reduce their
business with us, our results of operations and financial conditions could be
adversely affected.
Suppliers
We are dependent on products and services provided by a variety of Internet
suppliers. Many of these suppliers have reported significant financial losses
and may not continue operations in the long term. Accordingly, we have
established redundant relationships with our suppliers in order to mitigate our
risk. The unavailability of adequate supplies could adversely affect us.
Technology and Infrastructure
We have developed an expandable, secure and reliable technology
infrastructure to support our online direct marketing programs. One of the
principal elements of our proprietary technology is our ability to ensure that
our free software customers use our homepage as their Internet browser's
starting page.
Expandability
Our technology is designed to support up to approximately 25 million
visitors per month. To date we have demonstrated that our architecture is
capable of rapid expansion as visitors-per-month have increased from
approximately 800,000 in February 1999 to more than four million in August 1999.
Security
We incorporate a variety of encryption techniques meant to protect the
privacy of consumer information. We also employ a variety of automated fraud
detection procedures to identify patterns of abuse and potential fraudulent use
33
<PAGE>
of the system. Our fraud detection systems can automatically disable accounts in
which fraud is suspected. The data center where our system is located provides
security management 24 hours per day, seven days per week.
Reliability
Our software system architecture uses industry standard technologies to
maximize reliability. We use Secure Socket Layer for secure transactions, Oracle
databases, the UNIX operating system and the Apache web server within our
infrastructure. All of these platforms have demonstrated a high degree of
reliability. We back up our Oracle databases and other information to long-term
tape storage on a regular basis.
Our network servers are housed separately at three separate geographic
locations. We believe that each data center provides redundant network
connections, redundant connections to power grids, diesel generators for
emergency power, air conditioning and engineering support 24 hours per day,
seven days per week. Our infrastructure is built to maximize reliability through
the use of multiple central processor units and redundant power supplies,
networking and input/output controllers.
Competition
Website Competition
We face intense competition from both traditional and online advertising
and direct marketing companies. We also face competition from established online
portals and community websites that engage in direct marketing. We compete
directly and indirectly for marketers and consumers with companies in various
categories, including:
Other Free-Offer Websites There are a number of sites, both large and
small, that give consumers access to free software and other offers, including
Freeshop.com, Winfiles.com, Download.com, shareware.com, Volition.com, and
Free2Try.com.
Specialty Lead-Generation Websites. Various websites focus on generating
leads for a specific segment of the direct marketing industry, such as the
catalog, magazine or coupon segments. While these websites typically provide a
depth of offerings within their specific sector, they may not offer promotions
across a broad spectrum of product categories. These sites include eNews,
Cataloglink and Catalogcity. In some instances, we may include their offerings
on our websites.
Other Websites. We also compete with a number of "community" sites that
offer content, services or information about a particular topic, as well as
other advertising networks. In addition, we compete with sites featuring loyalty
programs that reward consumers for taking specific actions such as Cybergold,
Inc. and MyPoints.com
The number of websites competing for consumer attention and marketers'
dollars has proliferated, and we expect that competition will continue to
intensify. We also compete with traditional media such as television, radio and
print for a share of marketers' total marketing budgets. We may be unable to
compete successfully against current or future competitors, many of which have
significantly greater financial, technical and marketing resources.
We believe that the principal competitive factors in our website markets
are:
- brand recognition;
- website speed and ease of use;
- quality and diversity of offers; and
- the volume of online visitors, duration and frequency of visits and
their demographic profiles.
34
<PAGE>
Software Competition
Competition in the computer software industry is fierce. We believe that
the principal competitive factors in the software industry generally include
content quality, brand name recognition, ease of use, merchandising, product
features, quality, reliability, online technology and price. Based on our
current and anticipated future product offerings, we believe that we compete or
will compete effectively in these areas, particularly in the way of quality,
ease of use, product features, online technology and price; however, no
assurance can be given that our products will continue to achieve market
acceptance or that any such market acceptance can be sustained.
We compete primarily with other software publishers. Our competitors vary
in size from very small companies with limited resources to very large
corporations with greater financial, marketing, distribution, technical and
other resources. We believe that the primary competitors for our software
products are Microsoft Corporation, Web 3000, Bonzi Software, Symantec, Network
Associates, Real Networks, Nico Mak Computing, Inc. and Aureate Software, among
others. Many of our competitors are larger and have greater financial resources
than us, and no assurance can be given that we will be able to successfully
compete against these competitors.
Government Regulation
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in Internet usage and reduce the demand for all products and
services offered on the Internet. Recently, Congress enacted legislation
regarding children's privacy on the Internet. It is possible that additional
laws and regulations may be proposed or adopted with respect to the Internet,
covering issues such as user privacy, taxation, advertising, intellectual
property rights and information security. Several states have proposed
legislation to limit the use of personal user information gathered online or to
require online services to establish privacy policies.
The Federal Trade Commission recently reported that it has no present
intention of proposing legislation to address online privacy in the near future,
and that it believes self-regulation to be the best course of action, except for
rules enacted to implement the Children's Online Privacy Protection Act, which
governs the collection of personal information from children and the
confidentiality of such information. However, the FTC has initiated action
against at least one online service regarding the manner in which personal
information was collected from users and provided to third parties.
Legislation has recently been enacted in several states relating to sending
unsolicited emails, a practice commonly referred to as "spamming." The federal
government and several other states, including New York, are considering, or
have considered, similar legislation. Although the provisions of these current
and contemplated laws vary, generally they limit or prohibit both the
transmission of unsolicited emails and the use of familiar spamming techniques,
such as the use of forged or fraudulent routing and header information. Some
states, including California, require that unsolicited emails include opt-out
instructions and that senders of such emails honor any opt-out requests. We
believe that our email newsletters will not be affected by legislation directed
at unsolicited emails because we do not send unsolicited messages and because
our current practices are intended to comply with current and proposed
legislation. However, if we are required to change our business practices as a
result of new legislation, our business could suffer.
We do not know how our business may be affected by the application to the
Internet of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. Most of these laws were adopted before
the advent of the Internet and do not contemplate or address the unique issues
of the Internet and related technologies. Changes in laws intended to address
such issues could create uncertainty in the Internet marketplace. That
uncertainty could reduce demand for our service or increase the cost of doing
business as a result of litigation costs or increased service delivery costs.
In addition, because our services are available on the Internet in multiple
states and foreign countries, these states and countries may claim that we are
required to qualify to do business in their jurisdictions. Our failure to
qualify in any jurisdictions where we are required to do so could subject us to
taxes and penalties. It could also restrict
35
<PAGE>
our ability to enforce contracts in those jurisdictions. The application of
laws or regulations from jurisdictions whose laws do not currently apply to our
business could have a material adverse effect on our business, results of
operations and financial condition.
The European Union has adopted a privacy directive that went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited with respect to the transactions in which they may engage with
business entities domiciled outside the EU, unless the non-EU entities are
domiciled in jurisdictions with privacy laws comparable to the EU privacy
directive. The United States presently does not have laws that satisfy the EU
privacy directive. Discussions between representatives of the EU and the United
States are ongoing and may lead to certain safe harbor provisions which, if
adhered to, would allow business entities in the EU and the United States to
continue doing business without limitation. If these negotiations are not
successful and the EU begins enforcing the privacy directive, there could be an
adverse impact on international Internet business. If we do business directly in
the EU in the future, we will be required to comply with the EU privacy
directive.
Intellectual Property
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers,
independent contractors, partners and others to protect our intellectual
property rights. We own nine patents, including one foreign patent, on our
software products and have ten patent applications pending with respect thereto.
We have registered certain trademarks in the United States and may apply for
registration in the United States for other trademarks and service marks.
However, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our products and
services are made available online. We generally rely on common law copyright
protection, and do not generally register our copyrights.
We have registered a number of domain names, including eAcceleration.com,
homepageware.com, clicksales.com, downloadsales.com, signupsales.com and
freebranding.com. Domain names generally are regulated by Internet regulatory
bodies. The regulation of domain names in the United States and in foreign
countries is evolving. Regulatory bodies could establish additional top-level
domains, appoint additional domain name registrars or modify the requirements
for holding domain names. The relationship between regulations governing domain
names and laws protecting trademarks and similar intellectual property rights is
unclear. Therefore, we could be unable to prevent third parties from acquiring
domain names that infringe on or otherwise decrease the value of our trademarks
and other proprietary rights. We have no knowledge of any companies in other
countries using domain names that infringe on our trademarks.
We may be required to obtain licenses from others to refine, develop,
market and deliver new services. We may be unable to obtain any such license on
commercially reasonable terms, if at all, or guarantee that rights granted by
any licenses will be valid and enforceable.
Employees
As of September 30, 1999, we had a total of 35 employees, including four in
sales and marketing, 26 in technology and development, and five in
administration. None of our employees are represented by unions, and we consider
relations with our employees to be good.
Facilities
We currently occupy approximately 4,500 square feet in a leased facility in
Poulsbo, Washington, with a monthly rental cost of approximately $2,100 per
month. Our current lease for our Poulsbo space expires in February, 2004. We
expect that this facility will not be adequate to meet our needs over the next
several months, and we are currently in the process of seeking to lease up to
50,000 additional square feet in the Kitsap County, Washington area.
36
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following persons are our current executive officers, directors and
director nominees:
Name Age Position
Clint Ballard 36 President, Chief Executive Officer
and Director
Diana T. Ballard 42 Chairman of the Board, Secretary
and Treasurer
Shane H. Traveller 32 Chief Financial Officer
Michael J. Clementz 56 Director nominee
Edward P. Swain, Jr. 64 Director nominee
Set forth below is a brief description of the background of our officers
and directors based on information provided by them to us.
Clint Ballard is the President and Chief Executive Officer of
eAcceleration, serving as Chief Executive Officer as well as President or other
executive capacities since inception. Mr. Ballard received a B.S. in mathematics
from the California Institute of Technology in 1984.
Diana T. Ballard is the Chairman of the Board, Secretary and Treasurer of
eAcceleration serving as Chairman of the Board as well as other executive
capacities including President since inception. Ms. Ballard is the wife of
Clint Ballard.
Shane H. Traveller was elected in October 1999 as Chief Financial Officer
of eAcceleration. Mr. Traveller served as Chief Financial Officer of Trimedyne,
Inc. a manufacturer of medical equipment, since 1998, as President of Pyro
Shield, Inc., a U.S. - Russian joint venture that developed industrial
insulation, from 1996 though 1998 and as Chief Financial Officer of Worldwide
Investment Network, Inc., an asset management company, from 1994 through 1996.
Mr. Traveller received a B.S. in Accounting from Brigham Young University's
Marriot School of Management in 1991.
Michael J. Clementz was nominated in November 1999 to serve as director of
eAcceleration and has served as consultant to us since September 1999. Mr.
Clementz has been Chairman and CEO of North Sound Bank (formerly, the Bank of
Poulsbo) since 1999, President and CEO of such Company since prior to 1994 and
President and CEO of Liberty Bay Financial Corporation since prior to 1994. Mr.
Clementz was a bank examiner with the Washington State Division of Banking from
1966 to 1979. Mr. Clementz serves on the Board of Directors of North Sound Bank
and Liberty Bay Financial Corporation. He is a past president and director of
the Washington Bankers Association and has served the American Bankers
Association as a committee member of the Government Relations Council and
Community Bankers Council. He is a former advisory director of the Conference of
State Bank Supervisors, Washington D. C. He was appointed by the Supreme Court
for the State of Washington, to serve as a lay person on the Washington State
Lawyers Disciplinary Board.
Edward P. Swain, Jr. was nominated in November 1999 to serve as director of
eAcceleration and has served as consultant to us since September 1999. Mr. Swain
has served as President of PT Holdings Corporation since December 1997. From
January 1992 through December 1997, Mr. Swain served as President, CEO and
director of Port Townsend Paper Corporation and from December 1997 to December
1998 he served as Chairman of the Board of such company. Mr. Swain has served as
a director of FiberMark, Inc. since 1998 and as director of Interactive
Financial Services Group, Inc., the holding company for a proposed Internet bank
(national charter applied for) since
37
<PAGE>
December 1998. He is also a member of the Board of Trustees of the Museum
of Flight in Seattle, Washington. Mr. Swain received a B.A. from Williams
College in 1957 and a LLb from Harvard Law School in 1964.
We expect to become the beneficiary of a "key person" life insurance policy
in the amount of $2,000,000 on the life of Clint Ballard, our President and
Chief Executive Officer, shortly after the date of this Prospectus.
Our Board of Directors is elected annually by our stockholders. Directors
receive no cash compensation for their services to us as directors, but are
reimbursed for expenses actually incurred in connection with attending meetings
of the Board of Directors. Members of the Board of Directors are eligible to
participate in our 1999 Stock Option Plan.
The Audit Committee currently consists of Clint Ballard and Diana T.
Ballard. We anticipate that Michael J. Clementz and Edward P. Swain, Jr. will
serve as the Audit Committee immediately upon being elected to our Board of
Directors. The Audit Committee recommends engagement of our independent
certified public accountants, and is primarily responsible for reviewing and
approving the scope of the audit and other services performed by our independent
certified public accountants and for reviewing and evaluating our accounting
principles and practices, systems of internal controls, quality of financial
reporting and accounting and financial staff, as well as any reports or
recommendations issued by the independent accountants.
The Compensation Committee currently consists of Clint Ballard and Diana T.
Ballard. We anticipate that Michael J. Clementz and Edward P. Swain, Jr. will
serve as the Compensation Committee immediately upon being elected to our Board
of Directors. The Compensation Committee generally reviews and approves our
executive compensation and currently administers our 1999 Stock Option Plan.
Executive Compensation
The following table sets forth the cash and other compensation paid in the
last three years to our chief executive officer and all other executive
officers.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------
Name and Other Annual
Principal Position Year Salary Bonu Compensation(1)
- ------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C> <C>
Clint Ballard 1998 $104,000 $175,000 (2) -
President and Chief 1997 208,000 198,325 (2) -
Executive Officer 1996 208,000 60,000 (2) -
Diana T. Ballard 1998 - 175,000 (2) -
Chairman of the Board, 1997 - 198,325 (2) -
Secretary and Treasurer 1996 - 60,000 (2) -
<FN>
(1) The value of all perquisites provided did not exceed the
lesser of $50,000 or 10% of the officer's salary and bonus.
(2) Represents S corporation tax distributions.
</FN>
</TABLE>
Employment Agreements
We have entered into employment agreements with each of Clint Ballard and
Diana T. Ballard. The employment agreement with Clint Ballard provides for him
to serve as the President, Chief Executive Officer and a director, and provides
for an annual base salary of $104,000, a bonus of 2.5% of our income before
taxes and various fringe benefits. The employment agreement with Diana T.
Ballard provides for her to serve as the Chairman of the Board, provides for an
annual base salary of $104,000 and provides for a bonus of 2.5% of our income
before taxes and various fringe benefits. Each of the above-described agreements
becomes effective upon the first closing of this offering, expires on the fifth
anniversary of the first closing of this offering and contains restrictions on
the employee
38
<PAGE>
engaging in competition with us for the term thereof and for one year
thereafter and provisions protecting our proprietary rights and information.
Each agreement also provides for the payment of three times the employee's
previous year's cash compensation, less $1.00, upon his or her termination in
the event of a change in control of eAcceleration (a "Change in Control"), which
is defined therein to mean (a) a change in control as defined in Rule 12b- 2
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (b)
a person (as such term is defined in Sections 13(d) and 14(d) of the Exchange
Act) other than a current director or officer of eAcceleration becoming the
beneficial owner, directly or indirectly, of 20% of the voting power of our
outstanding securities or (c) the members of the Board of Directors at the
beginning of any two-year period ceasing to constitute at least a majority of
the Board of Directors unless the election of any new director during such
period has been approved in advance by two-thirds of the directors in office at
the beginning of such two-year period.
1999 Stock Option Plan
We have adopted the 1999 Stock Option Plan, as amended, (the "1999 Plan")
in order to motivate our qualified employees, officers, directors, consultants
and independent contractors, to assist us in attracting employees and to align
the interests of such persons with those of our stockholders. The 1999 Plan
provides for the grant of "incentive stock options" within the meaning of the
Section 422 of the Internal Revenue Code of 1986, as amended, "non-qualified
stock options," restricted stock and other types of awards to our officers,
directors, key employees, consultants, agents, advisors and independent
contractors.
The 1999 Plan, which will be administered by the Compensation Committee of
the Board of Directors, authorizes the issuance of a maximum of 5,000,000 shares
of common stock, which may be either newly issued shares, treasury shares,
reacquired shares, shares purchased in the open market or any combination
thereof. Incentive stock options generally may be granted at an exercise price
of not less than the fair market value of shares of common stock on the date of
grant, and non-qualified stock options may be granted at an exercise price of
not less than 85% of such fair market value. If any award under the 1999 Plan
terminates, expires unexercised, or is cancelled, the shares of common stock
that would otherwise have been issuable pursuant thereto will be available for
issuance pursuant to the grant of new awards. We have options to purchase an
aggregate of 1,085,000 shares of common stock outstanding under the 1999 Plan,
including options to purchase 50,000 shares of common stock granted to each of
Michael J. Clementz and Edward P. Swain, Jr., each of which such options are
exercisable at $3.00 per share in equal annual installments over five years. We
have also granted options to purchase 150,000 shares of common stock to
Shane H. Traveller, which are exercisable at $3.00 per share, 62,500 of which
are exercisable in equal installments over ten years and 87,500 of which are
exercisable in full after nine years; provided, that all or a portion of such
87,500 shares may become exercisable at earlier times upon the consummation of
an underwritten public offering if certain market capitalization threshold
levels are achieved. No options have been granted to Clint Ballard or Diana T.
Ballard.
Personal Liability and Indemnification of Directors
Our Certificate of Incorporation and Bylaws contain provisions which reduce
the potential personal liability of directors for certain monetary damages and
provide for indemnification of directors and other persons. We are unaware of
any pending or threatened litigation against us or our directors that would
result in any liability for which such director would seek indemnification or
similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase our ability to attract and retain
qualified persons to serve as directors. We believe that the substantial
increase in the number of lawsuits being threatened or filed against
corporations and their directors has resulted in a growing reluctance on the
part of capable persons to serve as members of boards of directors of companies,
particularly of companies which are or intend to become public companies.
Prior to the initial closing of this offering, we expect that our officers
and directors will be covered by officers' and directors' liability insurance.
We expect that the policy coverage will be $3,000,000, which will include
reimbursement for costs and fees. Prior to the initial closing of this offering,
we also expect to enter into Indemnification Agreements with each of our
executive officers and directors. The agreements will provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related
39
<PAGE>
disbursements) actually and reasonably incurred in connection with either
the investigation, defense or appeal of a "Proceeding", as defined in the
Indemnification Agreements, including amounts paid in settlement by or on behalf
of an "Indemnitee", as defined such agreements.
In the opinion of the SEC, indemnification for liabilities arising under
the Securities Act of 1933, such as those contained in the Indemnification
Agreements, is contrary to public policy and, therefore, is unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of October 31, 1999, and as adjusted to reflect the sale of the shares of
Common Stock offered by this Prospectus, of (i) each person known by us to
beneficially own 5% or more of the shares of outstanding common stock, (ii) each
of our executive officers and directors, and (iii) all of our executive officers
and directors as a group. Except as otherwise indicated, all shares are
beneficially owned, and investment and voting power is held by, the persons
named as owners.
<TABLE>
<CAPTION>
Amount and Nature of Percentage Ownership of Percentage Ownership of
Name and Address of Common Stock Common Stock Common Stock
Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------- -------------------- --------------- -----------------------
Minimum Maximum
------- -------
<S> <C> <C> <C> <C> <C>
Clint Ballard 34,300,000 (1) 100% 98.9% 92.0%
Diana Ballard 34,300,000 (2) 100% 98.9% 92.0%
Shane H. Traveller 0 - - -
All officers and directors 34,300,000 100% 98.9% 92.0%
as a group (3 persons)
- -----------------------------
<FN>
(1) Includes 17,150,000 shares owned by Mr. Ballard's wife, Diana Ballard.
(2) Includes 17,150,000 shares owned by Mr. Ballard.
</FN>
</TABLE>
RELATED PARTY TRANSACTIONS
We have entered into employment agreements with Clint Ballard, our
President and Chief Executive Officer and Diana T. Ballard, our Chairman of the
Board. See "Management Executive Compensation."
We have granted options to purchase 50,000 shares of common stock
exercisable at an exercise price of $3.00 per share in equal installments over a
five year period to two consultants and director nominees, Michael J. Clementz
and Edward P. Swain, Jr. See "Management - Stock Option Plans."
All transactions between us and any or our officers or directors will be on
terms no less favorable to us than would be available from unaffiliated third
parties.
40
<PAGE>
PLAN OF DISTRIBUTION
Arbitrary Determination of Offering Price
We have determined the initial offering price of the shares arbitrarily.
Among the factors we considered were the nature and scope of our operations, our
current financial condition and financial requirements, estimates of our
business potential and prospects, the perceived market demand for our products,
the market capitalization, revenues and profits of other companies with top 100
Internet websites, the economics of the information technology, Internet and
software industries, the general condition of the equities market, the
valuations of other companies in our market segment, and other factors.
Limited State Registration
We will qualify or register the sales of the shares in a limited number of
states. We will not accept subscriptions from investors resident in other
states. In order to comply with the applicable securities laws, if any, of
certain states, the shares will be offered or sold in such states through
registered or licensed brokers or dealers in those states.
Terms of Sale of the Shares
We are offering the shares on a "best efforts, 400,000 share minimum,
3,000,000 share maximum" basis through our officers and directors. No sales
commissions will be paid to any of our officers or directors. Prospective
investors must purchase the shares in increments of 100 shares. Until we have
sold at least 400,000 shares, we will not accept subscriptions for any shares.
All proceeds of this offering will be deposited in an non-interest bearing
escrow account with American Stock Transfer & Trust Co. We have the right to
accept or reject any subscription for shares offered hereby, in whole or in
part, for any reason or for no reason. The offering will remain open until all
shares offered hereby are sold or nine months after the date of this prospectus,
unless we decide to cease selling efforts at any time prior to such date. We
will reimburse our officers and directors for expenses incurred in connection
with the offer and sale of the shares. Our officers and directors are relying on
Rule 3a4-1 of the Exchange Act as a "safe harbor" from registration as a
broker-dealer in connection with the offer and sales of the shares. In order to
rely on such "safe harbor" provisions provided by Rule 3a4-1, an officer or
director must (1) not be subject to a statutory disqualification; (2) not be
compensated in connection with such selling participation by payment of
commissions or other remuneration based either directly or indirectly on such
transactions; (3) not be an associated person of a broker-dealer; and (4) (i)
restrict participation to transactions involving offers and sale of the shares,
and (ii) perform substantial duties for the issuer after the close of the
offering not connected with transactions in securities, and not have been
associated with a broker or dealer for the preceding 12 months, and not
participate in selling an offering of securities for any issuer more than once
every 12 months, and (iii) restrict participation to written communications or
responses to inquiries of potential purchasers. Our officers and directors
intend to comply with the guidelines enumerated in Rule 3a4-1.
Use of a Broker-Dealer
We may locate one or more broker-dealers who may offer and sell the shares
on terms acceptable to us. If we determine to use a broker-dealer, such
broker-dealer must be a member in good standing of the National Association of
Securities Dealers, Inc. and registered, if required, to conduct sales in those
states in which it would sell the shares. We anticipate that we would not pay in
excess of 10% as a sales commission for any sales of the shares. If a
broker-dealer were to sell shares, it is likely that such broker-dealer would be
deemed to be an underwriter of the shares as defined in Section 2(11) of the
Securities Act and we would be required to obtain a no-objection position from
the National Association of Securities Dealers, Inc. regarding the underwriting
and compensation terms entered into between us and such potential broker-dealer.
In addition, we would be required to file a post-effective amendment to the
registration statement of which this prospectus is a part to disclose the name
of such selling broker-dealer and the agreed underwriting and compensation
terms. We currently have no agreements or understandings with any broker-dealer
to offer shares for sale.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $.0001 per share, and 2,000,000 shares of Serial Preferred
Stock, par value $.0001 per share.
Common Stock
General. We have 100,000,000 authorized shares of common stock, par value
$.0001 per share, 34,300,000 of which are issued and outstanding prior to this
offering. All shares of common stock currently outstanding are validly issued,
fully paid and non-assessable, and are all owned beneficially and of record by
two stockholders, Clint Ballard and Diana T. Ballard. All shares which are the
subject of this prospectus, when issued and paid for pursuant to this offering,
will be validly issued, fully paid and non-assessable.
Voting Rights. Each share of our common stock entitles the holder thereof
to one vote, either in person or by proxy, at meetings of stockholders. Our
Board of Directors is elected annually at each annual meeting of the
stockholders. The holders are not permitted to vote their shares cumulatively.
According, the holders of more than fifty percent (50%) of the voting power of
eAcceleration can elect all of our directors. See "Principal Stockholders" and
"Risk Factors" Concentration of Stock Ownership in Management".
Dividend Policy. All shares of common stock are entitled to participate
ratably in dividends when, as and if declared by our Board of Directors out of
the funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of common stock. We have not paid any dividends
since our inception and presently anticipate that all earnings, if any, will be
retained for development of our business. We expect that no dividends on the
shares of common stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of our Board of Directors and will
depend upon, among other things, our future earnings, operating and financial
condition, capital requirements, general business conditions and other pertinent
facts. There can be no assurance that any dividends on the common stock will
ever be paid.
Miscellaneous Rights and Provisions. Holders of common stock have no
preemptive or other subscriptions rights, conversions rights, redemption or
sinking fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of eAcceleration, each share of common stock is
entitled to share ratably in any assets available for distribution to holders of
the equity of eAccleration after satisfaction of all liabilities.
Shares Eligible for future Sale. Upon completion of this offering, we will
have 34,700,000 shares of common stock outstanding if the minimum number of
shares offered hereby are sold, or 37,300,000 shares of common stock outstanding
if the maximum number of shares offered hereby are sold. Of these shares, the
shares sold in this offering will be freely tradeable without restriction or
further registration under the Securities Act, except for any shares purchased
by an "affiliate" of eAcceleration (in general, a person who has a control
relationship with eAcceleration), which will be subject to the limitations of
Rule 144 adopted under the Securities Act. All of the remaining shares are
deemed to be "restricted securities", as that term is defined under Rule 144
promulgated un the Securities Act.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, commencing 90 days after the date of
this prospectus, a person, including an affiliate of eAcceleration (or persons
whose shares are aggregated), who has owned restricted shares of common stock
beneficially for at least one year, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the total
number of outstanding shares of the same class or the average weekly trading
volume of our common stock on all exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the date on which notice of the sale is filed with
the SEC. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. A person who has not been an affiliate of eAcceleration
for at least the three months immediately preceding the sale and who has
beneficially owned shares of common stock for at least two years is entitled to
sell such shares under Rule 144 without regard to any of the limitations
described above.
42
<PAGE>
All of the shares of restricted stock presently outstanding have been held
at least two years. Accordingly, commencing following the completion of the
offering, these 34,300,000 shares will be eligible for resale pursuant to Rule
144 at the rates and subject to the conditions discussed above. No predictions
can be made as to the effect, if any, that sales of shares under Rule 144 or
otherwise or the availability of shares for sale will have on the market, if
any, prevailing from time to time. The sale of any substantial number of these
shares in the public market could adversely affect prevailing market prices
following the offering.
Preferred Stock
The Board of Directors is authorized by the our Certificate of
Incorporation to issue up to an additional 2,000,000 shares of one or more
series of serial preferred stock, par value $.0001 per share. No shares of such
serial preferred stock have been authorized for issuance by our Board of
Directors, and we have no present plans to issue any such shares. In the event
that the Board of Directors issues shares of serial preferred stock, it may
exercise its discretion in establishing the terms of such serial preferred
stock. In the exercise of such discretion, the Board of Directors may determine
the voting rights, if any, of the series of preferred stock being issued, which
would include the right to vote separately or as a single class with the common
stock and/or other series of preferred stock; to have more or less voting power
per share than that possessed by the common stock or other series of preferred
stock; and to vote on certain specified matters presented to the stockholders or
on all of such matters or upon the occurrence of any specified event or
condition. On liquidation, dissolution or winding up of eAcceleration, the
holders of preferred stock may be entitled to received preferential cash
distributions fixed by the Board of Directors when creating the particular
series thereof before the holders of the common stock are entitled to receive
anything. Preferred stock authorized by the Board of Directors could be
redeemable or convertible into shares of any other class or series of stock of
eAcceleration.
The issuance of preferred stock by the Board of Directors could adversely
affect the rights of holders of the common stock by, among other things,
establishing preferential dividends, liquidation rights or voting powers. The
issuance of preferred stock could be used to discourage or prevent efforts to
acquire control of eAcceleration through the acquisition of shares of common
stock.
Certain Provisions in the Certificate of Incorporation
Our Certificate of Incorporation contains certain provisions which may be
deemed to be "anti-takeover" in nature in that such provisions may deter,
discourage or make more difficult the assumption of control of eAcceleration by
another entity or person. In addition to the ability to issue preferred stock,
these provisions include a requirement for a vote of 66-2/3% of the stockholders
in order to approve certain transactions including mergers and sales or
transfers of all or substantially all of our assets.
The Delaware Corporation Law further contains certain anti-takeover
provisions. Section 203 of the Delaware Corporation Law provides, with certain
exceptions, that as a Delaware corporation, we may not engage in any of a broad
range of business combinations with a person who owns 15% or more of our
outstanding voting stock (an "interested stockholder") for a period of three
years from the date that such person became an interested stockholder unless:
(i) the transaction resulting in a person's becoming an interested stockholder,
or the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquires 85% or more of our outstanding voting stock
(excluding shares owned by persons who are both officers and directors of
eAcceleration, and shares held by certain employee stock ownership plans); or
(iii) the business combination is approved by our Board of Directors and by the
holders of at least 66-2/3% of our outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder.
Transfer Agent
The transfer agent for the Common Stock will be American Stock Transfer &
Trust Co.
43
<PAGE>
EXPERTS
Our financial statements as of December 31, 1998 and for each of the years
in the two-year period ended December 31, 1998, appearing in this prospectus and
registration statement have been audited by McKennon, Wilson & Morgan, LLP,
independent auditors, as set forth in their report thereon, appearing elsewhere
in this prospectus and in this registration statement, and are included in
reliance upon such reports given upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for us by
Kaufman & Moomjian, LLC, Mitchel Field, New York.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . F-2
Financial Statements:
Balance Sheets December 31, 1998 and August 31, 1999 (Unaudited) . . . . F-3
Consolidated Statements of Income for each of the years in the
two-year period ended December 31, 1998 and the eight months ended
August 31, 1998 and 1999 (Unaudited) . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the years in the two-year period ended December 31,
1998 and the eight months ended August 31, 1999 (Unaudited). . . . . . . . F-5
Consolidated Statements of Cash Flows for each of the years
in the two-year period ended December 31, 1998 and the eight
months ended August 31, 1998 and 1999 (Unaudited). . . . . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
eAcceleration Corp.
We have audited the accompanying consolidated balance sheet of eAcceleration
Corp., and its subsidiary Acceleration Software International Corporation (the
"Company"), as of December 31, 1998, and the related consolidated statements of
income, stockholders' equity (deficit) and cash flows for each of the years in
the two-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eAcceleration Corp.,
as of December 31, 1998, and the results of their operations and their cash
flows for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Irvine, California
September 10, 1999, except for the matters discussed in Notes 1 and 8, as to
which the date is November 1, 1999
F-2
<PAGE>
eACCELERATION CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, 1998 August 31, 1999
----------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 239,193 $ 300,897
Accounts receivable, net of allowance
for doubtful accounts of $0 and
$30,000, respectively
Other current assets 241,667 439,681
Total current assets - 31,185
--------- ---------
480,860 771,763
Property and equipment, net 64,776 70,899
Deferred offering costs - 35,010
Patents and trademarks, net 64,281 60,967
--------- ---------
$ 609,917 $ 938,639
========= =========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable $ 49,435 $ 182,479
Accrued liabilities 71,817 80,313
Deferred revenue - 177,433
Other current liabilities 20,361 -
--------- ---------
Total current liabilities 141,613 440,225
--------- ---------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, par value $.0001;
100,000,000 shares authorized;
35,000,000 shares issued, and
34,300,000 shares outstanding
at December 31, 1998; 34,300,000
shares issued and outstanding at
August 31, 1999 (unaudited) 3,430 3,430
Additional paid-in capital 113,454 23,060
Retained earnings 466,420 471,924
Treasury stock, at cost; 1,400,000
shares in 1998 (115,000) -
--------- ---------
Total stockholders' equity 468,304 498,414
--------- ---------
$ 609,917 $ 938,639
========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
F-3
<PAGE>
eACCELERATION CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, Eight Months Ended August 31,
----------------------- -----------------------------
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
License revenues $1,840,761 $1,919,149 $1,628,162 $ 1,106,304
Internet revenues - - - 1,225,306
---------- ---------- ---------- -----------
1,840,761 1,919,149 1,628,162 2,331,610
---------- ---------- ---------- -----------
Cost and expenses:
Software development and products 1,192,728 919,895 544,911 557,965
Sales and marketing 51,459 369,336 94,934 1,016,986
General and administrative 353,972 305,071 201,791 399,556
Reduction in reserves for claims (183,554) (28,542) (28,542) -
---------- ---------- ---------- -----------
1,414,605 1,565,760 813,094 1,974,507
---------- ---------- ---------- -----------
Income from operations 426,156 353,389 815,068 357,103
---------- ---------- ---------- -----------
Other income (expense):
Interest income 10,866 49,499 46,345 3,722
Interest expense (18,896) (6,557) (5,082) (465)
Settlement gains 616,728 - - -
Other 16,489 150 150 -
---------- ---------- ---------- -----------
625,187 43,092 41,413 3,257
---------- ---------- ---------- -----------
Net income $1,051,343 $ 396,481 $ 856,481 $ 360,360
========== ========== ========== ===========
Basic earnings per common share $ 0.03 $ 0.01 $ 0.02 $ 0.01
========== ========== ========== ===========
Diluted earnings per common share $ 0.03 $ 0.01 $ 0.02 $ 0.01
========== ========== ========== ===========
Pro forma financial data (unaudited):
Pro forma net income $ 261,677 $ 237,838
========== ===========
Pro forma basic and dilutive earnings
per common share $ 0.01 $ 0.01
========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-4
<PAGE>
eACCELERATION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Earnings Treasury Stockholders
Shares Amount Capital (Accumulated Deficit) Stock Equity (Deficit)
------ ------ ------- --------------------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 35,000,000 $ 3,430 $ 113,454 $ (234,754) $ - $ (117,870)
Distributions to stockholders - - - (396,650) - (396,650)
Repurchase of common stock 700,000 - - - (115,000) (115,000)
Net income - - - 1,051,343 - 1,051,343
---------- ------- --------- ---------- --------- ----------
Balances, December 31, 1997 34,300,000 3,430 113,454 419,939 (115,000) 421,823
Distributions to stockholders - - - (350,000) - (350,000)
Net income - - - 396,481 - 396,481
---------- ------- --------- ---------- --------- ----------
Balances, December 31, 1998 34,300,000 3,430 113,454 466,420 (115,000) 468,304
Value of stock options issued
below fair value (unaudited) - - 9,606 - - 9,606
Distributions to stockholders
(unaudited) - - - (339,856) - (339,856)
Cancellation of treasury stock - - (100,000) (15,000) 115,000 -
(unaudited)
Net income (unaudited) - - - 360,360 - 360,360
---------- ------- --------- ---------- --------- ----------
Balances, August 31, 1999
(unaudited) 34,300,000 $ 3,430 $ 23,060 $ 471,924 $ - $ 498,414
========== ======= ========= ========== ========= ==========
</TABLE>
See accompanying notes to these consolidated financial statements
F-5
<PAGE>
eACCELERATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, August 31,
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,051,343 $ 396,481 $ 856,481 $ 360,360
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 62,625 54,073 24,099 19,604
Provision for write down of inventory 149,730 13,053 - -
Provision for write down of fixed assets 24,340 - - -
Value of stock options issued below fair value - - - 9,606
Settlement gain (616,728) - - -
Changes in operating assets and liabilities:
Accounts receivable 1,584 (241,667) (375,000) (198,014)
Deferred offering costs - - - (35,010)
Other current assets 2,748 (11,012) - (31,185)
Accounts payable (399,541) (7,507) 10,662 133,044
Accrued liabilities 77,214 (8,691) (80,508) 8,496
Deferred revenue (250,000) - - 177,433
Other current liabilities 106,075 (91,546) (62,850) (14,528)
---------- --------- --------- ----------
Net cash provided by operating activities 209,390 103,184 372,884 429,806
---------- --------- --------- ----------
Cash flows from investing activities:
Purchases of equipment (28,021) (32,306) (43,906) (22,413)
Patent and trademark expenditures (33,114) (35,927) - -
Settlement gain 616,728 - - -
---------- --------- --------- ----------
Net cash provided by (used in) investing activities 555,593 (68,233) (43,906) (22,413)
---------- --------- --------- ----------
Cash flows from financing activities:
Payments on capital lease obligations (12,815) (15,514) (10,051) (5,833)
Distributions to stockholders (396,650) (350,000) (260,000) (339,856)
Repurchase of common stock (115,000) - - -
---------- ---------- --------- ----------
Net cash used in financing activities (524,465) (365,514) (270,051) (345,689)
---------- ---------- --------- ----------
Net increase (decrease) in cash and cash equivalents 240,518 (330,563) 58,927 61,704
Cash and cash equivalents at beginning of period 329,238 569,756 569,756 239,193
---------- ---------- --------- ----------
Cash and cash equivalents at end of period $ 569,756 $ 239,193 $ 628,683 $ 300,897
========== ========== ========= ==========
Supplemental disclosure of cash flow information-
Cash paid during the period for-
Interest $ 18,896 $ 6,557 $ 5,082 $ 465
========== ========== ========= ==========
</TABLE>
See accompanying notes to these consolidated financial statements
F-6
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND HISTORY
Organization and Nature of Operations
eAcceleration Corp., a Delaware corporation, (the "Company"), was incorporated
on November 1, 1999. At such time, the Company acquired 100% of the issued and
outstanding common stock of Acceleration Software International Corporation,
a Washington corporation ("ASIC"). ASIC was formed in June 1995 as Ballard
Synergy Corporation and immediately merged with Ballard Synergy Corporation,
a Nevada corporation ("Ballard") and changed its name in 1996.
Ballard was originally incorporated in the state of Nevada in 1987. In
connection with the Company's acquisition of ASIC, the Company issued one share
for every two shares of ASIC that was issued and outstanding at such time. This
acquisition of ASIC by eAcceleration was accounted for at historical bases
similar to a pooling of interest since the companies were under common control.
Beginning in late 1998, the Company has provided an integrated suite of websites
which allow Internet users to receive free products in exchange for using the
Company's home page as their startpage. The Company sells online advertising
space to online media buyers and merchants who can be assured they will reach a
relatively captive and targeted set of Internet users. The Company is thus able
to sell to such customers no-risk advertising based on quantifiable actions by
to Internet users on a per click, per download or per signup basis. The Company
provides co-branding and marketing services from its websites. The Company has
also commenced revenue sharing programs whereby the Company receives a portion
of sales originated from its websites.
Since inception, the Company has developed software that primarily increases the
speed of processing by computers, computer accessories and software. The
Company's principal products are web browser, CD-ROM and hard disk accelerators.
The Company licenses such software in the United States and Asia.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All inter-company accounts have been
eliminated in consolidation.
Revenue Recognition
The Company has revenue sources from software products, license sales and online
advertising services. Management believes its revenue recognition policies are
in conformity with the American Institute of Certified Public Accountants,
Statements of Position ("SOP)" 97-2, "Software Revenue Recognition," and 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition."
Revenues from software products are recorded when the software has been
delivered. Revenues from license agreements that allow unlimited duplication are
recorded when the product master is delivered. Maintenance and support of
software is not significant and is accrued at the time revenue is recognized.
Revenue from software developed for customers which require significant
production, modification or customization of software is recognized in a manner
which approximates SOP 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts." Specifically, the Company uses the
percentage of completion method based on labor costs incurred.
F-7
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Advertising revenues consist of banner advertising and anchor positions. Banner
advertising and anchor positions can be based on impressions, click-through,
signups, or downloads. Revenues from contracts based on impressions,
click-through, signups or downloads are recognized in the period in which the
services are provided.
Advertising Costs
Advertising costs are expensed as incurred.
Research and Development Costs
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the double
declining method over the estimated useful lives of the related assets, ranging
from five to seven years. Maintenance and repairs are charged to expense as
incurred. Significant renewals and betterments are capitalized. At the time of
retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
Software Development Costs
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," states
that all costs incurred in connection with the development of software
subsequent to technological feasibility should be capitalized until such time
that the software is available to customers. The Company believes its current
process for developing software is essentially completed concurrent with the
establishment of technological feasibility and, as such, no costs have been
capitalized to date.
Deferred Offering Costs
Direct costs incurred in connection with the Company's initial public offering
(the "Offering") are capitalized. In the event the Offering is unsuccessful, the
Company will charge these costs to operations.
Patents and Trademarks
Patents and trademarks are recorded at cost and are amortized using the
straight-line method over the estimated useful lives of the related assets
ranging from three (3) to five (5) years.
F-8
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets under the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. At present, the Company reviews for impairment annually.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair value of the financial
instruments could be different than that recorded on a historical basis in the
accompanying balance sheets. The Company's financial instruments consist of
accounts receivable and accounts payable. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of December 31,
1998.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" ("EPS"). SFAS No. 128 requires dual presentation
of basic EPS and diluted EPS on the face of all income statements issued after
December 15, 1997, for all entities with complex capital structures. Basic EPS
is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options, warrants and
other convertible securities. The table set forth below reconciles the
components of the basic net income per share calculation to the diluted net
income per share.
<TABLE>
<CAPTION>
December 31, August 31,
------------------------ -----------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 35,000,000 34,300,000 34,300,000 34,300,000
Effect of dilutive stock options - - - 127,719
---------- ---------- ---------- ----------
Weighted average shares outstanding - Dilutive 35,000,000 34,300,000 34,300,000 34,427,719
========== ========== ========== ==========
</TABLE>
There were 175,000 options to purchase common stock ranging from $1.50 to $3.00
per share which were considered anti-dilutive during the eight months ended
August 31, 1999 (unaudited).
F-9
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Income Taxes and Pro Forma Financial Data
The Company elected to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, profits and losses are reflected in the individual income tax
returns of the stockholders. Income taxes are not material to the financial
statements.
Included in the accompanying statements of income is pro forma financial data
(unaudited) reflecting pro forma net income and earnings per share assuming the
Company was taxed as a C-Corporation from the beginning of the most recent
annual statement of income and the most recent interim period. The Company's
estimated federal tax rate would be approximately 34%. There are no material
state income taxes incurred by the Company; however, the Company pays a business
tax based on certain revenues, which are not classified as income taxes.
Risks, Uncertainties and Concentrations
The Company's operations are subject to new innovations in product design and
function. Significant technological changes can have an adverse effect on
product lives. Design and development of new products are important elements to
achieve profitability in this industry segment.
The Company, at times, maintains cash balances at a certain financial
institution in excess of amounts insured by Federal agencies.
The Company provides credit in the normal course of business to customers
throughout the United States and Asia. The Company has a policy to perform
credit evaluations on all customers with significant orders. The Company does
not obtain collateral with which to secure its accounts receivable. The Company
maintains reserves for potential credit losses based upon the Company's
historical experience related to credit losses.
Licensing revenues from Asia for the years ended December 31, 1997 and 1998 were
$1,145,000 and $1,636,000, respectively.
During the year ended December 31, 1997, the Company received a significant
portion of its business from two unaffiliated customers. Sales to these
unaffiliated customers totaled 62% and 30%, respectively, of total sales.
During the year ended December 31, 1998, the Company received a significant
portion of its business from two unaffiliated customers. Sales to these
unaffiliated customers totaled 85% and 14% of sales, respectively. As of
December 31, 1998, 100% of accounts receivable was due from one of these
customers.
During the eight months ended August 31, 1999, the Company received a
significant portion of its business from two unaffiliated customers. Sales to
these unaffiliated customers totaled 47% and 18% (unaudited) of sales,
respectively. As of August 31, 1999, (unaudited) the Company had 49% of accounts
receivable due from one of these customers.
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 reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those estimates.
F-10
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Unaudited Interim Consolidated Financial Statements
The interim consolidated financial data as of August 31, 1999, and for the eight
months ended August 31, 1998 and 1999, is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of August 31, 1999, and the results of their operations and their
cash flows for the eight months ended August 31, 1998 and 1999.
Stock Compensation
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS No. 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS No. 123 had been applied. The Company has
elected to account for its stock-based compensation to employees under APB 25.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income, as well as
certain non-shareholder items that are reported directly within a separate
component of stockholders' equity and bypass net income. The Company has adopted
the provisions of this statement in 1998, with no impact on the accompanying
consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The provisions of this statement require
disclosures of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
stockholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating
decision-maker in the determination of resource allocation and assessing
performance, and for which discrete financial information is available. The
Company has adopted the provisions of this statement in 1998 with no impact on
the accompanying consolidated financial statements. The impact of such
provisions during the period ended August 31, 1999 will be reported at December
31, 1999.
F-11
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1998, and
August 31, 1999 (unaudited):
<TABLE>
<CAPTION>
December 31, August 31, 1999
1998 (unaudited)
------------ ---------------
<S> <C> <C>
Equipment $ 224,320 $ 246,733
Furniture and fixtures 15,886 15,886
Vehicles 39,987 39,987
---------- ----------
Less accumulated depreciation (215,417) (231,707)
---------- ----------
$ 64,776 $ 70,899
========== ==========
</TABLE>
During the years ended December 31, 1997 and 1998, and the eight months ended
August 31, 1998 and 1999 (unaudited), depreciation expense totaled $61,422,
$49,103, $23,221, and $16,290, respectively.
NOTE 4 PATENTS AND TRADEMARKS
Patents and trademarks consist of the following as of December 31, 1998, and
August 31, 1999 (unaudited):
<TABLE>
<CAPTION>
December 31, August 31, 1999
1998 (unaudited)
------------ ---------------
<S> <C> <C>
Patents $ 81,481 $ 81,481
Trademarks 4,560 4,560
---------- ---------
Less accumulated amortization ( 21,760) ( 25,074)
---------- ---------
$ 64,281 $ 60,967
========== =========
</TABLE>
F-12
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company currently leases a building that holds substantially all of the
Company's operations. The lease was extended in February 1999 for an additional
five years. As a result of this extension the lease expires in the year 2005.
The Company's future annual minimum lease payments at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1999 $ 24,677
2000 23,628
2001 22,491
2002 22,491
2003 22,491
Thereafter 24,365
---------
$ 140,143
=========
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1998, and for the
eight-month periods ended August 31, 1998 and 1999 (unaudited), amounted to
$51,565, $20,628, $11,764, and $17,166, respectively.
Litigation
In 1997, the Company reached an out-of-court settlement of a dispute with a
former licensee and purchaser of one of the Company's products. Under the terms
of the settlement, the Company received $616,728, net of attorneys' fees and
costs amounting to $308,272. The income from this settlement has been included
as other income in the 1997 statement of income.
In 1997, the Company settled a dispute with a former distributor of the
Company's product in relation to advertising expenses owed to the distributor.
Under the settlement agreement, the Company was obligated to pay $160,000, plus
5% interest on the unpaid portion, in monthly installments for two years
beginning May 1997. The unpaid portion as of December 31, 1998 was $14,528,
which has been included in other current liabilities.
A small number of claims have been made against the Company for credits and
unpaid advertising and marketing fees from various former distributors of the
Company's products. The Company estimated the credits to be approximately
$183,554. Accordingly, the Company recorded a provision of approximately
$183,554 to operations in fiscal 1995. In 1997, the Company determined that
these claims no longer had merit and, accordingly, recorded a reduction in its
reserves which are included in the accompanying statement of income.
The Company is subject to a limited number of claims and actions which arise in
the ordinary course of business. The litigation process is inherently uncertain,
and it is possible that the resolution of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters that may have material impact on the Company's financial position,
results of operations or cash flows.
F-13
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
As of July 12, 1999, the Company entered into a consulting agreement relating to
services consisting of financial public relations and advise regarding corporate
structuring and marketing. The terms of the contract include, among others,
payments of up to an aggregate of $187,500 and a grant of options to the
consultant in an amount equal to 0.1% of the outstanding common stock of the
Company. The Agreement expires on July 11, 2000.
NOTE 6 - STOCKHOLDERS' EQUITY
Common Stock Purchase Options
In 1995, the Board of Directors of ASIC adopted the 1995 Stock Option Plan (the
"1995 Plan") pursuant to which officers, directors and employees of the Company
were eligible to receive options to purchase common stock of the Company.
Options to purchase 27,500 shares were granted at $0.70 per share, vesting over
four years. As of December 31, 1998, the Company had 27,500 options outstanding
and exercisable. The Company did not grant nor have any exercises of stock
options during the fiscal years ended December 31, 1997 and 1998. The weighted
average remaining contractual life of options outstanding as of December 31,
1998, was 6.71 years.
On June 1, 1999, the Board of Directors of ASIC adopted the 1999 Stock Option
Plan (the "1999 Plan"). Under the 1999 Plan, the Company may issue 5,000,000
shares of common stock. The 1999 Plan is administered by the Compensation
Committee of the Board of Directors of the Company, which determines the terms
and conditions of the options granted, including exercise price, number of
options granted and the vesting period of such options. The maximum term of
options is ten years from the date of grant. Incentive stock options are granted
at the fair market value of the underlying stock on the date of grant, and
non-qualified stock options are generally granted at 85% of the estimated fair
value of the underlying stock on the date of grant.
During the eight-month period ended August 31, 1999 (unaudited), the Company
granted options to purchase an aggregate of 805,000 shares of common stock at
exercise prices ranging from $0.50 to $3.00 per share; the weighted average
exercise price of options granted is $0.70 per share. The Board of Directors
established the estimated fair value of the underlying common stock to be $1.04
to $3.00 per share near the dates of grants of such stock options. Due to the
transition of the Company's operations to the Internet and the related success
of such transition, the Company believes that the value of the Company is
increasing rather dramatically through 1999. The Company recorded $9,606 of
compensation based upon aggregate compensation of $521,335, which will be
amortized over the vesting period of the related options, generally 10 years.
Options granted to directors are vested over five years.
Subsequent to August 31, 1999, through November 1, 1999, the Company has granted
options to purchase 280,000 shares of common stock at an exercise price
of $3.00 per share. Options to purchase 130,000 shares vest ratably over five
years and options to purchase 150,000 shares vest on the 9th anniversary of the
date of grant, accelerating based on certain events. Options to purchase 130,000
shares were granted at estimated fair value; however, options to purchase
150,000 shares were granted below estimated fair value of $4.50 per share at the
time of grant. Compensation expense for such options issued below estimated fair
value will be charged to operations over the 10-year vesting term.
NOTE 7 - RELATED PARTY TRANSACTIONS
In fiscal 1997, the Company repurchased all shares of the Company's common stock
issued to a former director for $115,000 originally issued at $100,000. On
August 31, 1999, the Board of Directors of ASIC approved the cancellation of
such shares and, accordingly, the Company charged retained earnings in the
amount of $15,000 for the difference between the original issuance price and the
repurchase price.
See Note 6 for treasury stock transaction with a related party.
F-14
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - SUBSEQUENT EVENTS
On November 1, 1999, the Company entered into employment agreements with its two
shareholders. These agreements are for a period of five years and provide
compensation annually in the amount of $104,000 and bonuses based on 2.5% of
earnings before taxes. Such agreements become effective on the date of the first
closing of the initial public offering.
On November 2, 1999, the Board of Directors of the Company authorized the
Company's management to file a registration statement for an initial public
offering (the "Offering") of the Company's common stock.
See Notes 1 and 6 for additional subsequent events.
F-15
<PAGE>
================================================================================
Prospective investors may rely only on the information contained in this
prospectus. eAcceleration has not authorized anyone to provide prospective
investors with different or additional information. This prospectus is not an
offer to sell nor is it seeking an offer to buy in any jurisdiction where such
offer, or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of these shares.
-------------------------
TABLE OF CONTENTS
-------------------------
Page
Where you can find more information. . . . . . . . . . . . . . . . . . . 3
Forward looking statements . . . . . . . . . . . . . . . . . . . . . . . 3
Prospectus summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Use of proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Management's discussion and analysis . . . . . . . . . . . . . . . . . . 23
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Principal stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 40
Related party transactions . . . . . . . . . . . . . . . . . . . . . . . 40
Plan of distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Description of capital stock . . . . . . . . . . . . . . . . . . . . . . 42
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Legal matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Index to financial statements. . . . . . . . . . . . . . . . . . . . . . F-1
================================================================================
<PAGE>
================================================================================
[LOGO]
eACCELERATION CORP.
3,000,000 SHARES
of
COMMON STOCK
------------------
PROSPECTUS
------------------
1999
--------------,
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under the provisions of the Certificate of Incorporation and By-Laws of the
Registrant, each person who is or was a director or officer of Registrant shall
be indemnified by the Registrant as of right to the full extent permitted or
authorized by the General Corporation Law of Delaware. Under such law, to the
extent that such person is successful on the merits of defense of a suit or
proceeding brought against such person by reason of the fact that such person is
a director or officer of the Registrant, such person shall be indemnified
against expenses (including attorneys' fees) reasonably incurred in connection
with such action. If unsuccessful in defense of a third-party civil suit or a
criminal suit or if such a suit is settled, such a person shall be indemnified
under such law against both (1) expenses (including attorneys' fees) and (2)
judgments, fines and amounts paid in settlement if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and with respect to any criminal
action, had no reasonable cause to believe such person's conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Registrant, or if such suit is settled, such a person shall be indemnified under
such law only against expenses (including attorneys' fees) incurred in the
defense or settlement of such suit if such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the Registrant, except that if such a person is adjudicated to be
liable in such suit for negligence or misconduct in the performance of such
person's duty to the Registrant, such person cannot be made whole even for
expenses unless the court determines that such person is fairly and reasonably
entitled to be indemnified for such expenses.
Prior to the initial closing of this offering, the Registrant expects that
its officers and directors will be covered by officers' and directors' liability
insurance, with policy coverage will be $3,000,000, which will include
reimbursement for costs and fees. The Registrant has entered into
Indemnification Agreements with each of its executive officers and directors.
The Agreements provide for reimbursement for all direct and indirect costs of
any type or nature whatsoever (including attorneys' fees and related
disbursements) actually and reasonably incurred in connection with either the
investigation, defense or appeal of a Proceeding, as defined, including amounts
paid in settlement by or on behalf of an Indemnitee, as defined.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the distribution, all of which are to be borne by
the Registrant, are as follows:
SEC Registration Fee. . . . . . . . . . . . . . . . . . $ 5,213
Blue Sky Fees and Expenses. . . . . . . . . . . . . . . 60,000*
Accounting Fees and Expenses. . . . . . . . . . . . . . 60,000*
Legal Fees and Expenses . . . . . . . . . . . . . . . . 120,000*
Printing and Engraving. . . . . . . . . . . . . . . . . 40,000*
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 14,787*
----------
Total. . . . . . . . . . . . . . . . . . . . . . $300,000
==========
- --------------
*Estimated
Item 26. Recent Sales of Unregistered Securities
Not applicable.
II-1
<PAGE>
Item 27. Exhibits.
Number Description
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
5.1 Opinion and Consent of Kaufman & Moomjian, LLC regarding the legality
of the securities being registered.
10.1 Amended and Restated 1999 Stock Incentive Compensation Plan.
10.2 Employment Agreement between the Registrant and Clint Ballard.
10.3 Employment Agreement between the Registrant and Diana T. Ballard.
10.4 Form of Indemnification Agreement between the Registrant and its
executive officers and directors.
10.5 Form of Subscription Agreement for this offering.
10.6 Form of Escrow Agreement between Registrant and American Stock Transfer
& Trust Co.
10.7 Distribution Agreement between the Registrant and Pointe Control.
10.8 Software License and Distribution Agreement between the Registrant and
Syncronys Softcorp.
10.9 Lease Agreement, as amended, between Registrant and Finn Hill
Partnership.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.
Item 28. Undertakings.
The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts of events which, individually or
together, represent a fundamental change in the information in
the registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial
bona fide offering of those securities.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Poulsbo,
State of Washington on the 12th day of November, 1999.
eAcceleration Corp.
By: /s/ Clint Ballard
-------------------------------------
Clint Ballard
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Clint
Ballard, with full power of substitution, his/her true and lawful
attorney-in-fact and agent to do any and all acts and things in his/her name and
on his/her behalf in his/her capacities indicated below which he may deem
necessary or advisable to enable eAcceleration Corp. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for him/her in his/her name in the capacities stated below, any and all
amendments (including post-effective amendments) thereto, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in such connection, as
fully to all intents and purposes as we might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated on November 12, 1999.
Signatures Title
/s/ Clint Ballard
- ---------------------------- President, Chief Executive Officer and Director
Clint Ballard (Principal Executive Officer)
/s/ Diana T. Ballard
- ---------------------------- Chairman of the Board, Secretary and Treasurer
Diana T. Ballard
/s/ Shane H. Traveller
- ---------------------------- Chief Financial Officer
Shane H. Traveller (Principal Financial and Accounting Officer)
II-3
<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
5.1 Opinion and Consent of Kaufman & Moomjian, LLC regarding the legality of
the securities being registered.
10.1 Amended and Restated 1999 Stock Incentive Compensation Plan.
10.2 Employment Agreement between the Registrant and Clint Ballard.
10.3 Employment Agreement between the Registrant and Diana T. Ballard.
10.4 Form of Indemnification Agreement between the Registrant and its
executive officers and directors.
10.5 Form of Subscription Agreement for this offering.
10.6 Form of Escrow Agreement between Registrant and American Stock Transfer
& Trust Co.
10.7 Distribution Agreement between the Registrant and Pointe Control.
10.8 Software License and Distribution Agreement between the Registrant and
Syncronys Softcorp.
10.9 Lease Agreement, as amended, between Registrant and Finn Hill
Partnership.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.
II-4
CERTIFICATE OF INCORPORATION
of
EACCELERATION CORP.
(a Delaware corporation)
* * * * * *
THE UNDERSIGNED, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly, Chapter 1, Title 8, of the Delaware Code and
the acts amendatory thereof and supplemental thereto and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the Corporation is:
EACCELERATION CORP.
SECOND: The location of the registered office of the Corporation in the
State of Delaware is at 1013 Centre Road, Wilmington, Delaware 19805. The name
of the registered agent of the Corporation in the State of Delaware at such
address upon whom process against the Corporation may be served is Corporation
Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: (a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is ONE HUNDRED TWO MILLION
(102,000,000) shares, of which (i) TWO MILLION (2,000,000) shares shall be
Serial Preferred Stock of the par value of $.0001 per share and (ii) ONE HUNDRED
MILLION (100,000,000) shares shall be shares of Common Stock of the par value of
$.0001 per share.
(b) The statement of the relative rights, preferences and
limitations of the shares of each class of stock is as follows:
A. Serial Preferred Stock. The Serial Preferred Stock may be
issued from time to time in classes or series and shall have such voting
powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof,
as shall be stated and expressed in the resolution or resolutions of
the Board of Directors providing for the issuance of such stock.
B. Common Stock. Subject to the rights, privileges,
preferences and priorities of any holders of Serial Preferred Stock, the
Common Stock shall be entitled to dividends out of funds legally available
therefor, when, as and if declared and paid to the holders of Common
Stock, and upon liquidation, dissolution or winding up of the Corporation,
to share ratably in the assets of the Corporation available for
distribution to the holders of Common Stock. Except as otherwise provided
herein or by law, the holders of the Common Stock shall have full voting
rights and powers, and each share of Common Stock shall be entitled to
one vote. All shares of Common Stock shall be identical with each other in
every respect.
<PAGE>
FIFTH: The name and mailing address of the incorporator is as follows:
Richard B. Goodman
Kaufman & Moomjian, LLC
Suite 206
50 Charles Lindbergh Boulevard
Mitchel Field, New York 11553
SIXTH: The number of directors of the Corporation shall be determined in
the manner prescribed by the by-laws of the Corporation. Each director shall
serve until his successor shall have been duly elected and qualified, unless he
shall resign, become disqualified, disabled or shall otherwise be removed.
Whenever a vacancy occurs on the Board of Directors, a majority of the remaining
directors have the power to fill the vacancy by electing a successor director to
fill that portion of the unexpired term resulting from the vacancy.
SEVENTH: Meetings of stockholders may be held within or without the State
of Delaware as the by-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware, at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the Corporation. Election of directors
need not be by written ballot unless the by-laws of the Corporation shall so
provide.
EIGHTH: Subject to the provisions contained in Article TWELFTH hereof, the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
NINTH: Any action required to be taken or which may be taken at any annual
or special meeting of stockholders of the Corporation may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
TENTH: Special meetings of stockholders may be called by the Chairman of
the Board, President or a majority of the Board of Directors or at the written
request of stockholders owning at least 66 % of the entire voting power of the
Corporation's capital stock.
ELEVENTH: In the event that it is proposed that the Corporation enter into
a merger or consolidation with any other corporation and such other corporation
or its affiliates singly or in the aggregate own or control directly or
indirectly 15% or more of the outstanding voting power of the capital stock of
the Corporation, or that the Corporation sell substantially all of its assets or
business to such other corporation, the affirmative vote of the holders of not
less than 66 % of the total voting power of all outstanding shares of capital
stock of the Corporation shall be required for the approval of any such
proposal; provided, however, that the foregoing shall not apply to any such
merger, consolidation or sale of assets or business which was approved by
resolutions of the Board of Directors of the Corporation prior to the
acquisition of the ownership or control of 15% of the outstanding shares of the
Corporation by such other corporation or its affiliates, nor shall it apply to
any such merger, consolidation or sale of assets or business between the
Corporation and another corporation, 50% or more of the total voting power of
which is owned by the Corporation. For the purposes hereof, an "affiliate" is
any person (including a corporation, partnership, trust, estate or individual)
who directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified; and
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of management and policies of a person, whether through
the ownership of voting securities, by contract, or otherwise.
2
<PAGE>
TWELFTH: The provisions set forth in Articles SIXTH, NINTH, TENTH AND
ELEVENTH above may not be altered, amended or repealed in any respect unless
such alteration, amendment or repeal is approved by the affirmative vote of the
holders of not less than 66 % percent of the total voting power of all
outstanding shares of capital stock of the Corporation.
THIRTEENTH: Each person who at any time is or shall have been a director or
officer of the Corporation and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that the person
is, or the person or the person's testator or intestate was, a director,
officer, employee or agent of the Corporation, or served at the request of the
Corporation as a director, officer, employee, trustee or agent of another
corporation, partnership, joint, venture, trust or other enterprise, shall be
indemnified against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any such threatened, pending or completed action, suit or
proceeding to the full extent authorized under Section 145 of the General
Corporation Law of the State of Delaware. The foregoing right of indemnification
shall in no way be exclusive of any other rights of indemnification to which
such director or officer may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
FOURTEENTH: Any and all right, title, interest and claim in or to any
dividends declared by the Corporation, whether in cash, stock, or otherwise,
which are unclaimed by the stockholder entitled thereto for a period of six
years after the close of business on the payment date shall be and be deemed to
be extinguished and abandoned; such unclaimed dividends in the possession of the
Corporation, its transfer agents, or other agents or depositaries shall at such
time become the absolute property of the Corporation, free and clear of any and
all claims for any person whatsoever.
FIFTEENTH: Any and all directors of the Corporation shall not be liable to
the Corporation or any stockholder thereof for monetary damages for breach of
fiduciary duty as director except as otherwise required by law. No amendment to
or repeal of this Article FIFTEENTH shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any act or omission of such director occurring prior to such
amendment or repeal.
SIXTEENTH: The Board of Directors of the Corporation shall expressly have
the power and authorization to make, alter and repeal the by-laws of the
Corporation, subject to the reserved power of the stockholders to make, alter
and repeal any by-laws adopted by the Board of Directors.
THE UNDERSIGNED, for the purposes of forming the Corporation under the
laws of the State of Delaware, does hereby make and execute this Certificate and
affirm and acknowledge, under the penalties of perjury, that this Certificate is
my act and deed and that the facts herein stated are true, and I have
accordingly set my hand hereto this 1st day of November, 1999.
/s/ Richard B. Goodman
------------------------
Richard B. Goodman
Incorporator
Kaufman & Moomjian, LLC
50 Charles Lindbergh Boulevard
Suite 206
Mitchel Field, New York 11553
(516) 222-5100
3
eAcceleration Corp.
BY-LAWS
* * * * * *
ARTICLE I
OFFICES
Section 1. The registered office shall be in the city of Wilmington,
County of New Castle, State of Delaware.
The corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place as may be fixed from time to time by the
board of directors either within or without the State of Delaware as shall be
designated from time to time by the board of directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held on the third
Thursday of June if not a legal holiday, and if a legal holiday, then on the
next secular day
<PAGE>
following, at 11:00 a.m., or at such other date and time as shall be
designated from time to time by the board of directors and stated in the notice
of meeting, at which they shall elect by a plurality vote those directors whose
terms have expired pursuant to the provisions of the Certificate of
Incorporation, and transact such other business as may properly be brought
before the meeting.
Section 3. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten nor more than fifty days before the date of
the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of meeting,
or, if not specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, may be called only at the written request of the Chairman of the
Board, the President, a majority of the Board of Directors or by stockholders
owning at least sixty-six and two-thirds
-2-
<PAGE>
percent (66-2/3%) of the entire voting power of the corporation's capital
stock. Such request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose for which the meeting is called,
shall be given not less than ten nor more than fifty days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty (50%) percent of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting, at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall
-3-
<PAGE>
decide any question brought before such meeting, unless the question is one
upon which by express provision of the statutes or of the certificate of
incorporation, a different vote is required in which case such express provision
shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation or certificates of designations, and preferences, each stockholder
shall at every meeting of the stockholders be entitled to one vote in person or
by proxy for each share of the capital stock having voting power held by such
stockholder, but no proxy shall be voted on after three years from its date,
unless the proxy provides for a longer period.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be not less than two (2) nor more than eleven (11). The number of
directors constituting the whole board is initially set at two (2) and may be
changed from time to time by resolution of the board of directors. No director
need be a stockholder of the corporation. Any director may be removed from
office at any time by the affirmative vote of stockholders of record holding a
majority of the outstanding shares of stock of the corporation entitled to vote,
at a meeting of the stockholders called for that purpose.
Section 2. Each director shall serve until his successor shall have
been duly elected and qualified, unless he shall resign, become disqualified,
disabled or shall otherwise be removed. Whenever a vacancy occurs on the board
of directors, the remaining directors have the power to fill the vacancy by
electing a successor director to fill that portion of the unexpired term
resulting from the vacancy. An increase in the size of the board of directors
shall be deemed to
-4-
<PAGE>
create one vacancy for each number of directors in excess of the number of
directors prior to such increase in the size of the board of directors.
Section 3. The business of the corporation shall be managed by its
board of directors, which may exercise all such powers of the corporation and do
all such lawful acts and things as are not by statute or by these by-laws
directed or required to be exercised or done by the stockholders.
Section 4. The board of directors shall choose a chairman of the
board of directors who shall preside at all meetings of stockholders and
directors.
Section 5. The board of directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 6. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president or chairman of the board on two days' prior notice to each director,
either personally or by mail, nationally recognized overnight courier service,
confirmed electronic mail, facsimile transmission electronically confirmed or by
telegram; special meetings shall be called by the president or secretary in like
manner and on like notice on the written request of two or more directors.
Section 8. At all meetings of the board one-half of the board of
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation.
-5-
<PAGE>
If a quorum shall not be present at any meeting of the board of directors,
the directors present thereat may adjourn the meeting form time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10 (a) Nominations for the election of directors may be made
by the Board of Directors or by any stockholder entitled to vote for the
election of directors. Such nominations other than by the Board of Directors
shall be made by notice in writing, delivered or mailed by first class United
States mail, postage prepaid, to the Secretary of the corporation not less than
ninety (90) days prior to the first anniversary of the date of the last meeting
of stockholders of the corporation called for the election of directors.
(b) Each notice shall set forth (i) the name, age and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the stockholder is a
holder of record of the corporation entitled to vote at the meeting and intends
to appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (iii) the name, age, business address and, if known,
residence address of each nominee proposed in such notice; (iv) the principal
occupation or employment of each such nominee; (v) a description of all
arrangements or understandings between the stockholder and each such nominee and
any other person or persons
-6-
<PAGE>
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (vi) such other information
regarding each such nominee as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had each nominee been nominated, or intended to be nominated, by the
Board of Directors of the corporation; and (vii) the consent of each such
nominee to serve as a director of the corporation if so elected.
(c) The Chairman of any meeting of stockholders may, if the
facts warrant, determine and declare to the meeting that a nomination was not
made in accordance with the foregoing procedure, and if he or she should so
determine, the Chairman shall so declare to the meeting and the defective
nomination shall be disregarded.
(d) Except as required in the By-Laws no election need be
by written ballot.
COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member of any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all
-7-
<PAGE>
the powers and authority of the board of directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders of sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the board of directors.
Section 12. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation, the board of directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
-8-
<PAGE>
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, nationally recognized
overnight courier services, confirmed electronic mail, facsimile transmission
electronically confirmed or by telegram, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage or other delivery charges thereon prepaid, and such notice shall be
deemed to be given at the time when the same shall be deposited in the United
States mail or delivered by a nationally recognized overnight courier service,
confirmed electronic mail, facsimile transmission electronically confirmed or by
telegram. Notice to directors may also be given by telephone.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
board of directors and shall be a chairman of the board of directors, a
president, one or more vice-presidents, a secretary and a treasurer. The board
of directors may also choose additional vice-presidents, and one or more
assistant secretaries and assistant treasurers. Any number of
-9-
<PAGE>
offices may be held by the same person, unless the certificate of
incorporation or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a chairman of the board of
directors, a president, one or more vice-presidents, a secretary and a
treasurer.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries and other compensation of all officers and
agents of the corporation shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by the
board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
CHAIRMAN OF THE BOARD
Section 6. The chairman of the board of directors shall preside at
all meetings of stockholders and directors. Except where by law the signature of
the president is required, the chairman of the board of directors shall possess
the same power as the president to sign all certificates, contracts, and other
instruments of the corporation which may be authorized by the board of
directors. During the absence or disability of the president, he or she shall
exercise all powers and discharge all duties of the president.
-10-
<PAGE>
THE PRESIDENT
Section 7. The president shall be the chief executive officer of the
corporation, unless otherwise resolved by the board of directors. The president
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the board of directors are carried
into effect. In the absence of the chairman of the board of directors, the
president shall preside at all meetings of the stockholders and the board of
directors.
The president shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
THE VICE PRESIDENTS
Section 8. In the absence of the chairman of the board of directors
or the president or in the event of his inability or refusal to act, the vice
president (or in the event there be more than one vice president, the vice
presidents in the order designated, or in the absence of any designation, first
any vice presidents in the order of their election and then the remaining vice
presidents in the order of their election) shall perform the duties of the
chairman of the board of directors or the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the chairman
of the board of directors or the president. The vice presidents shall perform
such other duties and shall have other powers as the board of directors may from
time to time prescribe.
-11-
<PAGE>
THE SECRETARY AND ASSISTANT SECRETARIES
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all proceedings of the
meetings of the corporation and of the board of directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the board of directors, and shall perform
such other duties as may be prescribed by the board of directors, the chairman
of the board of directors or the president, under whose supervision he shall be.
He shall have custody of the corporate seal of the corporation and he, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such assistant secretary. The board of directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
Section 10. The assistant secretary, or if there be more than one,
the assistant secretaries, in the order determined by the board of directors (or
if there be no such determination, then in the order of their election), shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
TREASURER AND ASSISTANT TREASURER
Section 11. The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all monies
and other valuable effects in the name
-12-
<PAGE>
and to the credit of the corporation in such depositories as may be
designated by the board of directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the chairman of the board of directors and
the president and board of directors, at its regular meetings, or when the board
of directors so requires, an account of all his transactions as treasurer and of
the financial condition of the corporation.
Section 13. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 14. The assistant treasurer, of if there shall be more than
one, the assistant treasurers in the order determined by the board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
INDEMNIFICATION PROVISION
Section 15. The corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened pending or
completed action, suit or
-13-
<PAGE>
proceeding by reason of the fact that he is or was a director, officer,
employee or an agent of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with the
defense or settlement of such action, suit or proceeding, to the fullest extent
and in the manner set forth in and permitted by the General Corporation Law of
the State of Delaware, as from time to time in effect, and any other applicable
law, as from time to time in effect. Such right of indemnification shall not be
deemed exclusive of any other rights to which such director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of each such person.
The foregoing provisions of this Article shall be deemed to be a
contract between the corporation and each director, officer, employee or agent
who serves in such capacity at any time while this Article, and the relevant
provisions of the General Corporation Law of the State of Delaware and other
applicable law, if any, are in effect, and any repeal or modification thereof
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of the corporation by the
chairman of the board of directors,
-14-
<PAGE>
the president or a vice president and the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of the corporation,
certifying the number of shares owned by him in the corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class
of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitation or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock; provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Where a certificate is countersigned (1) by a transfer
agent other than the corporation or its employee, or (2) by a registrar other
than the corporation or its employee, any other signature on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate
-15-
<PAGE>
shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the board of directors may, in its
discretion and as a condition precedent to the issuance hereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall required
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
-16-
<PAGE>
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix in advance a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
-17-
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the board of directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining property of the corporation, or for such other purpose
as the directors shall think conducive to the interest of the corporation, and
the directors may modify or abolish any such reserve in the manner in which it
was created.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be January 1
through December 31 unless otherwise fixed by resolution of the board of
directors.
-18-
<PAGE>
SEAL
Section 5. The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words, "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended, repealed or new
by-laws may be adopted by the stockholders or by the board of directors, when
such power is conferred upon the board of directors by the certificate of
incorporation, at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting.
Front Page
NUMBER eAcceleration Corp. SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
EA _______ ________
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that CUSIP _____________
is the owner of
full-paid and non-assessable shares of Common stock of the par value
of One-Hundredth of One Cent ($.0001) each of
eAcceleration Corp.
transferable on the books of the Corporation by the registered owner hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent.
This certificate and the shares represented hereby are issued and shall be
subject to all of the provisions of the Certificate of Incorporation
and By-Laws of the Corporation as the same now exist or may be amended
hereafter, to all of which the holder, by acceptance hereof assents.
WITNESS the facsimile seal of the Corporation and the signatures of its duly
authorized officers.
Dated:
eAcceleration Corp.
Corporate Seal
1999
________________ SECRETARY Delaware _______________ PRESIDENT
Countersigned
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, N.Y.)
TRANSFER AGENT
By
AUTHORIZED SIGNATURE
<PAGE>
Back Page
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ___ Custodian ___
TEN ENT - as tenants by the entireties (Cust) Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________________
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------Shares represented
by the within Certificate, and do hereby irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
--------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signatures(s) Guaranteed:
- -------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
KAUFMAN & MOOMJIAN, LLC
Attorneys at Law
-------------
50 Charles Lindbergh Boulevard - Suite 206
Mitchel Field, New York 11553
-------------
Telephone: (516) 222-5100
Facsimile: (516) 222-5110
Internet: www.kmcorplaw.com
November 12, 1999
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 93870
Re: Registration Statement on Form SB-2
-----------------------------------
Dear Sirs/Madams
We have acted as special counsel to you in connection with the
proceedings for the authorization and issuance by eAcceleration Corp., a
Delaware corporation (the "Company") of up to 3,000,000 shares (the "Shares") of
the Company's common stock, $.0001 par value per share (the "Common Stock"), and
the preparation and filing of a registration statement on Form SB-2 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), which you are filing with the Securities and Exchange
Commission with respect to the Shares.
We have examined the Registration Statement and such documents and
records of the Company and other documents as we have deemed necessary for the
purpose of this opinion. In connection therewith, we have assumed the following:
(a) the filing and effectiveness of the Registration Statement and
any amendments thereto;
(b) due execution by the Company and counter-signature by its
transfer agent of certificates representing the Shares;
(c) the offering and sale of the Shares as contemplated
by the Registration Statement; and
(d) receipt by the Company of the consideration required for
the Shares contemplated by the Registration Statement.
<PAGE>
KAUFMAN & MOOMJIAN, LLC
eAcceleration Corp.
November 12, 1999
Page -2-
Based upon the foregoing, we are of the opinion that upon issuance as
described in the Registration Statement, the Shares will be duly authorized,
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
/s/ Kaufman & Moomjian, LLC
KAUFMAN & MOOMJIAN, LLC
ACCELERATION SOFTWARE INTERNATIONAL CORPORATION
AMENDED AND RESTATED
1999 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the Acceleration Software International Corporation 1999
Stock Incentive Compensation Plan, as amended hereby, (the "Plan") is to enhance
the long-term shareholder value of Acceleration Software International
Corporation, a Washington corporation (the "Company"), by offering opportunities
to selected persons to participate in the Company's growth and success, and to
encourage them to remain in the service of the Company and its Related
Corporations (as defined in Section 2) and to acquire and maintain stock
ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Stock Awards and Options, or any
combination of the foregoing.
"Board" means the Board of Directors of the Company.
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive and binding.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Common Stock" means the common stock, no par value, of the Company.
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company with or into
another corporation; or
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially all of
the Company's assets other than a transfer of the Company's assets to a
majority-owned subsidiary corporation (as defined in Section 8.3) of the
Company.
"Disability," unless otherwise defined by the Plan Administrator, means a
mental or physical impairment of the Participant that is expected to result in
death or that has lasted or is expected to last for a continuous period of 12
months or more and that causes the Participant to be unable, in the opinion of
the Company, to perform his or her duties for the Company or a Related
Corporation and to be engaged in any substantial gainful activity.
"Effective Date" has the meaning set forth in Section 17.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean (a) if the Common Stock is listed or
admitted to trade on a national securities exchange, the closing price of the
Common Stock on the Composite Tape, as published in The Wall Street Journal, of
the principal national securities exchange on which the Common Stock is so
listed or admitted to trade,
<PAGE>
on such date, or, if there is no trading of the Common Stock on such date,
then the closing price of the Common Stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (b) if the
Common Stock is not listed or admitted to trade on a national securities
exchange but is listed and quoted on The Nasdaq Stock Market ("Nasdaq"), the
last sale price, in the case of the Common Stock being listed on The Nasdaq
National Market or The Nasdaq SmallCap Market, for the Common Stock on such date
as reported by Nasdaq, or, if there is no reported trading of the Common Stock
on such date, then the last sale price for the Common Stock on the next
preceding date on which there was trading in the Common Stock; (c) if the Common
Stock is not listed or admitted to trade on a national securities exchange and
is not listed and quoted on Nasdaq, the mean between the closing bid and asked
price for the Common Stock on such date, as furnished by the National
Association of Securities Dealers, Inc. ("NASD") or similar organization and (d)
if none of the foregoing are applicable, as established in good faith by the
Plan Administrator.
"Grant Date" means the date on which the Plan Administrator completes the
corporate action relating to the grant of an Award and all conditions precedent
to the grant have been satisfied, provided that conditions to the exercisability
or vesting of Awards shall not defer the Grant Date.
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
"Liquidity Event" means the occurrence of (a) a Corporate Transaction that
is not a Related Party Transaction; or (b) the closing of a firm commitment
underwritten public offering of shares of Common Stock in which (1) the net
proceeds from such offering to the Corporation shall be at least $ 10.0 million
(after deduction of underwriters' discounts and commissions and expenses of the
offering) and (2) the price paid by the public for such shares shall be at least
Two Dollars ($2.00) (appropriately adjusted to reflect any event described in
Section 12.1 hereof).
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
"Option" means the right to purchase Common Stock granted under Section 7.
"Option Term" has the meaning set forth in Section 7.3.
"Parent," except as otherwise provided in Section 8.3 in connection with
Incentive Stock Options, means any entity, whether now or hereafter existing,
that directly or indirectly controls the Company.
"Participant" means (a) the person to whom an Award is granted; (b) for a
Participant who has died, the personal representative of the Participant's
estate, the person(s) to whom the Participant's rights under the Award have
passed by will or by the applicable laws of descent and distribution, or the
beneficiary designated in accordance with Section 11; or (c) the person(s) to
whom an Award has been transferred in accordance with Section 11.
"Plan Administrator" means the Board or any committee or committees
designated by the Board or any person to whom the Board has delegated authority
to administer the Plan under Section 3.1.
"Related Corporation" means any Parent or Subsidiary of the Company.
"Related Party Transaction" means (i) a merger of the Company in which the
holders of shares of Common Stock immediately prior to the merger hold at least
a majority of the shares of Common Stock in the surviving corporation
immediately after the merger, (ii) a mere reincorporation of the Company or
(iii) a transaction undertaken for the sole purpose of creating a holding
company.
2
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Award" means shares of Common Stock or units denominated in Common
Stock granted under Section 9, the rights of ownership of which may be subject
to restrictions prescribed by the Plan Administrator.
"Subsidiary," except as otherwise provided in Section 8.3 in connection
with Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company.
"Successor Corporation" has the meaning set forth in Section 12.3.
"Termination Date" has the meaning set forth in Section 7.6.
SECTION 3. ADMINISTRATION
3.1 Plan Administrator
The Plan shall be administered by the Board and/or a committee or
committees (which term includes subcommittees) appointed by, and consisting of
two or more members of, the Board (a "Plan Administrator"). If and so long as
the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act,
the Board shall consider in selecting the members of any committee acting as
Plan Administrator, with respect to any persons subject or likely to become
subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside
directors" as contemplated by Section 162(m) of the Code and (b) "nonemployee
directors" as contemplated by Rule 16b-3 under the Exchange Act. Notwithstanding
the foregoing, the Board may delegate the responsibility for administering the
Plan with respect to designated classes of eligible persons to different
committees consisting of two or more members of the Board, subject to such
limitations as the Board deems appropriate. Committee members shall serve for
such term as the Board may determine, subject to removal by the Board at any
time.
3.2 Administration and Interpretation by Plan Administrator
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and the terms of any instrument evidencing an Award and may
from time to time adopt, and change, rules and regulations of general
application for the Plan's administration. The Plan Administrator's
interpretation of the Plan and its rules and regulations, and all actions taken
and determinations made by the Plan Administrator pursuant to the Plan, shall be
conclusive and binding on all parties involved or affected. The Plan
Administrator may delegate administrative duties to such of the Company's
officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares
Subject to adjustment from time to time as provided in Section 12.1, a
maximum of 10 million shares of Common Stock shall be available for issuance
under the Plan.
Shares issued under the Plan shall be drawn from authorized and unissued
shares or shares now held or subsequently acquired by the Company.
3
<PAGE>
4.2 Reuse of Shares
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Related Corporations as the Plan Administrator
from time to time selects. Awards may also be made to consultants, agents,
advisors and independent contractors who provide services to the Company and its
Related Corporations; provided, however, that such Participants render bona fide
services that (a) are not in connection with the offer and sale of the Company's
securities in a capital-raising transaction and (b) do not directly or
indirectly promote or maintain a market for the Company's securities; provided,
further, that Participants must be natural persons, although agreements relating
to such services may be between the Company and an entity for whom the
Participant works.
SECTION 6. AWARDS
6.1 Form and Grant of Awards
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards may
include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
6.2 Settlement of Awards
The Company may settle Awards through the delivery of shares of Common
Stock, cash payments, the granting of replacement Awards or any combination
thereof as the Plan Administrator shall determine. Any Award settlement,
including payment deferrals, may be subject to such conditions, restrictions and
contingencies as the Plan Administrator shall determine. The Plan Administrator
may permit or require the deferral of any Award payment, subject to such rules
and procedures as it may establish, which may include provisions for the payment
or crediting of interest, or dividend equivalents, including converting such
credits into deferred stock equivalents. The Plan Administrator may at any time
offer to buy out, for a payment in cash or Common Stock, an Award previously
granted based on such terms and conditions as the Plan Administrator shall
establish and communicate to the Participant at the time such offer is made.
6.3 Acquired Company Awards
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
awards shall be deemed to be Participants.
4
<PAGE>
SECTION 7. AWARDS OF OPTIONS
7.1 Grant of Options
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 Option Exercise Price
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options. For
Incentive Stock Options granted to a more than 10% shareholder, the Option
exercise price shall be as specified in Section 8.2.
7.3 Term of Options
The term of each Option (the "Option Term") shall be as established by the
Plan Administrator or, if not so established, shall be ten years from the Grant
Date. For Incentive Stock Options, the maximum Option Term shall be as specified
in Sections 8.2 and 8.4.
7.4 Exercise of Options
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which, or the installments in which, the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time. If not so established in the
instrument evidencing the Option, the Option shall vest according to the
following schedule, which may be waived or modified by the Plan Administrator at
any time:
Period of Participant's Continuous
Employment or Service With the
Company or Its Related Corporations Percent of Total Option
From the Option Grant Date That Is Vested and Exercisable
- --------------------------------------------------------------------------------
After 1 year 10%
Each additional full year of continuous
service completed thereafter An additional 10%
After 10 years 100%
provided, however, that no Option granted pursuant to this Plan will be
exercisable until the occurrence of a Liquidity Event.
The Plan Administrator may adjust the vesting schedule of an Option held by
a Participant who works less than "full-time" as that term is defined by the
Plan Administrator.
To the extent that an Option has vested and become exercisable, the Option
may be exercised from time to time by delivery to the Company of a written stock
option exercise agreement or notice, in a form and in accordance with procedures
established by the Plan Administrator, setting forth the number of shares with
respect to which the Option is being exercised, the restrictions imposed on the
shares purchased under such exercise agreement, if any, and such representations
and agreements as may be required by the Plan Administrator, accompanied by
payment in
5
<PAGE>
full as described in Section 7.5. An Option may not be exercised as to less
than a reasonable number of shares at any one time, as determined by the Plan
Administrator.
7.5 Payment of Exercise Price
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, with the permission of the Plan
Administrator in its sole discretion, in any combination of
(a) cash or check;
(b) tendering (either actually or, if and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, by attestation)
shares of Common Stock already owned by the Participant for at least six months
(or any shorter period necessary to avoid a charge to the Company's earnings for
financial reporting purposes) having a Fair Market Value on the day prior to the
exercise date equal to the aggregate Option exercise price;
(c) if and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act, delivery of a properly executed exercise notice,
together with irrevocable instructions, to (i) a brokerage firm designated by
the Company to deliver promptly to the Company the aggregate amount of sale or
loan proceeds to pay the Option exercise price and any withholding tax
obligations that may arise in connection with the exercise and (ii) the Company
to deliver the certificates for such purchased shares directly to such brokerage
firm, all in accordance with the regulations of the Federal Reserve Board; or
(d) such other consideration as the Plan Administrator may permit.
In addition, to assist a Participant (including a Participant who is an
officer or a director of the Company) in acquiring shares of Common Stock
pursuant to an Award granted under the Plan, the Plan Administrator, in its sole
discretion, may authorize, either at the Grant Date or at any time before the
acquisition of Common Stock pursuant to the Award, (i) the payment by a
Participant of a full-recourse promissory note, (ii) the payment by the
Participant of the purchase price, if any, of the Common Stock in installments,
or (iii) the guarantee by the Company of a loan obtained by the Participant from
a third party. Subject to the foregoing, the Plan Administrator shall in its
sole discretion specify the terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of and security for repayment.
7.6 Post-Termination Exercises
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option shall continue to be exercisable,
and the terms and conditions of such exercise, if a Participant ceases to be
employed by, or to provide services to, the Company or its Related Corporations,
which provisions may be waived or modified by the Plan Administrator at any
time. If not so established in the instrument evidencing the Option, the Option
shall be exercisable according to the following terms and conditions, which may
be waived or modified by the Plan Administrator at any time:
(a) Any portion of an Option that is not vested and exercisable on the date
of termination of the Participant's employment or service relationship (the
"Termination Date") shall expire on such date.
(b) Any portion of an Option that is vested and exercisable on the
Termination Date shall expire upon the earliest to occur of
(i) the last day of the Option Term;
6
<PAGE>
(ii) if the Participant's Termination Date occurs for reasons other
than Cause, death or Disability, the three-month anniversary of such Termination
Date; and
(iii) if the Participant's Termination Date occurs by reason of
Disability or death, the one-year anniversary of such Termination Date.
Notwithstanding the foregoing, if the Participant dies after the
Termination Date while the Option is otherwise exercisable, the portion of the
Option that is vested and exercisable on such Termination Date shall expire upon
the earlier to occur of (y) the last day of the Option Term and (z) the first
anniversary of the date of death, unless the Plan Administrator determines
otherwise.
Also notwithstanding the foregoing, in case of termination of the
Participant's employment or service relationship for Cause, the Option shall
automatically expire upon first notification to the Participant of such
termination, unless the Plan Administrator determines otherwise. If a
Participant's employment or service relationship with the Company is suspended
pending an investigation of whether the Participant shall be terminated for
Cause, all the Participant's rights under any Option likewise shall be suspended
during the period of investigation.
A Participant's transfer of employment or service relationship between or
among the Company and its Related Corporations, or a change in status from an
employee to a consultant, agent, advisor or independent contractor, shall not be
considered a termination of employment or service relationship for purposes of
this Section 7. Employment or service relationship shall be deemed to continue
while the Participant is on a bona fide leave of absence, if such leave was
approved by the Company or a Related Corporation in writing and if continued
crediting of service for purposes of this Section 7 is expressly required by the
terms of such leave or by applicable law (as determined by the Company). The
effect of a Company-approved leave of absence on the terms and conditions of an
Option shall be determined by the Plan Administrator, in its sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 Dollar Limitation
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 More Than 10% Shareholders
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option Term shall not exceed five
years. The determination of more than 10% ownership shall be made in accordance
with Section 422 of the Code.
8.3 Eligible Employees
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation"
7
<PAGE>
and "subsidiary corporaiton" shall have the meanings attributed to those terms
for purposes of Section 422 of the Code.
8.4 Term
Except as provided in Section 8.2, the Option Term shall not exceed 10
years.
8.5 Exercisability
An Option designated as an Incentive Stock Option shall cease to qualify
for favorable tax treatment as an Incentive Stock Option to the extent it is
exercised (if permitted by the terms of the Option) (a) more than three months
after the Termination Date for reasons other than death or Disability, (b) more
than one year after the Termination Date by reason of Disability, or (c) after
the Participant has been on leave of absence for more than 90 days, unless the
Participant's reemployment rights are guaranteed by statute or contract.
For purposes of this Section 8.5, Disability shall mean "disability" as
that term is defined for purposes of Section 422 of the Code.
8.6 Taxation of Incentive Stock Options
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Participant must hold the shares issued upon
the exercise of an Incentive Stock Option for two years after the Grant Date and
one year from the date of exercise. A Participant may be subject to the
alternative minimum tax at the time of exercise of an Incentive Stock Option.
The Participant shall give the Company prompt notice of any disposition of
shares acquired by the exercise of an Incentive Stock Option prior to the
expiration of such holding periods.
8.7 Promissory Notes
The amount of any promissory note delivered pursuant to Section 7.5 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator, but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK AWARDS
9.1 Grant of Stock Awards
The Plan Administrator is authorized to make Awards of Common Stock or
Awards denominated in units of Common Stock on such terms and conditions and
subject to such restrictions, if any (which may be based on continuous service
with the Company or the achievement of performance goals), as the Plan
Administrator shall determine, in its sole discretion, which terms, conditions
and restrictions shall be set forth in the instrument evidencing the Award. The
terms, conditions and restrictions that the Plan Administrator shall have the
power to determine shall include, without limitation, the manner in which shares
subject to Stock Awards are held during the periods they are subject to
restrictions and the circumstances under which forfeiture of the Stock Award
shall occur by reason of termination of the Participant's employment or service
relationship.
9.2 Issuance of Shares
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Participant's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall release, as soon as practicable, to the
Participant or, in the case of the
8
<PAGE>
Participant's death, to the personal representative of the Participant's
estate or as the appropriate court directs, the appropriate number of shares of
Common Stock.
9.3 Waiver of Restrictions
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Stock Award under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 10. WITHHOLDING
The Company may require the Participant to pay to the Company the amount of
any withholding taxes that the Company is required to withhold with respect to
the grant, vesting or exercise of any Award. Subject to the Plan and applicable
law, the Plan Administrator may, in its sole discretion, permit the Participant
to satisfy withholding obligations (up to the minimum required rate), in whole
or in part, by paying cash, by electing to have the Company withhold shares of
Common Stock or by transferring shares of Common Stock to the Company, in such
amounts as are equivalent to the Fair Market Value of the withholding
obligation. The Company shall have the right to withhold from any Award or any
shares of Common Stock issuable pursuant to an Award or from any cash amounts
otherwise due or to become due from the Company to the Participant an amount
equal to such taxes. The Company may also deduct from any Award any other
amounts due from the Participant to the Company or a Related Corporation.
SECTION 11. ASSIGNABILITY
Awards granted under the Plan and any interest therein may not be assigned,
pledged or transferred by the Participant and may not be made subject to
attachment or similar proceedings otherwise than by will or by the applicable
laws of descent and distribution, and, during the Participant's lifetime, such
Awards may be exercised only by the Participant. Notwithstanding the foregoing,
and to the extent permitted by Section 422 of the Code, the Plan Administrator,
in its sole discretion, may permit such assignment, transfer and exercisability
and may permit a Participant to designate a beneficiary who may exercise the
Award or receive compensation under the Award after the Participant's death;
provided, however, that any Award so assigned or transferred shall be subject to
all the same terms and conditions contained in the instrument evidencing the
Award.
SECTION 12. ADJUSTMENTS
12.1 Adjustment of Shares
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator shall make proportional adjustments in (i) the maximum number and
kind of securities subject to the Plan as set forth in Section 4.1 and (ii) the
number and kind of securities that are subject to any outstanding Award and the
per share price of such securities, without any change in the aggregate price to
be paid therefor. The determination by the Plan Administrator as to the terms of
any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, a dissolution or liquidation of the Company or a
Corporate Transaction shall not be governed by this Section 12.1 but shall be
governed by Sections 12.2 and 12.3, respectively.
9
<PAGE>
12.2 Dissolution or Liquidation
In the event of the proposed dissolution or liquidation of the Company, the
Plan Administrator shall notify each Participant as soon as practicable prior to
the effective date of such proposed transaction. The Plan Administrator in its
discretion may permit a Participant to exercise an Option until ten days prior
to such transaction with respect to all vested and exercisable shares of Common
Stock covered thereby and with respect to such number of unvested shares as the
Plan Administrator shall determine. In addition, the Plan Administrator may
provide that any forfeiture provision or Company repurchase option applicable to
any Award shall lapse as to such number of shares as the Plan Administrator
shall determine, contingent upon the occurrence of the proposed dissolution or
liquidation at the time and in the manner contemplated. To the extent an Option
has not been previously exercised, the Option shall terminate automatically
immediately prior to the consummation of the proposed action. To the extent a
forfeiture provision applicable to a Stock Award has not been waived by the Plan
Administrator, the Stock Award shall be forfeited automatically immediately
prior to the consummation of the proposed action.
12.3 Corporate Transaction
In the event of a Corporate Transaction, except as otherwise provided in
the instrument evidencing the Award, each outstanding Option shall be assumed or
an equivalent option or right substituted by the surviving corporation, the
successor corporation or its parent corporation (the "Successor Corporation").
In the event that the Successor Corporation refuses to assume or substitute for
the Option, the Participant shall fully vest in and have the right to exercise
the Option as to all of the shares of Common Stock subject thereto, including
shares as to which the Option would not otherwise be vested or exercisable. If
an Option becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a Corporate Transaction, the Plan Administrator
shall notify the Participant in writing or electronically that the Option shall
be fully vested and exercisable for a specified time period after the date of
such notice, and the Option shall terminate upon the expiration of such period,
in each case conditioned upon consummation of the Corporate Transaction. For the
purposes of this Section 12.3, the Option shall be considered assumed if,
following the Corporate Transaction, the option or right confers the right to
purchase or receive, for each share of Common Stock subject to the Option,
immediately prior to the Corporate Transaction, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding shares);
provided, however, that if such consideration received in the Corporate
Transaction is not solely common stock of the Successor Corporation, the Plan
Administrator may, with the consent of the Successor Corporation, provide for
the consideration to be received upon the exercise of the Option, for each share
of Common Stock subject thereto, to be solely common stock of the Successor
Corporation equal in fair market value to the per share consideration received
by holders of Common Stock in the Corporate Transaction. All Options shall
terminate and cease to remain outstanding immediately following the consummation
of the Corporate Transaction, except to the extent assumed by the Successor
Corporation.
In the event of a Corporate Transaction, the vesting of Shares subject to
Stock Awards shall accelerate, and the forfeiture provisions to which such
Shares are subject shall lapse, if and to the same extent that the vesting of
outstanding Options accelerates in connection with the Corporate Transaction. If
unvested Options are to be assumed, continued or substituted by a Successor
Corporation without acceleration upon the occurrence of a Corporate Transaction,
the forfeiture provisions to which such shares are subject will continue with
respect to shares of the Successor Corporation that may be issued in exchange
for such Shares.
12.5 Further Adjustment of Awards
Subject to Sections 12.2 and 12.3, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to the Participants, with respect
to Awards. Such authorized action may include (but shall not be limited
10
<PAGE>
to) establishing, amending or waiving the type, terms, conditions or
duration of, or restrictions on, Awards so as to provide for earlier, later,
extended or additional time for exercise, lifting restrictions and other
modifications, and the Plan Administrator may take such actions with respect to
all Participants, to certain categories of Participants or only to individual
Participants. The Plan Administrator may take such action before or after
granting Awards to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
liquidation or change in control that is the reason for such action.
12.6 Limitations
The grant of Awards shall in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 13. REPURCHASE AND FIRST REFUSAL RIGHTS
13.1 Repurchase Rights
Until the date on which the initial registration of the Common Stock under
Section 12(b) or 12(g) of the Exchange Act first becomes effective, if a
Participant ceases to be employed by or provide services to the Company, then
all shares of Common Stock issued pursuant to an Award (whether issued before or
after cessation of employment or services) shall be subject to repurchase by the
Company, at the Company's sole discretion, at the Fair Market Value of such
shares on the date of such repurchase. The terms and conditions upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise) shall be established by the Plan Administrator.
13.2 First Refusal Rights
Until the date on which the initial registration of the Common Stock under
Section 12(b) or 12(g) of the Exchange Act first becomes effective, the Company
shall have the right of first refusal with respect to any proposed sale or other
disposition by the Participant of any shares of Common Stock issued pursuant to
an Award granted under the Plan. Such right of first refusal shall be
exercisable in accordance with the terms and conditions established by the Plan
Administrator and set forth in the agreement evidencing such right.
SECTION 14. MARKET STANDOFF
In connection with any underwritten public offering by the Company of its
equity securities pursuant to an effective registration statement filed under
the Securities Act, including the Company's initial public offering, a person
shall not sell, make any short sale of, loan, hypothecate, pledge, grant any
option for the purchase of, or otherwise dispose of or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to
any shares issued pursuant to an Award granted under the Plan without the prior
written consent of the Company or its underwriters. Such limitations shall be in
effect for such period of time as may be requested by the Company or such
underwriters and agreed to by the Company's officers and directors with respect
to their shares; provided, however, that in no event shall such period exceed
180 days. The limitations of this paragraph shall in all events terminate two
years after the effective date of the Company's initial public offering. Holders
of shares issued pursuant to an Award granted under the Plan shall be subject to
the market standoff provisions of this paragraph only if the officers and
directors of the Company are also subject to similar arrangements.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's outstanding Common Stock effected as a class without the Company's
receipt of consideration, any new, substituted or additional securities
distributed with respect to the purchased shares shall be immediately subject to
the provisions of this Section 14, to the same extent the purchased shares are
at such time covered by such provisions.
11
<PAGE>
In order to enforce the limitations of this Section 14, the Company may
impose stop-transfer instructions with respect to the purchased shares until the
end of the applicable standoff period.
SECTION 15. AMENDMENT AND TERMINATION OF PLAN
15.1 Amendment of Plan
The Plan may be amended only by the Board in such respects as it shall deem
advisable; provided, however, that to the extent required for compliance with
Section 422 of the Code or any applicable law or regulation, shareholder
approval shall be required for any amendment that would (a) increase the total
number of shares available for issuance under the Plan, (b) modify the class of
persons eligible to receive Options, or (c) otherwise require shareholder
approval under any applicable law or regulation. Any amendment made to the Plan
that would constitute a "modification" to Incentive Stock Options outstanding on
the date of such amendment shall not, without the consent of the Participant, be
applicable to such outstanding Incentive Stock Options but shall have
prospective effect only.
15.2 Termination of Plan
The Board may suspend or terminate the Plan at any time. The Plan shall
have no fixed expiration date; provided, however, that no Incentive Stock
Options may be granted more than ten years after the later of (a) the Plan's
adoption by the Board and (b) the adoption by the Board of any amendment to the
Plan that constitutes the adoption of a new plan for purposes of Section 422 of
the Code.
15.3 Consent of Participant
The amendment or termination of the Plan or the amendment of an outstanding
Award shall not, without the Participant's consent, impair or diminish any
rights or obligations under any Award theretofore granted to the Participant
under the Plan. Any change or adjustment to an outstanding Incentive Stock
Option shall not, without the consent of the Participant, be made in a manner so
as to constitute a "modification" that would cause such Incentive Stock Option
to fail to continue to qualify as an Incentive Stock Option. Notwithstanding the
foregoing, any adjustments made pursuant to Section 12 shall not be subject to
these restrictions.
SECTION 16. GENERAL
16.1 Evidence of Awards
Awards granted under the Plan shall be evidenced by a written instrument
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
16.2 No Individual Rights
Nothing in the Plan or any Award granted under the Plan shall be deemed to
constitute an employment contract or confer or be deemed to confer on any
Participant any right to continue in the employ of, or to continue any other
relationship with, the Company or any Related Corporation or limit in any way
the right of the Company or any Related Corporation to terminate a Participant's
employment or other relationship at any time, with or without Cause.
16.3 Registration
Notwithstanding any other provision of the Plan, the Company shall have no
obligation to issue or deliver any shares of Common Stock under the Plan or make
any other distribution of benefits under the Plan unless such
12
<PAGE>
issuance, delivery or distribution would comply with all applicable laws
(including, without limitation, the requirements of the Securities Act), and the
applicable requirements of any securities exchange or similar entity.
The Company shall be under no obligation to any Participant to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
To the extent that the Plan or any instrument evidencing an Award provides
for issuance of stock certificates to reflect the issuance of shares of Common
Stock, the issuance may be effected on a noncertificated basis, to the extent
not prohibited by applicable law or the applicable rules of any stock exchange.
As a condition to the exercise of an Option or any other receipt of Common Stock
pursuant to an Award under the Plan, the Company may require the Participant to
represent and warrant at the time of any such exercise or receipt that such
shares are being purchased or received only for the Participant's own account
and without any present intention to sell or distribute such shares. At the
option of the Company, a stop-transfer order against any such shares may be
placed on the official stock books and records of the Company, and a legend
indicating that such shares may not be pledged, sold or otherwise transferred,
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on stock certificates to ensure exemption from
registration. The Plan Administrator may also require such other action or
agreement by the Participant as may from time to time be necessary to comply
with the federal and state securities laws.
16.4 No Rights as a Shareholder
No Option or Stock Award denominated in units shall entitle the Participant
to any cash dividend, voting or other right of a shareholder unless and until
the date of issuance under the Plan of the shares that are the subject of such
Award.
16.5 Compliance With Laws and Regulations
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator, in its sole discretion, may bifurcate the Plan so as to restrict,
limit or condition the use of any provision of the Plan to Participants who are
officers or directors subject to Section 16 of the Exchange Act without so
restricting, limiting or conditioning the Plan with respect to other
Participants. Additionally, in interpreting and applying the provisions of the
Plan, any Option granted as an Incentive Stock Option pursuant to the Plan
shall, to the extent permitted by law, be construed as an "incentive stock
option" within the meaning of Section 422 of the Code.
16.6 Participants in Foreign Countries
The Plan Administrator shall have the authority to adopt such
modifications, procedures and subplans as may be necessary or desirable to
comply with provisions of the laws of foreign countries in which the Company or
its Related Corporations may operate to assure the viability of the benefits
from Awards granted to Participants employed in such countries and to meet the
objectives of the Plan.
16.7 No Trust or Fund
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
13
<PAGE>
16.8 Severability
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
16.9 Choice of Law
The Plan and all determinations made and actions taken pursuant hereto, to
the extent not otherwise governed by the laws of the United States, shall be
governed by the laws of the State of Washington without giving effect to
principles of conflicts of laws.
16.10 Appendix Provisions
Participants who are residents of the State of California shall be subject
to the additional terms and conditions set forth in Appendix A to the Plan.
SECTION 17. EFFECTIVE DATE
The Effective Date is the date on which the Plan is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
14
<PAGE>
APPENDIX A
to
ACCELERATION SOFTWARE INTERNATIONAL CORPORATION
AMENDED AND RESTATED
1999 STOCK INCENTIVE COMPENSATION PLAN
[FOR CALIFORNIA RESIDENTS ONLY]
This Appendix to the Acceleration Software International Corporation 1999
Stock Incentive Compensation Plan (the "Plan") shall have application only to
Participants who are residents of the State of California. Capitalized terms
contained herein shall have the same meanings given to them in the Plan, unless
otherwise provided in this Appendix. Notwithstanding any provision contained in
the Plan to the contrary and to the extent required by applicable law, the
following terms and conditions shall apply to all Awards granted to residents of
the State of California, until such time as the Common Stock becomes a "listed
security" under the Securities Act:
1. Nonqualified Stock Options shall have an exercise price that is not less
than 85% of the Fair Market Value of the stock at the time the Option is
granted, as determined by the Board, except that the exercise price shall be
110% of the Fair Market Value in the case of any person who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or its parent or subsidiary corporations.
2. The purchase price for any Stock Awards that may be purchased under the
Plan ("Stock Purchase Rights") shall be at least 85% of the Fair Market Value of
the Common Stock at the time the Participant is granted the Stock Purchase Right
or at the time the purchase is consummated. Notwithstanding the foregoing, the
purchase price shall be 100% of the Fair Market Value of the Common Stock at the
time the Participant is granted the Stock Purchase Right or at the time the
purchase is consummated in the case of any person who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or its parent or subsidiary corporations.
3. Options shall have a term of not more than ten years from the date the
Option is granted.
4. Awards shall be nontransferable other than by will or the laws of
descent and distribution. Notwithstanding the foregoing, and to the extent
permitted by Section 422 of the Code, the Plan Administrator, in its discretion,
may permit distribution of an Option to an inter vivos or testamentary trust in
which the Option is to be passed to beneficiaries upon the death of the trustor
(settlor), or by gift to "immediate family" as that term is defined in Rule
16a-1(e) of the Exchange Act.
5. Options shall become exercisable at the rate of at least 20% per year
over five years from the date the Option is granted, subject to reasonable
conditions such as continued employment. However, in the case of an Option
granted to officers, directors or consultants of the Company or any of its
affiliates, the Option may become fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company or any of its affiliates.
6. Unless employment is terminated for Cause, the right to exercise an
Option in the event of termination of employment, to the extent that the
Participant is otherwise entitled to exercise an Option on the date employment
terminates, shall be
a. at least six months from the date of termination of employment if
termination was caused by death or Disability; and
1
<PAGE>
b. at least 30 days from the date of termination if termination of
employment was caused by other than death or Disability;
c. but in no event later than the remaining term of the Option.
7. No Award may be granted to a resident of California more than ten years
after the earlier of the date of adoption of the Plan and the date the Plan is
approved by the shareholders.
8. Any Award exercised before shareholder approval is obtained shall be
rescinded if shareholder approval is not obtained within 12 months before or
after the Plan is adopted. Such shares shall not be counted in determining
whether such approval is obtained.
9. The Company shall provide annual financial statements of the Company to
each California resident holding an outstanding Award under the Plan. Such
financial statements need not be audited and need not be issued to key employees
whose duties at the Company assure them access to equivalent information.
10. Any right of repurchase on behalf of the Company in the event of a
Participant's termination of employment shall be at a purchase price that is (a)
not less than the Fair Market Value of the securities upon termination of
employment, and the right to repurchase shall be exercised for cash or
cancellation of purchase money indebtedness for the shares within 90 days of
termination of employment (or in the case of securities issued upon exercise of
Options after the date of termination, within 90 days after the date of the
exercise), and the right shall terminate when the Company's securities become
publicly traded; or (b) at the original purchase price, provided that the right
to repurchase at the original purchase price lapses at the rate of at least 20%
of the shares per year over five years from the date the Option or Stock
Purchase Right is granted (without respect to the date the Option or Stock
Purchase Right was exercised or became exercisable) and the right to repurchase
shall be exercised for cash or cancellation of purchase money indebtedness for
the shares within 90 days of termination of employment (or in the case of
securities issued upon exercise of Options after the date of termination, within
90 days after the date of the exercise). In addition to the restrictions set
forth in clauses (a) and (b), the securities held by an officer, director or
consultant of the Company or an affiliate of the Company may be subject to
additional or greater restrictions.
2
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of November, 1999 by and between
eAcceleration Corp., a Delaware corporation (the "Company") and Clint Ballard,
an individual with an address at P.O. Box 3546, Silverdale, Washington 98383
(hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, this Agreement is intended to supersede and replace all prior
agreements, understandings and arrangements between or among the Company and the
Employee relating to the employment of the Employee.
NOW, THEREFORE, it is agreed as follows:
1. Retention of Services. The Company hereby retains the services of
Employee, and Employee agrees to furnish such services, upon the terms and
conditions hereinafter set forth.
2. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, and further subject to certain provisions hereof which
survive the term hereof, the term of this Agreement shall be comprised of a five
(5) year period of employment commencing on the date of the first closing of the
proposed public offering of shares of common stock pursuant to a registration
statement on form SB-2 filed with the Securities and Exchange Commission in
November 1999, and shall be extended thereafter for additional one-year periods
unless or until the Company or the Employee provides sixty (60) days' notice to
the other party of the termination of this Agreement.
3. Duties and Extent of Services During Period of Employment.
(a) During the term of employment, Employee shall be employed by the
Company as President and Chief Executive Officer or in such other equivalent
positions with the Company and its affiliates, as may be determined by the Board
of Directors of the Company, and shall also serve as a director of the Company.
In such capacity, Employee agrees that he shall devote Employee's full time
business efforts to serving the Company and its affiliates under the direction
of the Board of Directors of the Company, shall perform all duties incident to
Employee's position on behalf of the Company to the best of Employee's ability
and shall perform such other duties as may from time to time be assigned to him
by the Board of Directors of the Company.
(b) The Company and Employee agree that Employee shall perform
Employee's basic responsibilities and duties hereunder at the office of the
Company in Kitsap County, Washington, or at Employee's home office consistent
with past practice; subject, however, to the travel requirements of Employee's
position, including that Employee may be required to perform services on a
temporary basis at the offices of the Company and its affiliates outside Kitsap
County, Washington and travel to visit certain customers of the Company, in
connection with the Company acquiring the rights or license to market and sell
certain products or otherwise in connection with the business and investor
relations of the Company.
4. Remuneration. During the period of employment, Employee shall be
entitled to receive the following compensation for Employee's services:
(a) The Company shall pay to Employee a salary at the rate of $104,000
per annum, payable in equal bi-weekly installments, or in such other manner as
shall be consistent with the Company's payroll practices.
(b) In addition to the salary provided in clause (a) above, not later
than one hundred ten (110) days after the end of each fiscal year of the
Company, the Company shall pay to Employee, as incentive
<PAGE>
compensation, an amount equal to two and one-half percent (2.5%) of the
Company's Pre-Tax Income (as defined below) for such immediately preceding
fiscal year. For purposes of this Agreement, "Pre-Tax Income" shall mean an
amount equal to the net income of the Company before taxes, depreciation,
amortization, and extraordinary items, in each case computed in accordance with
United States generally accepted accounting principles, consistently applied.
The Company agrees to furnish to Employee a copy of the Company's financial
statements not later than one hundred and five (105) days after the end of each
fiscal year of the Company during the term of this Agreement. In the event that
this Agreement is terminated other than pursuant to Section 9(a), the Employee
shall be entitled to receive the amount which would be payable under this clause
(b) for each fiscal quarter of any fiscal year in which Employee was employed by
the Company at the date of such termination.
5. Employee Benefits; Expenses.
(a) During the term of this Agreement, the Company shall provide to
the Employee the right to participate in the Company's then existing medical and
dental insurance and other employee benefit plans and policies on the same terms
as are then generally available to the Company's executive and managerial
employees.
(b) Employee shall be entitled to paid vacation each year during the
term of this Agreement at the rate of four (4) weeks per annum. Vacation shall
be taken each year and, if not taken, shall be carried over for one (1) year
and, if not taken during such carry-over period, shall be forfeited.
(c) The Corporation shall reimburse Employee, in accordance with the
practice followed from time to time for other executive and managerial officers
of the Company, for all reasonable and necessary business and traveling
expenses, and other disbursements incurred by Employee for or on behalf of the
Corporation in the performance of Employee's duties hereunder, upon presentation
by Employee to the Company of an appropriate accounting or documentation of
such.
6. Disability. If Employee, during the period of employment, becomes
unable for any 120 days in any twelve-month period due to ill health or other
physical or mental incapacity, to perform Employee's services hereunder, the
Company may thereafter, upon at least 100 days' written notice to Employee,
place him on disability status. After such action by the Company, Employee shall
no longer be entitled to receive any compensation hereunder until the Employee
returns to full-time status.
7. Confidential Information.
(a) In the course of Employee's employment by the Company, Employee
will have access to and possession of valuable and important confidential or
proprietary data or information of the Company and its operations. Employee will
not during Employee's employment by the Company or at any time for a period of
five (5) years thereafter divulge or communicate to any person nor shall
Employee direct any employee, representative or agent of the Company or its
affiliates to divulge or communicate to any person or entity (other than to a
person or entity bound by confidentiality obligations similar to those contained
herein and other than as necessary in performing Employee's duties hereunder) or
use to the detriment of the Company or for the benefit of any other person or
entity, including without limitation any competitor, supplier, licensor,
licensee or customer of the Company , any of such confidential or proprietary
data or information or make or remove any copies thereof, whether or not marked
or otherwise identified as "confidential" or "secret." Employee shall take all
reasonable precautions in handling the confidential or proprietary data or
information within the Company to a strict need-to-know basis and shall comply
with any and all security systems and measures adopted from time to time by the
Company to protect the confidentiality of confidential or proprietary data or
information.
(b) The term "confidential or proprietary data or information" as used
in this Agreement shall mean information not generally available to the public,
including, without limitation, all database information, personnel information,
financial information, customer lists, account lists or other account
information, names,
2
<PAGE>
telephone numbers or addresses, supplier lists, trade secrets, patented or
proprietary information, forms, information regarding products, operations,
systems, methods, financing, services, know how, computer and any other
processed or collated data, computer programs, pricing, marketing, media and
advertising data.
(c) Employee will at all times promptly disclose to the Company in
such form and manner as the Company may reasonably require, any inventions,
improvements or procedural or methodological innovations, including without
limitation relating to programs, methods, forms, systems, services, designs,
marketing ideas, products or processes (whether or not capable of being
trademarked, copyrighted or patented) conceived or developed or created by
Employee during or in connection with Employee's employment hereunder and which
relate to the business of the Company ("Intellectual Property"). Employee agrees
that all such Intellectual Property shall be the sole property of the Company.
Employee further agrees that Employee will execute such instruments and perform
such acts as may reasonably be requested by the Company to transfer to and
perfect in the Company all legally protectable rights in such Intellectual
Property.
(d) In accordance with RCW 49.44.140, any assignment of inventions
required by this Agreement does not apply to an invention for which no
equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on the Employee's own time, unless (a) the
invention relates (i) directly to the business of the Company or (ii) to the
Company's actual or demonstrably anticipated research or development or (b) the
invention results from any work performed by the Employee for the Company.
(e) As a matter of record Employee attaches hereto as Exhibit A a
complete list of all inventions (including patent applications and patents)
relevant to the subject matter of Employee's engagement pursuant to this
Agreement which have been made, conceived, developed or first reduced to
practice by Employee, alone or jointly with others, prior to Employee's
engagement with Company pursuant to this Agreement that Employee desires to
remove from the operation of this Agreement, and Employee covenants that such
list is complete. If no such list is attached to this Agreement, Employee
represents that it has no such inventions at the time of signing this Agreement.
(f) All written materials, books, records and documents made by
Employee or coming into Employee's possession during Employee's employment by
the Company concerning any products, processes or equipment manufactured, used,
developed, investigated, purchased, sold or considered by the Company or
otherwise concerning the business or affairs of the Company, including without
limitation any files, customer records such as names, telephone numbers and
addresses, lists, firm records, brochures and literature, shall be the sole
property of the Company, shall not be removed from the Company's premises by the
Employee, and upon termination of Employee's employment by the Company, or upon
request of the Company during Employee's employment by the Company, Employee
shall promptly deliver the same to the Company. In addition, upon termination of
Employee's employment by the Company, Employee will deliver to the Company all
other Company property in Employee's possession or under Employee's control,
including, but not limited to, financial statements, marketing and sales data,
customer and supplier lists, account lists and other account information,
database information and other documents, and any Company credit cards.
(g) The Employee acknowledges that the covenants contained in this
Section 7 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 7 may be inadequate and that the violation of any of the covenants
contained in this Section 7 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 7 shall run in favor
of the Company and its successors and assigns. In
3
<PAGE>
addition, to the extent the Company is successful on the merits in any
proceeding to enforce the terms of this Section 7, the Employee agrees to pay
the Company the costs it incurs, including reasonable attorneys' fees and
expenses, in bringing and prosecuting any such proceeding.
(h) The provisions of this Section 7 shall survive the termination of
this Employment Agreement.
8. Non-Competition.
(a) During the term of this Agreement and for one year thereafter (the
"Restricted Period"), the Employee shall not, without the written consent of the
Company, directly or indirectly,
(i) become associated with, render services to, invest in,
represent, advise or otherwise participate in as an officer, employee, director,
stockholder, partner, promoter, agent of, consultant for or otherwise, any
business which is conducted in any of the jurisdictions in which the Company's
business is conducted and which is competitive with the business conducted by
the Company ; provided, that this Section 8(a)(i) shall not prohibit the
Employee from purchasing or owning up to one percent (1%) of the outstanding
capital stock of a company which is listed or authorized for trading on any
national securities exchange, Nasdaq or the OTC Electronic Bulletin Board or is
a company with a class of securities registered under Section 12 of the
Securities Act of 1934, as amended;
(ii) for the Employee's own account or for the account of any other
person or entity (A) interfere with the Company's relationship with any of its
suppliers, customers, accounts, brokers, representatives or agents or (B)
contact, telephone, meet, solicit or transact any business with any material
customer, account or supplier of the Company who or which transacts or has
transacted business with the Company at any time during the term of this
Agreement; or
(iii) employ or otherwise engage, or solicit, entice or induce on
behalf of the Employee or any other person or entity, the services, retention or
employment of any person who has been an employee, principal, partner,
stockholder, sales representative, trainee, consultant to or agent of the
Company within one year of the date of such offer or solicitation.
(b) Nothing herein contained shall be construed as prohibiting the
Company from pursuing any other remedies available to it for such violation,
including but not limited to any injunctive or other equitable relief or the
recovery of damages from the Employee.
(c) The Employee acknowledges that the covenants contained in this
Section 8 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 8 may be inadequate and that the violation of any of the covenants
contained in this Section 8 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 8 shall run in favor of
the Company and its successors and assigns. In addition, to the extent the
Company is successful on the merits in any proceeding to enforce the terms of
this Section 8, the Employee agrees to pay the Company the costs it incurs,
including reasonable attorneys' fees and expenses, in bringing and prosecuting
any such proceeding.
4
<PAGE>
(d) In case any one or more of the terms or provisions contained in
this Section 8 shall for any reason be held invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect any other terms
or provisions hereof, but such term or provision shall be deemed modified or
deleted as or to the extent required by applicable law, and such modification or
deletion shall not affect the validity of the other terms or provisions of this
Section 8. In addition, if any one or more of the restrictions contained in this
Section 8 shall for any reason be held to be unreasonable with regard to time,
duration, geographic scope or activity, the parties contemplate and hereby agree
that such restriction shall be modified and shall be enforced to the full extent
compatible with applicable law. The parties hereto intend that the covenants
contained in this Section 8 shall be deemed a series of separate covenants for
each country, state, county and city. If, in any judicial proceeding, a court
shall refuse to enforce all the separate covenants deemed included in this
Section 8 because, taken together, they cover too extensive a geographic area,
the parties intend that those of such covenants (taken in order of the cities,
counties, states and countries therein which are lease populous) which if
eliminated would permit the remaining separate covenants to be enforced in such
proceeding shall, for the purpose of such proceeding, be deemed eliminated from
the provisions of this Section 8.
(e) The provisions of this Section 8 shall survive the termination of
this Employment Agreement.
9. Termination.
(a) The Company may terminate the Employee's services hereunder "for
cause" by delivering to Employee not less than ten (10) days prior to the date
on which the termination is to be effective, a written notice of termination for
cause specifying the act, acts or failure to act that constitute the cause. For
the purposes of this agreement, "for cause" shall mean; (i) any act of fraud or
embezzlement which materially adversely affects the financial or market
interests of the Company or any affiliate thereof, (ii) in the event of a
conviction of the Employee for any violent felony or other serious crime or any
knowing violation of any federal or state securities law or regulation, (iii)
repeated failure to perform Employee's duties hereunder after notice and
opportunity to cure, (iv) any material breach by the Employee of this Agreement,
or (v) the death of the Employee.
(b) If the Company terminates Employee's employment hereunder for any
reason other than "for cause" as set forth in Section 9(a) hereof, the Company
shall pay to the Employee compensation pursuant to Sections 4(a) and 4(b) hereof
at the time and in the manner provided for herein, and no other compensation
payable hereunder shall be payable to the Employee. If the Company terminates
Employee's employment hereunder "for cause" as set forth in Section 9(a) hereof
or if Employee resigns voluntarily from Employee's employment by the Company,
Employee shall be paid the compensation pursuant to Sections 4(a) and 4(b)
hereof through the date of such termination but shall not be entitled to receive
any further compensation hereunder. Employee and the Company acknowledge that
the foregoing provisions of this paragraph 9(b) are reasonable and are based
upon the facts and circumstances of the parties at the time of entering into
this Agreement, and with due regard to future expectations.
10. Notices. Any notice to be given to the Company hereunder shall be
deemed sufficient if addressed to the Company in writing and delivered or mailed
by certified or registered mail to it at 1223 NW Finn Hill Road, Poulsbo
Washington 98730, Attention: President, or to such other address as the Company
may hereafter designate, and a copy to Neil M. Kaufman, Esq., Kaufman &
Moomjian, LLC, 50 Charles Lindbergh Boulevard, Suite 206, Mitchel Field, New
York 11553. Any notice to be given to Employee hereunder shall be delivered or
mailed by certified or registered mail to her at the address set forth at the
head of this Agreement or such other address as he may hereafter designate.
11. Change of Control. (a) In the event that at any time after any
securities of the Company are publicly traded there shall be a change in the
control of the Company, as hereinafter defined, or in any person directly or
indirectly presently controlling the Company, as hereinafter defined, Employee
shall have the option, exercisable within six (6) months of Employee's becoming
aware of such event, to terminate Employee's
5
<PAGE>
employment by the Company pursuant to this Employment Agreement forthwith.
Upon such termination, Employee shall have the right to immediately receive as a
lump sum payment an amount equal to three (3) times the average of the total
annual compensation paid by the Company to Employee, with respect to the five
fiscal years of the Company prior to the change of control, minus $1.00.
(b) For purposes of this Agreement, a change in control of the Company, or
in any person directly or indirectly controlling the Company, shall mean:
(i) A change in control as such term is presently
defined in Regulation 240.12b-2 under the Securities Exchange Act of
1934 ("Exchange Act); or
(ii) if any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act) other than the Company or any
"person" who on the date of this Agreement is a director or officer of
the Company, becomes the "beneficial owner" (as defined in Rule
13(d)-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing twenty (20%) percent of the voting power
of the Company's then outstanding securities, unless such person
becomes such a beneficial owner as a result of a transaction approved
by a majority of the board of directors of the Company; or
(iii) if during any period of two (2) consecutive years
during the term of this Agreement, individuals who at the beginning of
such period constitute the Board of Directors cease for any reason to
constitute at least a majority thereof, unless the election of each
director who is not a director at the beginning of such period has
been approved in advance by directors representing at least two-thirds
(2/3) of the directors then in office who were directors at the
beginning of the period.
12. Successors and Assigns; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of the successors and assigns of the
Company, and unless clearly inapplicable, all references herein to the Company
shall be deemed to include any such successor. In addition, this Agreement shall
be binding upon and inure to the benefit of the Employee and Employee's heirs,
executors, legal representatives and assigns; provided, however, that the
obligations of Employee hereunder may not be delegated without the prior written
approval of the Board of Directors of the Company. In the event of any
consolidation or merger of the Company into or with any other corporation during
the term of this Agreement, or the sale of all or substantially all of the
assets of the Company to another corporation, person or entity during the term
of this Agreement, such successor corporation shall assume this Agreement and
become obligated to perform all of the terms and provisions hereof applicable to
the Company, and Employee's obligations hereunder shall continue in favor of
such successor corporation.
13. Amendments. This Agreement may not be altered, modified, amended
or terminated except by a written instrument signed by each of the parties
hereto.
14. Prior Agreements Superseded. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
any other agreements, oral or written, entered into between Employee and the
Company prior to the date of this Agreement relating thereto.
15. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington, without regard
to conflicts of laws.
16. Severability. If any provision of this Agreement shall be held by
a court of competent jurisdiction to be contrary to law or public policy, the
remaining provisions shall remain in full force and effect.
6
<PAGE>
17. Waiver. No term or provision hereof shall be deemed waived and no
breach consented to or excused, unless such waiver, consent or excuse shall be
in writing and signed by the party claimed to have waived, consented or excused.
A consent, waiver or excuse of any breach shall not constitute a consent to,
waiver or, or excuse of any other or subsequent breach whether or not of the
same kind of the original breach.
18. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
agreement.
19. Acknowledgment. Employee acknowledges that he has carefully read this
Agreement, has had an opportunity to consult counsel regarding this Agreement
and hereby represents and warrants to the Company that Employee's entering into
this Agreement, and the obligations and duties undertaken by Employee hereunder,
will not conflict with, constitute a breach of or otherwise violate the terms of
any other agreement to which Employee is a party and that Employee is not
required to obtain the consent of any person, firm, corporation or other entity
in order to enter into and perform Employee's obligations under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
eAcceleration Corp.
By: /s/ Diana T. Ballard
-------------------------------
Name: Diana T. Ballard
Title: Chairman of the Board
/s/ Clint Ballard
-----------------------------------
Clint Ballard
7
<PAGE>
EXHIBIT A
Inventions
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of services pursuant to this Agreement that
have been made or conceived or first reduced to practice by Employee, alone
or jointly with others, prior to the first effective date of this Agreement
that Employee desires to remove from the operation of this Agreement
entered into between the Company and Employee.
(a) No inventions or improvements.
(b) Any and all inventions regarding: Nothing
2. Employee proposes to bring to this relationship the following materials
and documents of a former employer.
(a) No materials or documents.
/s/ Clint Ballard
----------------------------
Clint Ballard
8
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of November, 1999 by and between
eAcceleration Corp. , a Delaware corporation (the "Company") and Diana T.
Ballard, an individual with an address at P.O. Box 3546, Silverdale, Washington
98383 (hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, this Agreement is intended to supersede and replace all prior
agreements, understandings and arrangements between or among the Company and the
Employee relating to the employment of the Employee.
NOW, THEREFORE, it is agreed as follows:
1. Retention of Services. The Company hereby retains the services of
Employee, and Employee agrees to furnish such services, upon the terms and
conditions hereinafter set forth.
2. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, and further subject to certain provisions hereof which
survive the term hereof, the term of this Agreement shall be comprised of a five
(5) year period of employment commencing on the date of the first closing of the
proposed public offering of shares of common stock pursuant to a registration
statement on form SB-2 filed with the Securities and Exchange Commission in
November 1999, and shall be extended thereafter for additional one-year periods
unless or until the Company or the Employee provides sixty (60) days' notice to
the other party of the termination of this Agreement.
3. Duties and Extent of Services During Period of Employment.
(a) During the term of employment, Employee shall be employed by the
Company as Chairman of the Board or in such other equivalent positions with the
Company and its affiliates, as may be determined by the Board of Directors of
the Company, and shall also serve as a director of the Company. In such
capacity, Employee agrees that he shall devote Employee's full time business
efforts to serving the Company and its affiliates under the direction of the
Board of Directors of the Company, shall perform all duties incident to
Employee's position on behalf of the Company to the best of Employee's ability
and shall perform such other duties as may from time to time be assigned to him
by the Board of Directors of the Company.
(b) The Company and Employee agree that Employee shall perform
Employee's basic responsibilities and duties hereunder at the office of the
Company in Kitsap County, Washington, or at Employee's home office consistent
with past practice; subject, however, to the travel requirements of Employee's
position, including that Employee may be required to perform services on a
temporary basis at the offices of the Company and its affiliates outside Kitsap
County, Washington and travel to visit certain customers of the Company, in
connection with the Company acquiring the rights or license to market and sell
certain products or otherwise in connection with the business and investor
relations of the Company.
4. Remuneration. During the period of employment, Employee shall be
entitled to receive the following compensation for Employee's services:
(a) The Company shall pay to Employee a salary at the rate of $104,000
per annum, payable in equal bi-weekly installments, or in such other manner as
shall be consistent with the Company's payroll practices.
(b) In addition to the salary provided in clause (a) above, not later
than one hundred ten (110) days after the end of each fiscal year of the
Company, the Company shall pay to Employee, as incentive compensation, an amount
equal to two and one-half percent (2.5%) of the Company's Pre-Tax Income (as
defined
<PAGE>
below) for such immediately preceding fiscal year. For purposes of this
Agreement, "Pre-Tax Income" shall mean an amount equal to the net income of the
Company before taxes, depreciation, amortization, and extraordinary items, in
each case computed in accordance with United States generally accepted
accounting principles, consistently applied. The Company agrees to furnish to
Employee a copy of the Company's financial statements not later than one hundred
and five (105) days after the end of each fiscal year of the Company during the
term of this Agreement. In the event that this Agreement is terminated other
than pursuant to Section 9(a), the Employee shall be entitled to receive the
amount which would be payable under this clause (b) for each fiscal quarter of
any fiscal year in which Employee was employed by the Company at the date of
such termination.
5. Employee Benefits; Expenses.
(a) During the term of this Agreement, the Company shall provide to
the Employee the right to participate in the Company's then existing medical and
dental insurance and other employee benefit plans and policies on the same terms
as are then generally available to the Company's executive and managerial
employees.
(b) Employee shall be entitled to paid vacation each year during the
term of this Agreement at the rate of four (4) weeks per annum. Vacation shall
be taken each year and, if not taken, shall be carried over for one (1) year
and, if not taken during such carry-over period, shall be forfeited.
(c) The Corporation shall reimburse Employee, in accordance with the
practice followed from time to time for other executive and managerial officers
of the Company, for all reasonable and necessary business and traveling
expenses, and other disbursements incurred by Employee for or on behalf of the
Corporation in the performance of Employee's duties hereunder, upon presentation
by Employee to the Company of an appropriate accounting or documentation of
such.
6. Disability. If Employee, during the period of employment, becomes unable
for any 120 days in any twelve-month period due to ill health or other physical
or mental incapacity, to perform Employee's services hereunder, the Company may
thereafter, upon at least 100 days' written notice to Employee, place him on
disability status. After such action by the Company, Employee shall no longer be
entitled to receive any compensation hereunder until the Employee returns to
full-time status.
7. Confidential Information.
(a) In the course of Employee's employment by the Company, Employee
will have access to and possession of valuable and important confidential or
proprietary data or information of the Company and its operations. Employee will
not during Employee's employment by the Company or at any time for a period of
five (5) years thereafter divulge or communicate to any person nor shall
Employee direct any employee, representative or agent of the Company or its
affiliates to divulge or communicate to any person or entity (other than to a
person or entity bound by confidentiality obligations similar to those contained
herein and other than as necessary in performing Employee's duties hereunder) or
use to the detriment of the Company or for the benefit of any other person or
entity, including without limitation any competitor, supplier, licensor,
licensee or customer of the Company , any of such confidential or proprietary
data or information or make or remove any copies thereof, whether or not marked
or otherwise identified as "confidential" or "secret." Employee shall take all
reasonable precautions in handling the confidential or proprietary data or
information within the Company to a strict need-to-know basis and shall comply
with any and all security systems and measures adopted from time to time by the
Company to protect the confidentiality of confidential or proprietary data or
information.
(b) The term "confidential or proprietary data or information" as used
in this Agreement shall mean information not generally available to the public,
including, without limitation, all database information, personnel information,
financial information, customer lists, account lists or other account
information, names, telephone numbers or addresses, supplier lists, trade
secrets, patented or proprietary information, forms,
2
<PAGE>
information regarding products, operations, systems, methods, financing,
services, know how, computer and any other processed or collated data, computer
programs, pricing, marketing, media and advertising data.
(c) Employee will at all times promptly disclose to the Company in
such form and manner as the Company may reasonably require, any inventions,
improvements or procedural or methodological innovations, including without
limitation relating to programs, methods, forms, systems, services, designs,
marketing ideas, products or processes (whether or not capable of being
trademarked, copyrighted or patented) conceived or developed or created by
Employee during or in connection with Employee's employment hereunder and which
relate to the business of the Company ("Intellectual Property"). Employee agrees
that all such Intellectual Property shall be the sole property of the Company.
Employee further agrees that Employee will execute such instruments and perform
such acts as may reasonably be requested by the Company to transfer to and
perfect in the Company all legally protectable rights in such Intellectual
Property.
(d) In accordance with RCW 49.44.140, any assignment of inventions
required by this Agreement does not apply to an invention for which no
equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on the Employee's own time, unless (a) the
invention relates (i) directly to the business of the Company or (ii) to the
Company's actual or demonstrably anticipated research or development or (b) the
invention results from any work performed by the Employee for the Company.
(e) As a matter of record Employee attaches hereto as Exhibit A a
complete list of all inventions (including patent applications and patents)
relevant to the subject matter of Employee's engagement pursuant to this
Agreement which have been made, conceived, developed or first reduced to
practice by Employee, alone or jointly with others, prior to Employee's
engagement with Company pursuant to this Agreement that Employee desires to
remove from the operation of this Agreement, and Employee covenants that such
list is complete. If no such list is attached to this Agreement, Employee
represents that it has no such inventions at the time of signing this Agreement.
(f) All written materials, books, records and documents made by
Employee or coming into Employee's possession during Employee's employment by
the Company concerning any products, processes or equipment manufactured, used,
developed, investigated, purchased, sold or considered by the Company or
otherwise concerning the business or affairs of the Company, including without
limitation any files, customer records such as names, telephone numbers and
addresses, lists, firm records, brochures and literature, shall be the sole
property of the Company, shall not be removed from the Company's premises by the
Employee, and upon termination of Employee's employment by the Company, or upon
request of the Company during Employee's employment by the Company, Employee
shall promptly deliver the same to the Company. In addition, upon termination of
Employee's employment by the Company, Employee will deliver to the Company all
other Company property in Employee's possession or under Employee's control,
including, but not limited to, financial statements, marketing and sales data,
customer and supplier lists, account lists and other account information,
database information and other documents, and any Company credit cards.
(g) The Employee acknowledges that the covenants contained in this
Section 7 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 7 may be inadequate and that the violation of any of the covenants
contained in this Section 7 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 7 shall run in favor of
the Company and its successors and assigns. In addition, to the extent the
Company is successful on the merits in any proceeding to enforce the terms of
this
3
<PAGE>
Section 7, the Employee agrees to pay the Company the costs it incurs,
including reasonable attorneys' fees and expenses, in bringing and prosecuting
any such proceeding.
(h) The provisions of this Section 7 shall survive the termination of
this Employment Agreement.
8. Non-Competition.
(a) During the term of this Agreement and for one year thereafter (the
"Restricted Period"), the Employee shall not, without the written consent of the
Company, directly or indirectly,
(i) become associated with, render services to, invest in,
represent, advise or otherwise participate in as an officer, employee, director,
stockholder, partner, promoter, agent of, consultant for or otherwise, any
business which is conducted in any of the jurisdictions in which the Company's
business is conducted and which is competitive with the business conducted by
the Company ; provided, that this Section 8(a)(i) shall not prohibit the
Employee from purchasing or owning up to one percent (1%) of the outstanding
capital stock of a company which is listed or authorized for trading on any
national securities exchange, Nasdaq or the OTC Electronic Bulletin Board or is
a company with a class of securities registered under Section 12 of the
Securities Act of 1934, as amended;
(ii) for the Employee's own account or for the account of any other
person or entity (A) interfere with the Company's relationship with any of its
suppliers, customers, accounts, brokers, representatives or agents or (B)
contact, telephone, meet, solicit or transact any business with any material
customer, account or supplier of the Company who or which transacts or has
transacted business with the Company at any time during the term of this
Agreement; or
(iii) employ or otherwise engage, or solicit, entice or induce on
behalf of the Employee or any other person or entity, the services, retention or
employment of any person who has been an employee, principal, partner,
stockholder, sales representative, trainee, consultant to or agent of the
Company within one year of the date of such offer or solicitation.
(b) Nothing herein contained shall be construed as prohibiting the
Company from pursuing any other remedies available to it for such violation,
including but not limited to any injunctive or other equitable relief or the
recovery of damages from the Employee.
(c) The Employee acknowledges that the covenants contained in this
Section 8 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 8 may be inadequate and that the violation of any of the covenants
contained in this Section 8 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 8 shall run in favor of
the Company and its successors and assigns. In addition, to the extent the
Company is successful on the merits in any proceeding to enforce the terms of
this Section 8, the Employee agrees to pay the Company the costs it incurs,
including reasonable attorneys' fees and expenses, in bringing and prosecuting
any such proceeding.
(d) In case any one or more of the terms or provisions contained in
this Section 8 shall for any reason be held invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect any
4
<PAGE>
other terms or provisions hereof, but such term or provision shall be
deemed modified or deleted as or to the extent required by applicable law, and
such modification or deletion shall not affect the validity of the other terms
or provisions of this Section 8. In addition, if any one or more of the
restrictions contained in this Section 8 shall for any reason be held to be
unreasonable with regard to time, duration, geographic scope or activity, the
parties contemplate and hereby agree that such restriction shall be modified and
shall be enforced to the full extent compatible with applicable law. The parties
hereto intend that the covenants contained in this Section 8 shall be deemed a
series of separate covenants for each country, state, county and city. If, in
any judicial proceeding, a court shall refuse to enforce all the separate
covenants deemed included in this Section 8 because, taken together, they cover
too extensive a geographic area, the parties intend that those of such covenants
(taken in order of the cities, counties, states and countries therein which are
lease populous) which if eliminated would permit the remaining separate
covenants to be enforced in such proceeding shall, for the purpose of such
proceeding, be deemed eliminated from the provisions of this Section 8.
(e) The provisions of this Section 8 shall survive the termination of
this Employment Agreement.
9. Termination.
(a) The Company may terminate the Employee's services hereunder "for
cause" by delivering to Employee not less than ten (10) days prior to the date
on which the termination is to be effective, a written notice of termination for
cause specifying the act, acts or failure to act that constitute the cause. For
the purposes of this agreement, "for cause" shall mean; (i) any act of fraud or
embezzlement which materially adversely affects the financial or market
interests of the Company or any affiliate thereof, (ii) in the event of a
conviction of the Employee for any violent felony or other serious crime or any
knowing violation of any federal or state securities law or regulation, (iii)
repeated failure to perform Employee's duties hereunder after notice and
opportunity to cure, (iv) any material breach by the Employee of this Agreement,
or (v) the death of the Employee.
(b) If the Company terminates Employee's employment hereunder for any
reason other than "for cause" as set forth in Section 9(a) hereof, the Company
shall pay to the Employee compensation pursuant to Sections 4(a) and 4(b) hereof
at the time and in the manner provided for herein, and no other compensation
payable hereunder shall be payable to the Employee. If the Company terminates
Employee's employment hereunder "for cause" as set forth in Section 9(a) hereof
or if Employee resigns voluntarily from Employee's employment by the Company,
Employee shall be paid the compensation pursuant to Sections 4(a) and 4(b)
hereof through the date of such termination but shall not be entitled to receive
any further compensation hereunder. Employee and the Company acknowledge that
the foregoing provisions of this paragraph 9(b) are reasonable and are based
upon the facts and circumstances of the parties at the time of entering into
this Agreement, and with due regard to future expectations.
10. Notices. Any notice to be given to the Company hereunder shall be
deemed sufficient if addressed to the Company in writing and delivered or mailed
by certified or registered mail to it at 1223 NW Finn Hill Road, Poulsbo
Washington 98730, Attention: President, or to such other address as the Company
may hereafter designate, and a copy to Neil M. Kaufman, Esq., Kaufman &
Moomjian, LLC, 50 Charles Lindbergh Boulevard, Suite 206, Mitchel Field, New
York 11553. Any notice to be given to Employee hereunder shall be delivered or
mailed by certified or registered mail to her at the address set forth at the
head of this Agreement or such other address as he may hereafter designate.
11. Change of Control. (a) In the event that at any time after any
securities of the Company are publicly traded there shall be a change in the
control of the Company, as hereinafter defined, or in any person directly or
indirectly presently controlling the Company, as hereinafter defined, Employee
shall have the option, exercisable within six (6) months of Employee's becoming
aware of such event, to terminate Employee's employment by the Company pursuant
to this Employment Agreement forthwith. Upon such termination, Employee shall
have the right to immediately receive as a lump sum payment an amount equal to
three (3) times the average of
5
<PAGE>
the total annual compensation paid by the Company to Employee, with respect
to the five fiscal years of the Company prior to the change of control, minus
$1.00.
(b) For purposes of this Agreement, a change in control of the Company,
or in any person directly or indirectly controlling the Company, shall mean:
(i) A change in control as such term is presently defined in
Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act);
or
(ii) if any "person" (as such term is used in Section 13(d) and 14(d)
of the Exchange Act) other than the Company or any "person" who on the date of
this Agreement is a director or officer of the Company, becomes the "beneficial
owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing twenty (20%) percent of
the voting power of the Company's then outstanding securities, unless such
person becomes such a beneficial owner as a result of a transaction approved by
a majority of the board of directors of the Company; or
(iii) if during any period of two (2) consecutive years during the
term of this Agreement, individuals who at the beginning of such period
constitute the Board of Directors cease for any reason to constitute at least a
majority thereof, unless the election of each director who is not a director at
the beginning of such period has been approved in advance by directors
representing at least two-thirds (2/3) of the directors then in office who were
directors at the beginning of the period.
12. Successors and Assigns; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of the successors and assigns of the
Company, and unless clearly inapplicable, all references herein to the Company
shall be deemed to include any such successor. In addition, this Agreement shall
be binding upon and inure to the benefit of the Employee and Employee's heirs,
executors, legal representatives and assigns; provided, however, that the
obligations of Employee hereunder may not be delegated without the prior written
approval of the Board of Directors of the Company. In the event of any
consolidation or merger of the Company into or with any other corporation during
the term of this Agreement, or the sale of all or substantially all of the
assets of the Company to another corporation, person or entity during the term
of this Agreement, such successor corporation shall assume this Agreement and
become obligated to perform all of the terms and provisions hereof applicable to
the Company, and Employee's obligations hereunder shall continue in favor of
such successor corporation.
13. Amendments. This Agreement may not be altered, modified, amended or
terminated except by a written instrument signed by each of the parties hereto.
14. Prior Agreements Superseded. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
any other agreements, oral or written, entered into between Employee and the
Company prior to the date of this Agreement relating thereto.
15. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington, without regard
to conflicts of laws.
16. Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to law or public policy, the
remaining provisions shall remain in full force and effect.
17. Waiver. No term or provision hereof shall be deemed waived and no
breach consented to or excused, unless such waiver, consent or excuse shall be
in writing and signed by the party claimed to have waived, consented or excused.
A consent, waiver or excuse of any breach shall not constitute a consent to,
waiver or, or excuse of any other or subsequent breach whether or not of the
same kind of the original breach.
6
<PAGE>
18. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
agreement.
19. Acknowledgment. Employee acknowledges that he has carefully read this
Agreement, has had an opportunity to consult counsel regarding this Agreement
and hereby represents and warrants to the Company that Employee's entering into
this Agreement, and the obligations and duties undertaken by Employee hereunder,
will not conflict with, constitute a breach of or otherwise violate the terms of
any other agreement to which Employee is a party and that Employee is not
required to obtain the consent of any person, firm, corporation or other entity
in order to enter into and perform Employee's obligations under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
eAcceleration Corp.
By: /s/ Clint Ballard
---------------------------------
Name: Clint Ballard
Title: President and Chief Executive
Officer
/s/ Diana T. Ballard
--------------------------------------
Diana T. Ballard
7
<PAGE>
EXHIBIT A
Inventions
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of services pursuant to this Agreement that
have been made or conceived or first reduced to practice by Employee, alone
or jointly with others, prior to the first effective date of this Agreement
that Employee desires to remove from the operation of this Agreement
entered into between the Company and Employee.
(a) No inventions or improvements.
(b) Any and all inventions regarding: Nothing
2. Employee proposes to bring to this relationship the following materials
and documents of a former employer.
(a) No materials or documents.
/s/ Diana T. Ballard
----------------------------
Diana T. Ballard
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, made and entered into this ___ day of
_______________, 1999 ("Agreement"), by and between eACCELERATION CORP., a
Delaware corporation (the "Corporation", which term shall include any one or
more of its subsidiaries where appropriate), and____________________
("Indemnitee"):
WHEREAS, highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or as officers or in other capacities
unless they are provided with adequate protection through insurance or adequate
indemnification against inordinate risks of claims and actions against them
arising out of their service to, and activities on behalf of, such corporations;
and
WHEREAS, the statutes and judicial duties regarding the duties of
officers and directors are often difficult to apply, ambiguous or conflicting
and therefore fail to provide such directors and officers with adequate and
reliable knowledge of legal risks to which they are exposed or information
regarding the proper cause of action to take; and
WHEREAS, the current impracticability of obtaining adequate insurance
and the uncertainties relating to indemnification have increased the difficulty
of attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") has determined that the difficulty in attracting and retaining such
persons is detrimental to the best interests of the Corporation's stockholders
and that the Corporation should act to assure such persons that there will be
increased certainty of such protection in the future; and
WHEREAS, the Corporation believes it is unfair for the directors and
officers to assume the risk of huge judgments and other expenses which may occur
in cases in which the director or officer acted in good faith; and
WHEREAS, Section 145 of the General Corporation law of Delaware
("Section 145") under which the Corporation is organized, empowers the
Corporation to indemnify its officers and directors by agreement and expressly
provides that the indemnification provided by Section 145 is not exclusive; and
WHEREAS, it is reasonable, prudent and necessary for the Corporation
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the
Corporation free from undue concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and/or to
take on additional service for or on behalf of the Corporation on the condition
that he be so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Corporation and Indemnitee do hereby covenant and agree as
follows:
1. DEFINITIONS FOR PURPOSES OF THIS AGREEMENT:
(a) "Change in Control" means a change in control of the
Corporation of a nature that would be required to be reported in response to
Item 5(f) of Schedule 14A of Regulation 14A (or in response to any similar item
or similar schedule or form) promulgated under the Securities Exchange Act of
1934 (the "Act"), whether or not the Corporation is then subject to such
reporting requirement; provided, however, that, without limitation, such a
Change in Control shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act),
<PAGE>
directly or indirectly, of securities of the Corporation representing 20%
or more of the combined voting power of the Corporation's then outstanding
securities without the prior approval of at least two-thirds of the members of
the Board of Directors in office immediately prior to such person attaining such
percentage interest; (ii) the Corporation is a party to a merger, consolidation,
sale of assets or other reorganization, or a proxy contest, as a consequence of
which members of the Board of Directors in office immediately prior to such
transaction or event constitute less than two-thirds of the Board of Directors
thereafter; (iii) during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period constituted the Board of
Directors (including for this purpose any new director whose election or
nomination for election by the Corporation's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who were directors
at the beginning of such period) cease for any reason to constitute at least
two-thirds of the Board of Directors; or (iv) the stockholders of the
Corporation approve a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation (in one transaction or
a series of transactions) of all or substantially all of the Corporation's
assets.
(b) "Potential Change in Control" shall be deemed to have occurred
if (i) the Corporation enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control; (ii) a person (including the
Corporation) publicly announces a legitimate intention to take or to consider
taking actions which if consummated would constitute a Change in Control; (iii)
any person, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or a corporation owned, directly or
indirectly, by the shareholders of the Corporation in substantially the same
proportions as their ownership of stock of the Corporation, who is or becomes
the beneficial owner, directly or indirectly, of securities of the Corporation
representing 9.5% or more of the combined voting power of the Corporation's then
outstanding Voting Securities, increases his beneficial ownership of such
securities by five percentage points or more over the percentage so owned by
such person; or (iv) the Board of Directors adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(c) "Corporate Status" describes the status of a person who is or
was or has agreed to become a director, officer, employee or agent of the
Corporation, or served at the request of the Corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint, venture,
trust or other enterprise.
(d) "Disinterested Director" means a director of the Corporation
who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(e) "Proceeding" includes any threatened, pending or completed
inquiry, action, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding, whether civil,
criminal, administrative or investigative, except one initiated by an Indemnitee
pursuant to Section 12(a) of this Agreement to enforce his rights under this
Agreement.
(f) "Expenses" includes all direct and indirect costs of any type
or nature whatsoever (including, without limitation, all attorneys' fees and
related disbursements, other out-of-pocket costs and reasonable compensation for
time spent by the Indemnitee for which he is not otherwise compensated by the
Corporation or any third party, provided that the rate of compensation and
estimated time involved is approved in advance by the Board of Directors),
actually and reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a Proceeding (including amounts paid in
settlement by or on behalf of Indemnitee), or the prosecution of an action or
proceeding, including appeals, to establish or enforce a right to
indemnification under this Agreement, Section 145 or otherwise. Expenses as
defined herein, shall not include any judgments, fines or penalties actually
levied against the Indemnitee.
(g) "Independent Counsel" means (i) any law firm or member of a law
firm which the Board of Directors may designate from time to time provided that
the law firm or member of the law firm so designated is experienced in matters
of corporation law and neither presently is, nor in the past five years has
been, retained to represent: (A) the Corporation or Indemnitee in any matter
material to either such party, or (B) any other party to the Proceeding giving
rise to a claim for indemnification hereunder. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under the
applicable standards of professional
2
<PAGE>
conduct then prevailing, would have a conflict of interest in representing
either the Corporation or Indemnitee in an action to determine Indemnitee's
rights under this Agreement arising on or after the date of this Agreement,
regardless of when the Indemnitee's act or failure to act occurred.
2. SERVICES BY INDEMNITEE.
Indemnitee agrees to serve or continue to serve as a Director of
the Board of the Corporation so long as he is duly appointed or elected and
qualified in accordance with the applicable provisions of the By-Laws of the
Corporation or the By-Laws of any subsidiary of the Corporation or until such
time as he tenders his resignation in writing. This Agreement shall not impose
any obligation on the Indemnitee or the Corporation to continue the Indemnitee's
position with the Corporation beyond any period otherwise applicable, nor to
create any right to continued employment of the Indemnitee in any capacity.
3. GENERAL.
The Corporation shall indemnify, and shall advance Expenses to
Indemnitee as provided in this Agreement and to the fullest extent permitted by
law.
4. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION.
Indemnitee shall be entitled to the rights of indemnification
provided in this Section 4 if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any Proceeding, other than a Proceeding by or
in the right of the Corporation. Pursuant to this Section 4, Indemnitee shall be
indemnified against Expenses, including amounts paid in settlement, as well as
any judgments, fines and penalties levied or awarded against him in connection
with such Proceeding or any claim, issue or matter therein, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Corporation, and, with respect to any criminal Proceeding,
had no reasonable cause to believe his conduct was unlawful.
5. PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.
Indemnitee shall be entitled to the rights of indemnification
provided in this Section 5, if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any threatened, pending or completed
Proceeding brought by or in the right of the Corporation to procure a judgment
in its favor. Pursuant to this Section, Indemnitee shall be indemnified against
Expenses actually incurred by him or on his behalf in connection with such
Proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation. Notwithstanding
the foregoing, no indemnification against such Expenses shall be made in respect
of any claim, issue or matter as to which Indemnitee shall have been adjudged to
be liable to the Corporation if such indemnification is not permitted by the
laws of the State of Delaware or other applicable law; provided, however, that
indemnification against Expenses nevertheless shall by made by the Corporation
in such event to the extent that the Court of Chancery of the State of Delaware,
or the court in which such Proceeding shall have been brought or is pending,
shall determine.
6. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR
PARTLY SUCCESSFUL.
Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually incurred by him or on his behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Corporation shall
indemnify Indemnitee against all Expenses actually incurred by him or on his
behalf in connection with each successfully resolved claim, issue or matter. For
purposes of this Section, but without limitation, the termination of any claim,
issue or matter in such a Proceeding by dismissal or withdrawal, with or without
prejudice, shall be deemed to be a successful result
3
<PAGE>
as to such claim, issue or matter.
7. ADVANCE OF EXPENSES.
The Corporation shall advance all reasonable Expenses incurred by
or on behalf of Indemnitee in connection with any Proceeding within twenty days
after the receipt by the Corporation of a statement or statements from
Indemnitee requesting such advance or advances from time to time, whether prior
to or after final disposition of such Proceeding. Such statement or statements
shall evidence or reflect the Expenses incurred by Indemnitee and shall include
or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to
repay any Expenses advanced if it is determined ultimately that Indemnitee is
not entitled to be indemnified against such Expenses.
8. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO
INDEMNIFICATION.
(a) To obtain indemnification under this Agreement, Indemnitee
shall submit to the Corporation a written request, including therein or
therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. Promptly upon receipt of such a
request for indemnification, the Secretary of the Corporation shall advise the
Board of Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
Section 8(a) hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in the specific case
as follows: (i) if a Change in Control shall have occurred, by Independent
Counsel in a written opinion to the Board of Directors, a copy of which shall be
delivered to Indemnitee (unless Indemnitee shall request that such determination
be made by the Board of Directors, in which case the determination shall be made
in the manner provided below in clauses (ii) or (iii)); (ii) if a Change of
Control shall not have occurred, (A) by the Board of Directors by a majority
vote of a quorum consisting of Disinterested Directors, or (B) if a quorum of
the Board of Directors consisting of Disinterested Directors is not obtainable
or, even if obtainable, if such quorum of Disinterested Directors so directs, by
Independent Counsel in a written opinion to the Board of Directors, a copy of
which shall be delivered to Indemnitee; (iii) as provided in Section 9(b) of
this Agreement; and, if it is determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within ten (10) days after
such determination. Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
costs or Expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating shall be borne by the Corporation (regardless of
the determination as to Indemnitee's entitlement to indemnification) and the
Corporation hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 8(b) of this Agreement,
and no counsel shall have been designated previously by the Board of Directors
or the Independent Counsel so designated is unwilling or unable to serve, then,
(i) if no Change of Control shall have occurred, the Independent Counsel shall
be selected by the Board of Directors and the Corporation shall give written
notice to Indemnitee advising him of the identity of the Independent Counsel so
selected; (ii) if a Change of Control shall have occurred, the Independent
Counsel shall be selected by Indemnitee (unless Indemnitee shall request that
such selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the
Corporation advising it of the identity of the Independent Counsel so selected.
In either event, Indemnitee or the Corporation, as the case may be, may, within
7 days after such written notice of selection shall have been given, deliver to
the Corporation or to Indemnitee, as the case may be, a written objection to
such selection. Such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirement of "Independent
Counsel" as defined in this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. If such written objection is
made, the Independent Counsel so selected may not serve as Independent Counsel
unless and until a
4
<PAGE>
court has determined that such objection is without merit. If, within 20
days after submission by Indemnitee of a written request for indemnification
pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected
or if selected, shall have been objected to, in accordance with this Section
8(c), either the Corporation or Indemnitee may petition the Court of Chancery of
the State of Delaware or other court of competent jurisdiction for resolution of
any objection which shall have been made by the Corporation or Indemnitee to the
other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the Court or by such other person as
the Court shall designate, and the person with respect to whom an objection is
favorably resolved or the person so appointed shall act as Independent Counsel
under Section 8(b) hereof. The Corporation shall pay any and all reasonable fees
and expenses of Independent Counsel incurred by such Independent Counsel in
connection with the performance of his responsibilities pursuant to Section 8(b)
hereof, and the Corporation shall pay all reasonable fees and Expenses incident
to the implementation of the procedures of this Section 8(c), regardless of the
manner in which such Independent Counsel was selected or appointed. Upon the due
commencement of any judicial proceeding or arbitration pursuant to Section 12 of
this Agreement, Independent Counsel shall be discharged and relieved of any
further responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing).
9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person, persons or entity making such determination shall presume that the
Indemnitee is entitled to indemnification under this Agreement if the Indemnitee
has submitted a request for indemnification in accordance with Section 8(a) of
this Agreement, and the Corporation shall have the burden of proof to overcome
that presumption in connection with the making of any determination contrary to
that presumption by any person, persons or entity.
(b) If within 30 days after receipt by the Corporation of the
request for indemnification, the Board shall not have made a determination under
Section 8(b)(i) or 8(b)(ii)(A) with regard thereto, the requisite determination
of entitlement to indemnification shall be deemed to have been made in favor of
the Indemnitee who then shall be entitled to such indemnification. The foregoing
provisions of this Section 9(b) shall not apply if the determination of
entitlement to indemnification is to be made by Independent Counsel pursuant to
Section 8(b)(i) or 8(b)(ii)(B) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not (except as otherwise expressly provided
in this Agreement) of itself adversely affect the right of the Indemnitee to
indemnification or create a presumption that the Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the Corporation or, with respect to any criminal
Proceeding, that the Indemnitee had reasonable cause to believe that his conduct
was unlawful.
10. ASSUMPTION OF DEFENSE.
In the event the Corporation shall be obligated to pay the Expenses
of any Proceeding against the Indemnitee, the Corporation, if appropriate, shall
be entitled to assume the defense of such Proceeding, with counsel reasonably
acceptable to the Indemnitee, upon the delivery to the Indemnitee of written
notice of its election to do so. After delivery of such notice, approval of such
counsel by the Indemnitee and the retention of such counsel by the Corporation,
the Corporation will not be liable to the Indemnitee under this Agreement for
any fees of counsel subsequently incurred by the Indemnitee with respect to the
same Proceeding, provided that (i) the Indemnitee shall have the right to employ
his counsel in such Proceeding at the Indemnitee's expense; and (ii) if (a) the
employment of counsel by the Indemnitee has been previously authorized in
writing by the Corporation, (b) the Corporation shall have reasonably concluded
that there may be a conflict of interest between the Corporation and the
Indemnitee in the conduct of any such defense, or (c) the Corporation shall not,
in fact, have employed counsel to assume the defense of such Proceeding, the
fees and Expenses of the Indemnitee's counsel shall be at the expense of the
Corporation.
5
<PAGE>
11. ESTABLISHMENT OF A TRUST.
(a) In the event of a Potential Change in Control, the Corporation,
upon written request by the Indemnitee, shall create a trust for the benefit of
the Indemnitee and from time to time upon written request of the Indemnitee
shall fund such trust in an amount sufficient to satisfy any and all Expenses
which at the time of each such request it is reasonably anticipated will be
incurred in connection with a Proceeding for which the Indemnitee is entitled to
rights of indemnification under Section 4 or 5 hereof, and any and all
judgments, fines, penalties and settlement amounts of any and all proceedings
for which the Indemnitee is entitled to rights of indemnification under Section
4 or 5 from time to time actually paid or claimed, reasonably anticipated or
proposed to be paid. The amount or amounts to be deposited in the trust pursuant
to the foregoing funding obligation shall be determined by the party who would
be required to make the determination of the Indemnitee's right to
indemnification under Section 8(b) hereof (the "Reviewing Party"). The terms of
the trust shall provide that upon a Change in Control (i) the trust shall not be
revoked or the principal thereof invaded, without the written consent of the
Indemnitee, (ii) the trustee shall advance, within two business days of a
request by the Indemnitee, any and all Expenses to the Indemnitee (and the
Indemnitee hereby agrees to reimburse the trust under the circumstances under
which the Indemnitee would be required to reimburse the Corporation under
Section 7 hereof), (iii) the trust shall continue to be funded by the
Corporation in accordance with the funding obligation set forth above, (iv) the
trustee shall promptly pay to the Indemnitee all amounts for which the
Indemnitee shall be entitled to indemnification pursuant to this Agreement or
otherwise, and (v) all unexpended funds in such trust shall revert to the
Corporation upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The trustee shall be an
institutional trustee with a highly regarded reputation chosen by the
Indemnitee. Nothing in this Section 11 shall relieve the Corporation of any of
its obligations under this Agreement.
(b) Nothing contained in this Section 11 shall prevent the Board of
Directors of the Corporation in its discretion at any time and from time to
time, upon request of the Indemnitee, from providing security to the Indemnitee
for the Corporation's obligations hereunder through an irrevocable line of
credit or other collateral. Any such security, once provided to the Indemnitee,
may not be revoked or released without the prior consent of the Indemnitee.
12. REMEDIES OF INDEMNITEE.
(a) In the event that any one or more of the following events shall
have occurred: (i) a determination is made pursuant to Section 8 of this
Agreement that Indemnitee is not entitled to indemnification under this
Agreement; (ii) Expenses are not advanced timely in accordance with Section 7 of
this Agreement; (iii) the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 8(b) of this Agreement and
such determination shall not have been made and delivered in a written opinion
within 90 days after receipt by the Corporation of the request for
indemnification; (iv) payment of indemnification is not made pursuant to Section
6 of this Agreement within ten days after receipt by the Corporation of a
written request therefor; (v) payment of indemnification is not made within ten
days after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 9(b) of this Agreement; and/or (vi) the Corporation fails to comply with
its obligations under Section 11(a) with regard to the establishment or funding
of a trust for Expenses, the Indemnitee shall be entitled to an adjudication of
his entitlement to such indemnification, advancement of Expenses or the
establishment and funding of the trust in an appropriate court of the State of
Delaware, or in any other court of competent jurisdiction. Alternatively,
Indemnitee, at his option, may seek an award in arbitration to be conducted by a
single arbitrator pursuant to the rules of the American Arbitration Association.
Indemnitee shall commence such proceeding seeking an adjudication or an award in
arbitration within 180 days following the date on which Indemnitee first has the
right to commence such proceeding pursuant to this Section 12. The Corporation
shall not oppose Indemnitee's right to seek any such adjudication or award in
arbitration.
(b) Whenever a determination is made pursuant to Section 8 of this
Agreement that Indemnitee is not entitled to indemnification, the judicial
proceeding or arbitration commenced pursuant to this Section 12 shall be
conducted in all respects as a de novo trial, or arbitration, on the merits and
Indemnitee shall not
6
<PAGE>
be prejudiced by reason of that adverse determination. If a Change of
Control shall have occurred, the Corporation shall have the burden of proving
that Indemnitee is not entitled to indemnification or advancement of Expenses,
as the case may be, in any judicial proceeding or arbitration commenced pursuant
to this Section 12.
(c) If a determination shall have been made or deemed to have been
made pursuant to Section 8 of this Agreement that Indemnitee is entitled to
indemnification, the Corporation shall be bound by such determination in any
judicial proceeding or arbitration commenced pursuant to this Section 12 absent
(i) a misstatement by Indemnitee of a material fact, or an omission of a
material fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law.
(d) The Corporation shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 12 that
the procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Agreement.
(e) In the event that Indemnitee, pursuant to this Section 12,
seeks a judicial adjudication or an award in arbitration to enforce his rights
under, or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Corporation, and shall be indemnified by the
Corporation against, any and all expenses (of the types described in the
definition of Expenses in this Agreement) actually incurred by him in connection
with obtaining such judicial adjudication or arbitration, but only if he
prevails therein. If it shall be determined in said judicial adjudication or
arbitration that Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall be
appropriately prorated.
13. NON-EXCLUSIVITY; DURATION OF AGREEMENT; INSURANCE:
SUBROGATION.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Corporation's certificate of incorporation or by-laws, any other
agreement, a vote of stockholders or a resolution of directors, or otherwise.
This Agreement shall continue until and terminate upon the later of: (a) 10
years after the date that Indemnitee shall have ceased to serve as an officer or
director of the Corporation, or (b) the final termination of all pending
Proceedings in respect of which Indemnitee is granted rights of indemnification
or advancement of Expenses hereunder and of any proceeding commenced by
Indemnitee pursuant to Section 12 of this Agreement relating thereto. This
Agreement shall be binding upon the Corporation and its successors and assigns
and shall inure to the benefit of Indemnitee and his heirs, executors and
administrators.
(b) (i) To the extent that the Corporation maintains an insurance
policy or policies providing liability insurance for directors and officers of
the Corporation, Indemnitee shall be covered by such policy or policies in
accordance with the terms thereof to the maximum extent of the coverage
available for any such director or officer under such policy or policies. The
Corporation shall take all necessary or appropriate action to cause such
insurers to pay on behalf of the Indemnitee all amounts payable as a result of
the commencement of a proceeding in accordance with the terms of such policy.
(ii) For a period of three years after the date the Indemnitee
shall have ceased to serve as an officer or director of the Corporation, the
Corporation will provide officers and directors liability insurance for
Indemnitee on terms no less favorable than the terms of the liability insurance
which the Corporation then provides to the current officers and directors;
provided, that the Corporation provides officers and directors liability
insurance to its current officers and directors; and provided further, that the
annual premiums for the liability insurance to be provided to the Indemnitee do
not exceed by more than 50% the premium charged for the coverage available for
any of the Corporation's current officers and directors.
7
<PAGE>
(c) In the event of any payment under this Agreement, the Corporation
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Corporation to bring suit to enforce such rights.
(d) The Corporation shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee otherwise actually has received such payment under any insurance
policy, contract, agreement or otherwise.
14. SEVERABILITY.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity,
legality and enforceability of the remaining provisions of this Agreement
(including without limitation, each portion of any Section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby; and (b) to the fullest extent possible the
provisions of this Agreement (including, without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable.
15. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF
EXPENSES.
Except as otherwise provided specifically herein, Indemnitee shall
not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding, or any claim herein, brought or made
by him against the Corporation.
16. HEADINGS.
The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction thereof.
17. MODIFICATION AND WAIVER.
This Agreement may be amended from time to time to reflect changes
in Delaware law or for other reasons. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
18. NOTICE BY INDEMNITEE.
Indemnitee agrees promptly to notify the Corporation in writing upon
being served with any summons, citation, subpoena, complaint, indictment,
information or other document relating to any Proceeding or matter which may be
subject to indemnification or advancement of Expenses covered hereunder;
provided, however, that the failure to give any such notice shall not disqualify
the Indemnitee from indemnification hereunder.
19. NOTICES.
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if (i) delivered
by hand to the party to whom said notice or other communication shall have been
directed, (ii) mailed by certified or registered mail with postage prepaid or
(iii) delivered by facsimile transmission electronically confirmed.
8
<PAGE>
(a) If to Indemnitee, to:
-----------------
-----------------
-----------------
(b) If to the Corporation, to:
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98730
Fax No: (360) 598-2450
with a copy to:
Kaufman & Moomjian, LLC
50 Charles Lindbergh Boulevard
Mitchel Field, New York 111553
Attn: Neil M. Kaufman, Esq.
Fax No: (516) 222-5110
or to such other address as may have been furnished to Indemnitee by the
Corporation or to the Corporation by Indemnitee, as the case may be.
20. GOVERNING LAW.
The parties agree that this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the day and year first above written.
eACCELERATION CORP.
By:
-------------------------------
Name:
Title:
Indemnitee:
-----------------------------------
9
INVESTOR SUBSCRIPTION AGREEMENT FOR eACCELERATION CORP.
Persons interested in purchasing shares of the common stock of eAcceleration
Corp. (the "Shares") must complete and return this Subscription Agreement along
with their check or money order (unless they are sending a wire transfer) to
American Stock Transfer & Trust Co., as escrow agent for eAcceleration Corp.,
Attention: Corporate Trust Department, 6201 15th Avenue, Brooklyn, New York
11219.
The Shares involve a high degree of risk and immediate and substantial dilution.
No person should complete and sign a Subscription agreement unless he or she has
received and read the Company's Prospectus dated
---------------------.
eAcceleration Corp. (the "Company") reserves the right to accept or reject
any subscription in whole or in part for any reason or for no reason. If and
when accepted by the Company, this Subscription Agreement shall constitute a
subscription for shares of the Company's Common Stock ($.0001 par value per
shares). The minimum subscription is $625 for 100 shares. Method of Payment:
Check, Money Order or Wire Transfer payable to "eAcceleration Corp.,
Subscription Escrow Account."
A copy of this Agreement will be returned to you as your receipt within
thirty (30) days, confirming your subscription and indicating the extent to
which your subscription has been accepted by the Company. As discussed in the
Prospectus, until 400,000 shares (the "Minimum Shares") are sold, all proceeds
of the Offering will be held in an Escrow Account at American Stock Transfer &
Trust Co. When the Minimum Shares are sold, the funds held in the Escrow Account
will be disbursed to the Company and stock certificates will be issued within
thirty (30) days. Thereafter, a subscriber will be mailed his or her stock
certificates within thirty (30) days of the date of the Company has mailed
written confirmation of the subscription. In the event the Minimum Shares are
not sold prior to the Termination Date of the Offering, all deposits will be
returned to subscribers with interest earned, if any.
I hereby irrevocably tender this Subscription Agreement for the purchase of
_______ Shares at $6.25 per Share. With this Subscription Agreement, I tender
payment in the amount of $_______ ($6.25 per Share) for the Shares subscribed.
I am a bona fide resident of the state of _______________ [insert state of
residence].
Please register the Shares which I am purchasing as follows:
Check one:
___ Individual
___ Tenants-in-Common in Trust
___ Joint Tenants
___ Corporation
___ Minor with adult custodian under the Uniform Gifts to Minor's Act
___ Existing Partnership
<PAGE>
For the person(s) who will be registered shareholder(s):
- ---------------------------------- ----------------------------------
Investor No. 1 (print name above) Investor No. 2 (print name above)
- ---------------------------------- ----------------------------------
Street (residence address) Street (residence address)
- ---------------------------------- ----------------------------------
City State Zip City State Zip
- ---------------------------------- ----------------------------------
Home Phone Home Phone
- ---------------------------------- ----------------------------------
Social Security Number Social Security Number
- ---------------------------------- ----------------------------------
Date of Birth Date of Birth
- ---------------------------------- ----------------------------------
Signature Signature
- ---------------------------------- ----------------------------------
Date Date
Accepted by eAccleration Corp.
By: Date:
-------------------------------- ----------------------------
Name: Name:
Title: Title:
2
eACCELERATION CORP.
ESCROW AGREEMENT
with
AMERICAN STOCK TRANSFER & TRUST CO.
This Agreement is made and entered into as of ___________, 1999 by and
among eACCELERATION CORP. a Delaware corporation (the "Company") and AMERICAN
STOCK TRANSFER & TRUST CO., a New York corporation with a principal corporate
trust office at 6201 15th Avenue, Brooklyn, New York 11219 (the
"Escrow Agent").
WHEREAS, the Company proposes to offer for sale to investors through a
direct public offering up to 3,000,000 shares of common stock, par value $.0001
per share (the "Shares") with a minimum offering of 400,000 Shares (the "Minimum
Offering), at a proposed price of $6.25 per Share.
WHEREAS, the offering of Shares will terminate at the close of business on
July ___, 2000 (the "Termination Date"), unless otherwise terminated by the
Company, and if acceptable subscriptions for the minimum number of Shares have
not been received by the Company on or before such date, no Shares will be sold
and all payments made by subscribers will be refunded without interest by the
Escrow Agent upon written authorization of fund destination by the subscribers.
The Company reserves the right, in its sole discretion, to reject any
subscription, in whole or in part, for the purchase of the Shares offered
hereby. In the case of orders which are rejected or partially rejected, the
Escrow Agent will promptly refund, without interest, the amount of the
subscription price representing the entire rejected order or that portion
thereof which has not been accepted.
WHEREAS, with respect to all subscription payments for Shares received from
subscribers, the Company proposes to establish an escrow account with the Escrow
Agent at its office, 6201 15th Avenue, Brooklyn, New York 11219.
WHEREAS, the Company intends to sell the Shares as the Company's placement
agent on a "best efforts all or none" basis as to 400,000 Shares (the "Minimum
Offering"), and on a "best efforts" basis as to an additional 2,600,000 Shares.
WHEREAS, the Company desires to establish an escrow account in which funds
received from subscribers of Shares ("subscribers") will be deposited pending
completion of the escrow period. The Escrow Agent agrees to serve as escrow
agent in accordance with the terms and conditions set forth herein.
NOW THEREFORE, the parties hereto agree as follows:
1. The Escrow Agent shall hold the Escrow Fund Account subject to the
terms of this Escrow Agreement and shall act in accordance with the instructions
contained in this Escrow Agreement.
2. Upon the written instructions of the Company, the Escrow Agent
shall deliver all or a part of the Escrow Fund at such times and in such manner
as shall be set forth in such instructions. Any such written instruction
of the Company shall be accompanied by a written opinion of counsel to the
Company to the effect that all conditions to the release of the subject funds
have been satisfied.
<PAGE>
3. The Escrow Agent shall invest any cash balances held under this Escrow
Agreement in accordance with instructions given in writing or orally and
confirmed in writing. The Escrow Agent shall have no liability for any losses
relating to any investments made in accordance with the written instructions of
the Company. The Escrow Agent shall have no obligation to invest any cash
balances except in accordance with the written instructions of the Company. All
income earned from such investments shall be retained by the Escrow Agent and
disbursed on the written instructions of the Company, provided, however, if any
fees, expenses or other amounts are owed and due to the Escrow Agent and have
not been paid, the Escrow Agent shall be paid such money from income earned
prior to disbursing at the direction of the Company.
4. This Escrow Agreement shall terminate upon the final distribution of
all amounts in the Escrow Account and any income earned thereon.
5. (a) The Escrow Agent shall not in any way be bound or affected by any
notice of modification or cancellation of this Escrow Agreement unless in
writing signed by the Company, nor shall the Escrow Agent be bound by any
modification hereof unless the same shall be satisfactory to it. The Escrow
Agent shall be entitled to rely upon any notice, certification, demand or other
writing delivered to it hereunder by the Company without being required to
determine the authenticity or the correctness of any facts stated therein, the
propriety or validity of the service thereof, or the jurisdiction of the court
issuing any judgment.
(b) The Escrow Agent may act in reliance upon any signature believed
by it to be genuine, and may assume that any person purporting to give any
notice or receipt, or make any statements in connection with the provisions
hereof has been duly authorized to do so.
(c) The Escrow Agent may act relative hereto in reliance upon advice
of counsel in reference to any matter connected herewith, and shall not be
liable for any mistake of fact or error or judgment, or for any acts or
omissions of any kind, unless caused by its willful misconduct or gross
negligence.
(d) The Escrow Agent may resign and be discharged of its duties as
Escrow Agent hereunder by giving ten (10) days written notice to the Company.
Such resignation shall take effect ten (10) days after the giving of such
notice, or upon receipt by the Escrow Agent of an instrument of acceptance
executed by a successor escrow agent and upon delivery by the Escrow Agent to
such successor of all of the escrowed documents and funds or securities then
held by it. If no successor escrow agent is appointed in writing ten (10) days
after giving such notice, the Escrow Agent shall deliver all funds in the Escrow
Account to the Company.
(e) The Company hereby agrees to indemnify and hold the Escrow Agent
harmless from any loss, liability or expense, arising out of or related to this
Escrow Agreement, and for all costs and expenses, including the fees and
expenses of counsel, incurred in connection with this Escrow Agreement. The
provisions of this paragraph shall survive the termination of this Agreement.
(f) The duties and obligations of the Escrow Agent shall be determined
solely by the express provisions of this Agreement and the Escrow Agent shall
not be liable except for the performance of such duties and obligations as are
specifically set forth in this Escrow Agreement. The Escrow Agent shall have no
liability or duty to inquire into the terms and conditions of any agreement to
which it is not a party.
(g) If a controversy arises between one or more of the parties hereto,
or between any of the parties hereto and any person not a party hereto, as to
whether or not or to whom the Agent shall deliver the Escrow Account or any
portion thereof or as to any other matter arising out of or relating to this
Agreement or the Escrow Account deposited hereunder, the Escrow Agent shall not
be required to determine same and need not make any delivery of the funds in the
Escrow Account or any portion thereof but may retain such funds until the rights
of the parties to the dispute shall have finally been determined by agreement or
by final order of court of competent jurisdiction, provided, however, that the
time of appeal of any such final order has expired without an appeal having
been made. The Escrow Agent shall deliver the Escrow Account or any
portion thereof within 15 days after the
2
<PAGE>
Escrow Agent has received written notice of any such agreement or final
order (accompanied by an affidavit that the time for appeal has expired without
an appeal having been made). The Escrow Agent shall be entitled to assume that
no such controversy has arisen unless it has received a written notice that such
a controversy has arisen which refers specifically to this Agreement and
identifies by name and address the adverse claimants to the controversy. If a
controversy of the type referred to in this paragraph arises, the Escrow Agent
may, in its sole discretion but shall not be obligated to, commence interpleader
or similar actions or proceedings for determination of the controversy.
(h) The Escrow Agent shall not be required to institute or defend any
action (including interpleader) or legal process involving any matter referred
to herein which in any manner affects it or its duties or liabilities hereunder.
In the event the Escrow Agent shall institute or defend any such action or legal
process, it shall do so only upon receiving full indemnity in an amount and of
such character as it shall require, against any and all claims liabilities,
judgments, attorney's fees and other expenses of every kind in relation thereto,
except in the case of its own willful misconduct or gross negligence.
(i) In the event that the Escrow Agent receives or becomes aware of
conflicting demands or claims with respect to any funds, securities, property or
documents deposited or delivered in connection herewith, or the parties disagree
about the interpretation of this Agreement, or about the rights and obligations,
or the propriety, of any action contemplated by the Escrow Agent hereunder, or
if the Escrow Agent otherwise has any doubts as to the proper disposition of
funds or the execution of any of its duties hereunder, the Escrow Agent shall
have the right to discontinue any or all further acts on its part until such
conflict, disagreement or doubt is resolved to its satisfaction. In addition,
the Escrow Agent may, in its sole discretion, file an action in interpleader in
any court of competent jurisdiction to resolve the dispute or uncertainty. The
Company agrees to indemnify the Escrow Agent and hold it harmless from and
against all costs, including reasonable attorney's fees and expenses incurred by
it in connection with such action. In the event that the Escrow Agent files an
action in interpleader, it shall thereupon be fully released and discharged from
all further obligations to perform any and all duties or obligations imposed
upon it by this Agreement, other than safekeeping of the assets in the Escrow
Account, if not paid into Court.
6. Any notice, direction, request, instruction, legal process, or other
instrument to be given or served hereunder by any party to another shall be in
writing, shall be delivered personally or sent by certified mail, return receipt
requested, to the respective party or parties at the following addresses, and
shall be deemed to have been given when received.
IF TO THE COMPANY,
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98730
Attn: President
Tel: (360) 697-9260
Fax: (360) 598-2450
Tax ID#: 91-2006409
WITH A COPY TO,
Kaufman & Moomjian, LLC
50 Charles Lindbergh Boulevard
Suite 260
Mitchel Field, New York 11553
Attn: Neil M. Kaufman, Esq.
Tel: (516) 222-5100
Fax: (516) 222-5110
3
<PAGE>
If to the Escrow Agent, 6201 15th Avenue, Brooklyn, New York 11219,
Attention: Corporate Trust Department.
Any party may change its or his address by written notice to each of
the other parties.
7. The Escrow Agent's fee for acting under this Escrow Agreement shall be
set forth in a separate letter and agreed to by the party or parties responsible
for payment. The Escrow Agent's fees and expenses, including counsel fees, shall
be paid by the Company. The Escrow Agent is hereby given a first priority lien
on the Escrow Fund to protect, indemnify and reimburse itself for all fees,
costs, expenses and liabilities arising out of this Escrow Agreement and the
performance of its duties hereunder.
8. This Escrow Agreement shall be binding upon the parties hereto and the
Escrow Agent, and their respective successors, legal representatives and
assigns.
eACCELERATION CORP.
By:
---------------------------------
Clint Ballard
President
AMERICAN STOCK TRANSFER & TRUST CO., as
Escrow Agent
Date:
------------------------------
By:
------------------------------
Name:
Title:
4
<PAGE>
EXHIBIT A
AMERICAN STOCK TRANSFER & TRUST CO. AS ESCROW AGENT FOR eACCELERATION CORP.
Escrow Agent Fee: $15,000
Out-of-Pocket Expenses: billed as incurred
Out-of-Pocket expenses shall include but are not limited to: legal, travel,
telephone, facsimile, postage, overnight courier and other related expenses. In
the event special administrative attention is required due to unusual
circumstances, an additional maintenance fee will be charged to cover time and
expenses.
5
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into
effective as of November 9, 1996,("Effective Date") by and between Acceleration
Software International Corporation, a Washington corporation ("Developer"), and
Pointe Control, a Washington corporation ("Distributor").
RECITALS
A. Distributor is in businesses related to development, distribution and
sale of software and other technology-related products (including
computer-related products and services), and, with their shareholders other
parties, may form other related entities to further engage in such business.
B. Developer and Distributor desire that Distributor distribute certain of
Developer's existing and future software and other technology in specified
geographic areas, and desire to enter into a flexible agreement providing for
such distribution, subject to future identification of the specific software or
other technology, the geographic areas of distribution, pricing, volumes and
other matters as may be determined by the parties as the necessity arises.
IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES AGREE
AS FOLLOWS:
1. Definitions.
1.01 "Software" shall mean the software product(s) described in Exhibit A
(as defined below), and upgrades or other modifications to such specific product
(but not other products sold or otherwise distributed with or in connection with
such product), as determined in the discretion of Developer.
1.02 "Software Copy" shall mean an object code copy of the Software,
together with a copy of any user manual or other documentation or materials
which are (or, if none, ordinarily would be) customarily supplied to End Users
by Developer with the Software, packaged for retail sale.
1.03 "End User" shall mean, in the case of Software, any third party which
obtains a Software Copy to fulfill its own computer aided instruction or tool
needs, or, in the case of Technology, any third party which obtains the
Technology in a form suitable to fulfill its needs.
1.04 "Territory" shall mean the geographic area identified in Exhibit A.
1.05 "Localization" shall mean modification of Software or Software Copies
("Localized Software") or Technology ("Localized Technology") to meet the needs
of non-English speaking End Users in the Territory. This may include code
changes, additions and alterations to the feature set, changes in the data,
translation, or new art or new packaging, with the intent to provide more
culturally acceptable Software or Technology to End Users speaking a principal
language in use in the Territory.
1.06 "Sale" or "Selling" or "Purchase" or "Purchasing" of Software,
Software Copies or Technology shall mean, with respect to the intellectual
property rights related to such Software or Technology, the grant or
acquisition, respectively, of a license to use the Software or Technology. With
respect to tangible property, such terms shall be accorded their common
meanings. In either case, such terms shall (i) include all sales, licenses,
transfers or other dispositions for value, (ii) include use by Distributor, and
(iii) be deemed a sale not later than when recorded as such on the books and
records of Distributor which are maintained for financial statement purposes.
1.07 "Exhibit A" shall mean each such Exhibit attached to and made a part
of this Agreement as of
<PAGE>
this Agreement's Effective Date, and each such Exhibit subsequently
executed by the parties and so made a part of this Agreement as of the Effective
Date specified in such subsequent Exhibit. Each such Exhibit A shall be
construed, together with this Agreement, as a separate and distinct agreement
between the parties, without taking into account or considering any such other
Exhibit A, such that performance or default in connection with any one such
Exhibit A shall not determine or affect performance or default as construed in
connection with any such other Exhibit A. In the event of any conflict between
the terms and conditions of any such Exhibit A and this Agreement considered
without such Exhibit A, the terms and conditions of Exhibit A shall take
precedence and control.
1.08 "Affiliate" shall mean any entity fifty percent (50%) or more of the
value or control of which is owned, directly or indirectly, by Distributor, or
their shareholders, or any combination of such parties, or any entity which
owns, directly or indirectly, fifty percent (50%) or more of the value or
control of such entities or their shareholders.
1.09 "Technology" shall mean the technology described in Exhibit A. For
purposes of this Agreement, "technology" shall be construed in its broadest
sense to include any information of actual or potential commercial use or value
relating to or arising out of the business of Developer, regardless of whether
patented, copyrighted or otherwise protected by law, and including but not
limited to computer and other programs, trade secrets, procedures, concepts,
processes, methodology, design data, computer software, specifications,
research, inventions or know-how, any of which may include or be incorporated
within or utilized in connection with either tangible or intangible property or
services, or some combination of such property and services. Such technology may
be of various forms or kinds which may, in various cases, be distributed,
licensed, provided or otherwise used. "Potential Technology" for purposes of
Section 8.09 shall be deemed to include (i) any technology which Developer is
developing or considering developing, and as to which Developer has given
Distributor notice of such development, and (ii) all performance-enhancement
computer utility software, specifically including that relating to CD-ROM drive,
hard drive and other storage media. In interpreting this Agreement in connection
with Technology (as distinguished from Software or Software Copies), a broad
interpretation shall be applied to all terms and conditions to effect the intent
of the parties that this Agreement apply to future transactions in connection
with such Technology, in accordance with any Exhibit A made a part of this
Agreement after the Effective Date.
2. Appointment and Authority of Distributor.
2.01 Appointment as Distributor for Territory. Subject to the terms and
conditions set forth in this Agreement, Developer hereby appoints Distributor as
Developer's distributor for the Software and/or the Technology in the Territory,
as specified in Exhibit A, and Distributor hereby accepts such appointment.
"Distributor," "distribution" and similar terms shall be construed as
appropriate for the circumstances in cases in which Technology is marketed,
sold, or provided in connection with services or tangible property. The parties
contemplate that Developer may appoint Distributor, and Distributor may accept
appointment as Developer's distributor, with respect to other or additional
Software and/or Technology in the Territory or other territories, which
appointment and acceptance, if any, shall be pursuant to additional Exhibit(s) A
in substantially the form attached, as executed by the parties and made a part
of this Agreement.
2.02 Exclusive Distributor. For so long as Distributor is performing in
compliance with this Agreement (including complying with any Minimum Performance
Requirements, as defined in Section 10.03), Developer shall not grant any other
party rights to distribute Localized Software or Localized Technology in the
Territory. Distributor acknowledges that certain of Developer's other
distributors are not prohibited from distributing in the Territory Software or
Technology which has not been localized, but Developer will not make any
Localized Software or Localized Technology available to such distributors with
respect to the Territory.
2.03 OEM Sales and Site Licenses. In addition to distribution of Software
Copies provided for in Section 2.01, Distributor shall have the right to
distribute the Software to either (i) a computer hardware manufacturer or seller
desiring to bundle the Software with computer hardware (an "OEM Sale") or (ii) a
user desiring a license to use the Software on more than one (1) computer owned,
operated and used by such user in such
2
<PAGE>
user's place of business without acquiring individual Software Copies for
use on each such computer (a "Site License", as further interpreted within the
ordinary meaning of the term). Such Software shall consist of CD-ROM discs (i)
which have been acquired from Developer for, and only for, such respective use,
(ii) which are packaged in a form not suitable for normal retail distribution to
End Users, and (iii) which are sold only in the Territory and for use or resale
only in the Territory. In the case of any other OEM Sale or Site License not
including an individual CD-ROM disc, Distributor shall further have the right to
negotiate the preliminary business terms of any such sale or license, on a
case-by-case basis, for review, further negotiation, and execution of a
definitive agreement by Developer (who shall have the sole right to enter into
any such agreement), in which case Distributor shall be compensated as provided
in Exhibit A.
2.04 Responsibilities of Distributor. Distributor shall, at its cost,
prepare localized versions of the Software and Software Copies or the
Technology, and shall market and distribute Software Copies and Technology in
the Territory, including marketing and distribution in the Territory for resale.
Distributor shall use its best efforts to pursue aggressive sales policies and
procedures (including marketing) to realize the maximum sales potential for the
Software or Technology, and to establish and promote Developer's business name,
trademarks, brandnames, and similar attributes, in the Territory. Distributor
shall not distribute or market the Software Copies or the Technology outside the
Territory.
2.05 Independent Contractors. The relationship of Developer and Distributor
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct or control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint ventures, co-owners or otherwise as
participants in a joint or common undertaking. All financial obligations
associated with Distributor's business are the sole responsibility of
Distributor. All sales and other agreements between Distributor and its
customers are Distributor's exclusive responsibility and shall have no effect on
Distributor's obligations under this Agreement. Distributor shall be solely
responsible for, and shall indemnify and hold Developer free and harmless from,
any and all claims, damages or lawsuits (including Developer's attorneys' fees)
arising out of the acts of Distributor, its employees or its agents. Distributor
shall not constitute, and shall take no action which would cause it to be
treated as, a "permanent establishment" of Developer within the meaning of the
tax laws of any country.
3. Production of Software, Software Copies and Technology.
3.01 CD-ROM Discs and Other Media. In the case of Software, except as
otherwise specifically provided in Exhibit A, Developer shall, at its cost and
at a facility of its selection, reproduce the object code of Software onto
CD-ROM discs (including labeling and artwork) in a form suitable for packaging
and distribution to End Users at Developer's cost and at a facility of
Developer's selection. Localized Software will be reproduced by Developer from a
master copy of the Software (including a master of labeling and artwork) which
has been Localized and provided by Distributor at Distributor's cost. As
circumstances may require or make advantageous (as determined in the discretion
of Developer), in particular in the case of Technology, Developer may reproduce
and provide to Distributor Software or Technology in other media or form. Under
no circumstances shall Distributor replicate or otherwise duplicate Software or
Technology, on CD-ROM discs or otherwise, or obtain such replicated or
duplicated Software from any source other than Developer. Possession by
Distributor of a "Gold Disc" or other medium commonly used to replicate or
duplicate software shall not be construed as evidence that Distributor has any
right to replicate or duplicate Software.
3.02 Documentation and Packaging. Distributor shall produce all
documentation, packaging and other items customarily supplied to End Users, and
shall assemble such items, all at Distributor's cost. Such items shall be
provided to Developer not less than fifteen (15) days prior to commencement of
production for Developer's review and approval, and production shall not be
commenced until approved in writing by Developer, except that failure by
Developer to approve or disapprove within fifteen (15) days shall be deemed to
be approval.
3.03 Mutual Assistance. Distributor and Developer shall cooperate and
provide reasonable and timely
3
<PAGE>
assistance to one another in connection with preparation of Localized Software
or Technology.
4. End User Restrictions.
Except as otherwise provided under applicable law:
4.01 Only a personal, non-transferable, and non-exclusive right to use
Software or Technology (on a single designated system shall be granted to each
End User.
4.02 Developer retains all rights in and title to Software and Technology,
including the media on which it is provided, and in and to all copies, and no
title to the Software or such media is transferred to either Distributor or any
End User.
4.03 The End User may not copy the Software or Technology (except in the
case of Software ,except for one (1) copy for backup purposes and only as
necessary to use the Software on such End User's designated system), and all
such copies shall contain all copyright and other proprietary notices or legends
of Developer on the Software as delivered to the End User.) No copies of the
Software documentation may be made by the End User.
4.04 Developer shall not be liable to the End User for any general,
special, direct, indirect, consequential, incidental, or other damages arising
out of the license to use the Software .
4.05 Software shall be provided to the End User subject to a "shrink-wrap"
or other appropriate license agreement, which shall be subject to approval by
Developer under Section 3.02.
5. Restrictions on Distributor.
Distributor agrees (i) in the case of Software, not to reverse assemble,
decompile, or otherwise attempt to derive source code from the Software, and, if
source code is provided, to use such code solely for necessary localization
purposes, not to disclose such code to persons other than those with a need to
know for such purposes (and then only subject to a non-disclosure agreement
approved in advance by Developer), and to return or destroy all copies of such
source code immediately upon the earlier of completion of localization or the
request of Developer; (ii) in the case of Technology, not to attempt to
determine any Confidential Information (within the meaning of Section 14) from
the Technology, (iii) to comply with all export, re-export, and anti-boycott,
restrictions and regulations of the Department of Commerce or other United
States agency or authority, and not to transfer, or authorize the transfer, of
the Software or Technology to a prohibited country or otherwise in violation of
any such restrictions or regulations, and (iv) to comply with all other laws,
foreign and domestic, in connection with the Software and Technology.
6. Payment.
6.01 Payment Amount. Distributor agrees to pay Developer the amounts set
forth in Exhibit A, plus shipping to points outside of the continental U.S., if
any. Such amounts specified shall be net of any withholding or similar tax
imposed by the taxing jurisdiction in which Distributor does business or with
respect to which or from which payments to Developer are made, and net of any
customs duty, tariff or similar charge.
6.02 Timing of Payments. In the case of Software or Technology, payment to
Developer for which is dependent upon delivery to Distributor of CD-ROM discs or
other media or tangible property, Payment shall be made prior to release to
Distributor of such property, except as otherwise specified in Exhibit A. In
other cases, including percentage royalties or amounts dependent upon or
affected by Distributor's gross receipts, net income, or other factors, payment
to Developer shall be made not later than thirty (30) days after the end of the
month in which such event occurs or such amounts may be reasonably determined.
All payments required to be made to Developer pursuant to this Agreement shall
be made to Developer in the State of Washington, USA, at its office or at such
4
<PAGE>
banking institution as Developer may direct from time to time, in immediately
available funds, in legal tender of the United States of America.
6.03 Audit Rights. Distributor shall maintain accurate books and records
pertaining to the production and distribution of Software or Technology,
including packaging, documentation, artwork, and all other components of the
Software Copies or Technology in whatever form distributed, and similar rights
as to Software or Technology sold in other than the form of Software Copies.
Developer's designated auditors shall have the right, upon reasonable request
and during ordinary business hours, to examine such books and records, and the
physical inventory of Software Copies. Developer shall be entitled to exercise
such right to examine upon the end of each calendar quarter with respect to the
first year of the term of this Agreement (including each applicable Exhibit A),
and shall thereafter be entitled to exercise such right upon the end of each
calendar semi-annual period or, if more frequent, upon the end of any calendar
quarter following any such examination in which it is determined that any
underpayment of five percent (5%) or more was made by Distributor to Developer.
Further, Distributor shall require its third party suppliers, vendors and
customers (including printers, manufacturers, distributors, and resellers) to
allow Developer to examine books and records and physical inventories of such
parties pertaining to the production, distribution and sale of Software or
Technology. Such examination shall be at Developer's expense, unless the
examination reflects an underpayment of five percent (5%) or more of the amount
that should have been paid for the period audited, in which case Distributor
shall bear the expense of such audit. Interest of one and one-half percent
(1.5%) per month shall paid on payments not timely made.
6.04 Transactions with Affiliates. All transactions by Distributor with
Affiliates shall be at fair market prices for comparable transactions between
unrelated parties, including a reasonable profit on such transactions. In any
case where payment by Distributor to Developer is a percentage royalty based
upon Distributor's receipts, or is otherwise dependent upon or affected by
Distributor's sales price or other amount received, for purposes of determining
Distributor's payment to Developer, Distributor's sales price or other amount
received from an Affiliate shall be disregarded, and instead shall be deemed to
be the amount received from the first non-Affiliate making such payment.
6.05 Bundled Transactions. In any case where payment to Developer by
Distributor is a percentage royalty or is otherwise dependent upon or affected
by Distributor's gross receipts, sales price, net income or other amount
received with respect to a Bundled Transaction, for purposes of determining
Distributor's payment to Developer, such amount received shall be deemed to
include all gross receipts received in connection with such Bundled Transaction,
without regard to the allocation or characterization of the gross receipts as
relating to the Software or Technology or to other aspects of the transaction.
For purposes of this Agreement, "Bundled Transaction" shall mean any transaction
in which Distributor receives payment for Software or Technology and other
property or services in a single integrated transaction, and "gross receipts"
shall mean the total amount realized, without reduction for cost of sales,
returns or allowances, or expenses of any kind.
6.06 Security Interest. Distributor hereby grants Developer a security
interest in accounts or other amounts receivable by Distributor in connection
with the sale of the Software or Technology or Software Copies. Distributor
further agrees that in event of a default in payment of amounts due Developer
which is not cured within fifteen (15) days as provided in Section 10.04,
Developer may take all reasonable action to perfect such security interest (or,
where appropriate, take comparable action under the laws of a jurisdiction other
than the U.S.). Distributor shall assist Developer in taking any such action,
including by executing documents reasonably requested by Developer to do so.
7. Developer's Warranty.
7.01 Warranty. Developer warrants that the Software provided to Distributor
by Developer in connection with Localization by Distributor will conform to the
Software or Technology then being distributed by Developer. Developer further
warrants that upon delivery, and for sixty (60) days thereafter, the media on
which the Software or Technology is delivered will be free of defects in
material and workmanship. Should any such
5
<PAGE>
defects appear in material and workmanship appear during the warranty period,
Developer shall, as its sole obligation, replace such defective copy upon its
prompt return to Developer.
7.02 Limitation of Liability and Remedies. EXCEPT AS SET FORTH ABOVE,
DEVELOPER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AND
SPECIFICALLY EXCLUDES ANY WARRANTY THAT ANY SERVICES, MATERIALS OR PRODUCTS
FURNISHED BY DEVELOPER ARE FIT FOR ANY PARTICULAR PURPOSE AND FURTHER
SPECIFICALLY EXCLUDES ANY IMPLIED WARRANTIES OF MERCHANTABILITY. THE STATED
WARRANTIES, COVENANTS AND REMEDIES SET FORTH IN THIS AGREEMENT ARE IN LIEU OF
ALL OTHER OBLIGATIONS OR LIABILITIES ON THE PART OF DEVELOPER FOR DAMAGES OR
OTHER RELIEF, INCLUDING, BUT NOT LIMITED TO, SPECIAL, INDIRECT OR CONSEQUENTIAL
DAMAGES THAT IN ANY WAY ARISE OUT OF OR IN CONNECTION WITH THE USE AND/OR THE
PERFORMANCE OF SUCH SERVICES, MATERIALS OR PRODUCTS FURNISHED BY DEVELOPER. IN
NO EVENT SHALL ANY LIABILITY OF DEVELOPER TO DISTRIBUTOR PURSUANT TO THIS
AGREEMENT EXCEED THE AMOUNT RECEIVED BY DEVELOPER FROM DISTRIBUTOR WITH RESPECT
TO THE TECHNOLOGY (INCLUDING SOFTWARE) GIVING RISE TO THE LIABILITY.
8. Additional Obligations of Distributor.
8.01 Estimated Distribution Date. Except as otherwise provided in Exhibit
A, upon receipt of Developer's localization kit, Distributor shall, within one
(1) week, provide Developer with an estimated distribution date for the related
Software or Technology. This distribution date must be within two (2) calendar
months after receipt of the localization kit. Failure to meet such distribution
date shall be a material breach within the meaning of Section 10.04.
8.02 Promotion of Software or Technology. Distributor shall, at its own
expense, vigorously promote the distribution of the Software or Technology
within the Territory. Such promotion shall include, but shall not be limited to,
advertising the Software or Technology in publications within the Territory,
participating in trade shows, establishing appropriate distribution channels and
merchandising programs, and directly soliciting orders from customers for
Software or Technology.
8.03 Technical Support. Distributor shall provide the level of technical
support for all Localized Software or Technology equivalent in all material
respects to that which Developer provides its distributors and End Users, within
the U.S.
8.04 Marketing and Sales Materials. Distributor shall be responsible to
produce appropriate sales and marketing materials, all of which are subject to
advance approval of Developer. In the event Developer fails to approve or
disapprove of any such materials within fifteen (15) days after submission to
Developer by Distributor with a request for approval, such materials shall be
deemed approved. Developer shall cooperate and provide reasonable assistance to
Distributor in connection with preparation of such materials.
8.05 No Assignment. Distributor shall not assign or otherwise transfer its
rights or obligations under this Agreement.
8.06 Governmental Approvals. Distributor shall advise Developer of any
governmental permits or approvals required to consummate the transactions
contemplated by this Agreement, shall obtain such permits or approvals, and
shall provide evidence thereof to Developer.
8.07 Registration of Users. Distributor shall include a registration form
in Software Copies, shall use its best efforts to obtain the registration of End
Users, and shall provide all such End User Registration information to Developer
promptly (and in any event within thirty (30) days) after the end of each
calendar quarter. Distributor shall similarly use its best efforts to identify
customers of Technology and make such information available to
6
<PAGE>
Developer.
8.08 Market Data. Distributor shall provide Developer with market data
relating to the Software or Technology, including (i) monthly numbers of
Software or Technology sold to other distributors, resellers, and End Users,
and, where feasible, the identity of the parties to whom sold, (ii) marketing
and merchandising programs completed and planned, (iii) names of distributors
and resellers offering the Software and Technology, and (iv) any other
information of benefit to Developer in cooperating with Distributor and
developing modifications to the Software or Technology or new products. In
particular, Distributor shall give Developer notice of all Software or
Technology "bugs" promptly upon discovery and, in the case of severe bugs,
within forty-eight (48) hours after discovery.
8.09 Other Products or Services. Distributor acknowledges that in the
course of the performance of this Agreement, certain valuable confidential and
proprietary information will be furnished by Developer to Distributor and
because of the unique nature of such information, it is necessary to provide for
non-competition obligations in order to protect such information. In light of
the above, during the term of this Agreement and, at the discretion of Developer
exercisable by notice to Distributor not later than the non-renewal or other
termination of this Agreement, for a period of six (6) months after such
non-renewal or other termination, Distributor shall not, without the express
written approval of Developer, commence marketing, distribution, sale or other
providing of any technology (as such term is described in Section 1.09,
including computer software) or other product or service which may tend to be
directly or indirectly competitive or similar in purpose or use with, or
otherwise related to, the Software or Technology or Potential Technology (as
defined in Section 1.09), as determined in Developer's discretion. The parties
acknowledge that breach of this Section would cause irreparable damage to
Developer, for which Developer would not have an adequate remedy for damages,
such that, in the event of any such breach, in addition to other remedies,
Developer may apply to a court to specifically enforce the provisions of this
Section.
9. Additional Obligations of Developer.
9.01 New Developments. Developer shall provide Distributor reasonable
notice of new developments in connection with the Software or Technology.
9.02 Marketing Assistance. Developer shall provide Distributor with market
data which is obtained by Developer and relates to the Software or Technology,
and which may benefit Distributor in distributing the Software or Technology.
10. Term, Renewal and Termination.
10.01 Term. The Effective Date of this Agreement is as set forth above, and
the Effective Date of each subsequent Exhibit A is as set forth in such Exhibit.
The term of this Agreement shall be one (1) year, commencing with its Effective
Date, and the term with respect to each subsequent Exhibit A shall be one (1)
year, commencing with its respective Effective Date, in either case unless
renewed or terminated earlier under the provisions of this Section 10.
10.02 Automatic Renewal and Extended Term. In any case in which Exhibit A
includes Minimum Peformance Requirements (as defined in Section 10.03) and
Developer has not granted to any third party rights to distribute Localized
Software or Localized Technology under its option to do so under Section 10.03,
the term of this Agreement shall be automatically renewed for an additional
period of one (1) year upon the end of each one (1) year term. This Agreement
shall not so automatically renew where no Minimum Performance Requirements are
so included in Exhibit A. Further, Exhibit A may specifically provide for a term
of more than one (1) year, including a perpetual term (an "Extended Term"), in
connection with, among other terms and conditions, for an advance or other
lump-sum royalty or other payment. Such Extended Term shall be provided only by
specific language to that effect, and shall not otherwise be implied or
construed from the terms of this Agreement or any Exhibit A. In the case of any
Extended Term, Exhibit A shall be deemed to include annual Minimum Performance
Requirements
7
<PAGE>
for the duration of such Extended Term, and such deemed Requirements shall be
deemed to be met on an annual basis for the duration of such Extended Term.
10.03 Conversion to Non-Exclusive Distributorship. In the event Distributor
fails to meet Minimum Peformance Requirements for any period in which such
Requirements are provided for in Exhibit A, Developer shall have the option to
grant to any third party rights to distribute Localized Software or Localized
Technology in the Territory notwithstanding the provisions of Section 2.02. Such
option may be exercised by giving notice to Distributor of Developer's desire to
grant such rights at any time within eleven (11) months after the end of any
period in which Distributor fails to meet such Requirements. The fact that after
such failure Developer meets such Requirements shall not affect Developer's
option or grant of rights. Such rights may be granted for the remainder of the
term of this Agreement or such longer period as Developer shall desire. Failure
by Distributor to meet any of such Minimum Performance Requirements shall not,
however, constitute a breach of this Agreement. "Minimum Performance
Requirements" for purposes of this Agreement shall mean any such requirements
specifically described as such on Exhibit A.
10.04 Retention, Return and Transfer of Materials and Intellectual Property
Rights. All Software or Technology, trademarks, trade names, packaging trade
dress, patents, other intellectual property rights, (including all derivative
works and enhancements) samples, literature and sales aides of every kind shall
remain the property of Developer, regardless of whether provided by Developer to
Distributor or whether created, developed, modified or otherwise obtained by
Distributor. Immediately upon termination of this Agreement, Distributor shall
ship or transfer to Developer, as Developer may direct, all such items in its
possession (or ownership, if any), at Developer's expense. Distributor shall
further execute any and all such documents as Developer may request in order to
convey and transfer title to any such property to Developer. Distributor shall
not make or retain any copies of any confidential items or information which may
have been entrusted to it. Effective upon the termination of this Agreement,
Distributor shall cease to use all trademarks, service marks, tradenames,
packaging trade dress, or other intellectual property rights used in connection
with Software or Technology by either Distributor or Developer.
10.05 Breach and Termination. Prior to terminating this Agreement,
requesting arbitration, filing suit or taking similar action upon a breach of
this Agreement by either party, the non-breaching party shall give the breaching
party notice of the basis for asserting such breach. If the breaching party
fails to cure such breach within thirty (30) days, and the breach is a material
breach, the non-breaching party may terminate this Agreement. If the breach is
the non-payment of amounts due under this Agreement, the breach shall be deemed
to be a material breach, and the breaching party shall have fifteen (15) days to
cure such breach.
10.06 Waiver of Liability on Termination. Should this Agreement or any
portion thereof expire, be terminated or not be renewed at any time for any
reason, neither party will be liable to the other because of such expiration,
termination or non-renewal for reimbursement of costs or expenses or for damages
on account of the loss of prospective profits, anticipated sales, goodwill or on
account of expenditures, inventory, investments, leases or commitment in
connection with the business of Developer or Distributor, or for any other
reason whatsoever flowing from such termination or expiration. Termination shall
not, however, relieve either party of any obligation incurred before termination
or of liability for breach of any of the provisions of this Agreement.
Distributor hereby specifically waives, to the maximum extent permitted by law,
any claims for compensation damages arising out of the termination or expiration
of this Agreement in accordance with its terms.
11. Property Rights.
11.01 Ownership. Distributor agrees that Developer owns all right, title
and interest in the Software or Technology now or hereafter subject to this
Agreement, and in all patents, trademarks, trade names, inventions, copyrights,
know-how, trade secrets, and any other proprietary information relating to the
design, operation or maintenance of the Software or Technology, and all
marketing, sales or other promotional materials, trade dress, and artwork
utilized in connection with the Software or Technology. Distributor shall not
record or file or otherwise attempt to establish ownership of such items in
Distributor's name. The use by Distributor of any of these property
8
<PAGE>
rights is authorized only for the purposes set forth in this Agreement, and
upon termination of this Agreement for any reason such authorization shall cease
except to the extent necessary for Distributor to provide maintenance to its
existing customers for the Software or Technology. Software source code shall be
disclosed by Developer to Distributor only in Developer's sole discretion. The
parties agree that their mutual intention is that after any termination of this
Agreement (or after Distributor's rights under this Agreement become
non-exclusive), Developer shall have all legal rights, and shall be allowed, to
continue manufacture, distribution and sale of the Software or Technology in the
form and manner which the Software or Technology were so manufactured,
distributed and sold during the term of this Agreement.
11.02 Trademarks. Distributor shall distribute Software or Technology using
only trademarks, tradenames and servicemarks expressly authorized in writing by
Developer ("Trademarks"). Distributor shall assist Developer in selecting local
Trademarks, the sole owner of which shall be Developer. Distributor admits the
validity of, and agrees not to challenge, any Trademarks and agrees that all
rights that may be acquired by use of Trademarks shall inure to the sole benefit
of Developer. Where Developer, in its sole discretion, deems it appropriate,
Distributor shall be recorded as a registered user of Trademarks, and will
cooperate with Developer to be so recorded. Distributor shall not use the
Trademarks or any part thereof as part of its name, and shall not use any
similar name, trademarks, service mark or other designation similar to the
Trademarks. Distributor agrees not to register any trademarks similar to the
Trademarks, and to assign any such registrations to Developer. If any
application for registration which is or has been filed by Distributor relates,
as determined in the sole discretion of Developer, to a mark which is similar,
deceptive or misleading with respect to any of the Trademarks, Distributor shall
reimburse Developer for all cost and expenses of any opposition or related
proceedings, including attorneys fees, brought by Developer or its authorized
representative to challenge, oppose or cancel such application or registration.
In the event Distributor learns of any actual or threatened infringement of a
Trademark or any passing- off, or any third party alleges that any Trademark is
liable to cause deception or confusion to the public, Distributor shall
immediately notify Developer, and Distributor shall provide reasonable
assistance to Developer if Developer determines to commence or defend
proceedings. Any such proceeding, and any recovery in such proceeding, shall be
equally divided between Developer and Distributor. Nothing in this Agreement
shall be construed to require Developer to defend or enforce the Trademarks.
Distributor shall comply with all applicable laws and regulations pertaining to
the proper use and designation of the Trademarks in the Territory, and shall
notify Developer promptly (and in any event within thirty (30) days) of any law
or regulation which is inconsistent with any provision of this Agreement. Upon
request, Distributor agrees to assist Developer in the filing and recording of
Developer's trade names, copyrights, patents and trademarks in Territory.
12. Indemnification of Developer. Distributor will defend, indemnify and
hold Developer harmless from and against any and all actions, damages,
liabilities, costs, and expenses (including but not limited to attorney's fees)
incurred by Developer as a result of (i) any false or misleading statement made
by Distributor to any customer or potential customer; (ii) any breach by
Distributor of any terms or conditions set forth in this Agreement, or of any
representations or warranties made by Distributor under this Agreement, (iii)
any action taken by Distributor in the performance of this Agreement which is
not authorized by Developer, or (iv) infringement or violation with respect to
the Territory of any patents, copyrights, trade secrets, or other proprietary or
intellectual property rights by any product owned by Developer which is
localized or distributed by Distributor.
13. Indemnification of Distributor. Developer warrants that as of the
Effective Date of any Exhibit A attached to this Agreement, the Software or
Technology specified in such Exhibit A does not infringe upon any copyrights or
trade secrets of any third party. Developer agrees, at its own expense, to
defend and indemnify Distributor, if necessary, against any actions,
liabilities, costs, damages, claims, losses and expenses (including but not
limited to attorney's fees) arising out of Developer's breach of this warranty.
14. Confidentiality. Distributor acknowledges that it may acquire
information which is proprietary or confidential to Developer, including
technology within the meaning of Section 1.09, or financial, product, sales or
marketing information (collectively, and in whatever form, "Confidential
Information"). Distributor agrees to hold such Confidential Information in
strict confidence and not to copy, reproduce, sell, assign, license, market,
transfer
9
<PAGE>
or otherwise disclose such information to third parties or to use such
information for any purposes without the express written consent of Developer,
and to advise Distributor's employees, agents, and representatives of their
obligation to keep such information confidential. Distributor shall use
reasonable efforts to identify and prevent any unauthorized use or disclosure of
Confidential Information, and shall advise Developer in the event Distributor
learns or has reason to believe that any person has violated or intends to
violate the terms of this Agreement, and will cooperate in seeking injunctive
relief against such person. Distributor shall have the right to disclose
Confidential Information to its employees, agents and third party consultants
who have a need to know such information in the course of localization,
marketing or distribution of the Software or Technology, provided that each such
person signs a nondisclosure agreement with respect to such information to
protect its confidentially.
15. Arbitration, Jurisdiction and Venue. Except as provided below, any
dispute or claim between the parties shall be finally settled by binding
arbitration in Seattle, Washington under the Rules of the American Arbitration
Association by a single arbitrator who is knowledgeable about the development,
distribution, and licensing of computer software or technology, as appropriate.
In resolving all such disputes, the arbitrator shall apply the law of the State
of Washington as more fully set forth in Section 16. Developer may, however, at
its option, seek a temporary restraining order, preliminary injunction,
permanent injunction and any other form of equitable relief from any court
having jurisdiction over the subject matter and personal jurisdiction over
Distributor. Distributor hereby consents to and submits to the jurisdiction of
federal and state courts located in the State of Washington. Should any such
action be commenced in the State of Washington, Distributor agrees not to
assert, and hereby waives, any defenses based on improper venue, inconvenience
of the forum, lack of personal jurisdiction or sufficiency of service of process
or the like. Distributor hereby appoints the Secretary of State of the State of
Washington as Distributor's agent for service of process.
16. Choice of Law. This Agreement shall be governed by and construed under
the laws of the State of Washington without regard to conflict of laws
principles or the U.N. Convention on Contracts for the International Sale of
Goods.
17. Legal Expense. The prevailing party in any legal action or arbitration
brought by one party against the other arising out of this Agreement shall be
entitled, in addition to any other rights and remedies it may have, to
reimbursement for its expenses, including court costs and reasonable attorney's
fees.
18. Entire Agreement: Amendment. This Agreement constitutes the entire agreement
of the parties relating to its subject matter and supersedes any prior
agreements, written or oral. This Agreement may be revised or amended only in a
writing executed by the parties.
19. Notices.
Any notices or other communications given in connection with this Agreement
will be validly given if in writing, and will be effective upon personal
delivery or upon delivery if sent by recognized carrier or by facsimile
transmission, with confirmation of the time and date of delivery, to the
following or such other person as the party may respectively designate in the
manner set forth in this Section:
If to Developer: Acceleration Software International Corporation
1223 N.W. Finn Hill Road
Poulsbo, WA 98370, United States
FAX 360-598-2450
If to Distributor: Pointe Control, Inc.
P.O.Box 1462
North Bend, WA 98405, United States
10
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement effective as of
the date provided above.
"Developer" "Distributor"
Acceleration Software Int. Corp. Point Control, Inc.
a Washington corporation a Washington corporation
by /s/ Clint T. Ballard by /s/ Robert Miracle
------------------------------ ---------------------------------
Clint T. Ballard, its C.E.O. Robert Miracle, its Managing Director
11
<PAGE>
Amendment to Exhibit "A" effective January 20, 1999 to Distribution Agreement
Dated November 9, 1996
Effective Date. October 14th, 1999 for this Exhibit A.
- ---------------
Territory. Japan
- ----------
Software or Technology. The Software shall consist of Developer's products
- ----------------------- called:
1. d-Time '98 (done)
2. MP3 App for '98 (done)
3. d-Time iMacintosh (done)
4. MP3 App for iMacintosh (done)
5. Compilation product comprising existing versions of: (done)
d-Time '98, SuperFassst! '98, Webcelerator '98, Phantom '98
6. TBD 7. TBD 8. TBD 9. TBD 10. TBD
Payment. Payment to Developer shall be a guaranteed additional US
$1,050,000 (one million fifty thousand dollars) plus an additional US $400,000
(four hundred thousand dollars) bonus for each of the products 4. through 10.
that achieves a "TOP PRODUCT" (as defined below) status according to the
following schedule:
1. November 7th, 1999 $ 150,000
2. December 7th, 1999 $ 150,000
3. January 7th, 2000 $ 150,000
4. February 7th, 2000 $ 150,000
5. March 7th, 2000 $ 150,000
6. April 7th, 2000 $ 150,000
7. May 7th, 2000 $ 150,000
Sub-Total: $1,050,000
"http://www.com-path.ne.jp" has a weekly "System and Utilities" best sellers
list for software products in Japan. Each week that a product is in the Top 10
of this list, or comparable list, shall earn two points and each week that it is
#11 to #20 on this list shall earn one point toward being a TOP PRODUCT. A
product shall be deemed to be a "TOP PRODUCT" after it accumulates 18 such
points and the bonus shall be paid within 30 days after the 18th point is
earned. A product can earn such points only during the 28 weeks following its
initial appearance on the list. Products 4. to 10. are eligible for a TOP
PRODUCT bonus, with a maximum possible bonus of two million dollars. In the
event that a product is released that is categorized outside of the "Sytem and
Utilities" category, the appropriate category's best sellers list shall be used.
Upon receipt by Developer of all of the above payments according to the schedule
above, an Unlimited License of the Software will be granted. All payments are an
irrevocable obligation of Pointe Control and Source. In the event of a delay of
any payment by 3 days, all unpaid amounts become due immediately with interest
of 0.05% per day compounded daily to accrue immediately. Both parties agree that
at the sole discretion of the Developer, other remedies can be chosen, which may
include but not be limited to, immediate termination, conversion to
non-exclusive, recalculation of amounts due based on units manufactured, etc.
In the event that the 10 SKU's cannot be delivered by May 7th, 2000,
Acceleration Software will continue to work to complete them without any more
payments than the above. In the event that the 10 SKU's are delivered ahead of
12
<PAGE>
schedule, a new agreement will be entered into to cover SKU's beyond the 10 from
this agreement. In such a scenario, there would be overlapping payment streams
from this agreement and the new agreement.
Alternative Source of Payment. Both parties agree to let Huge Incorporated have
the option to make the monthly and bonus payments instead of Pointe Control and
each such payment shall remove Pointe Control's obligation for that specific
payment. In the event that Developer receives all remaining payments from Huge
Incorporated, all parties agree that Huge Incorporated shall be the one granted
the Unlimited License for all of the Software.
Incorporation into Distribution Agreement. This Exhibit A is hereby made a part
of the Distribution Agreement dated November 9, 1996, between Acceleration
Software and Pointe Control, including but not limited to Sections 15 and 16
providing that disputes shall be settled by binding arbitration in, and
according to the laws of, the State of Washington, U.S.A., and the parties
executing below hereby agree to be bound by the terms and conditions of such
Agreement.
"Developer" "Distributor"
Acceleration Software Int. Corp. Pointe Control
a Washington corporation a Washington corporation
by /s/ Clint Ballard by /s/ Robert Miracle
------------------------------- -------------------------------------
Clint Ballard, its C.E.O. Robert Miracle, its Managing Director
13
SOFTWARE LICENSE & DISTRIBUTION AGREEMENT
This Agreement is made as of the 8th day of December, 1996
BETWEEN: SYNCRONYS SOFTCORP, a Nevada corporation with its principal place of
business at 3958 Ince Boulevard, Culver City, CA, 90232
("Distributor")
AND: ACCELERATION SOFTWARE INTERNATIONAL CORPORATION, a Washington
corporation with its principal place of business at 1223 NW Finn Hill
Road Poulsbo, WA 98370
("Developer")
WITNESS THAT WHEREAS Developer has developed a Windows 95 software program
entitled "Superfassst!" which Distributor wishes to distribute pursuant to the
terms of this Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises
and the mutual agreements and covenants herein contained (the receipt and
adequacy of such consideration is hereby mutually acknowledged by each party),
the parties hereby covenant and agree as follows:
Section 1. Definitions
1.01 "Software" shall mean an object copy of the hard drive accelerator called
Superfassst! for Windows '95 on a CD-ROM (or other media if available) packaged
for retail sale to end users, in retail packaging to be approved by Developer
in accordance with Section 2.06, together with modifications, revisions and
error corrections which Developer shall make available to Distributor from time
to time.
1.02 "End User" shall mean any third party which obtains a copy of the Software
to fulfill its own computer aided instruction or tool needs.
1.03 "Sale" or "Selling" or "Purchase" or "Purchasing" of Software or a copy of
the Software shall mean, with respect to the intellectual property rights
related to such Software, the grant or acquisition, respectively, of a license
to use the Software. With respect to tangible property, such terms shall be
accorded their common meanings. In either case, such terms shall (i) include
all sales, licenses, transfers or other dispositions for value, (ii) include
use by Distributor, and (iii) be deemed a sale not later than when recorded as
such on the books or records of Distributor which are maintained for financial
statement purposes.
1.04 "Site Licenses" shall mean licensing software for multiple computers or
multiple users. It is intended that the industry standard usage of selling
software to corporations using site, enterprise, server, seat or
processor-based licenses and similar transactions be incorporated into the
definition of Site Licenses.
1.05 "OEM Bundling" shall mean licensing software for resale only in
combination with one or more other items, typically hardware. It is intended
that the industry standard usage of selling software via OEM licensing,
bundling and similar transactions be incorporated into the definition of OEM
Bundling.
1.06 "Direct Marketing" shall mean the promotion and selling of software
directly to End Users without using a reseller, specifically using the
Internet, online sales, and direct mail. It is intended that the industry
standard usage of direct marketing be incorporated into the definition of
Direct Marketing.
<PAGE>
1.07 "Retail Channel" shall mean all resellers who purchase the Software for
ultimate sale to an individual and specifically excludes Site Licenses, OEM
Bundling and Direct Marketing.
Section 2. Appointment and Authority of Distributor
2.01 Grant of License. Developer hereby grants to Distributor a license to
distribute and market (a) the English language version of the Software into the
Retail Channel on an exclusive basis and Direct Marketing on a non-exclusive
basis for the United States and Canada, (b) if Distributor achieves the "Launch
Plan" described in Section 2.02, the English and German language version of the
Software into the Retail Channel on an exclusive basis and Direct Marketing on
a nonexclusive basis in Germany, and (c) the English language version of the
Software into the Retail Channel and Direct Marketing on a non-exclusive basis
for the rest of the world except for France, Poland and Japan (the "License").
Distributor may in its discretion from time to time sub-license, transfer or
assign in whole or part an interest in the license in sub-sections (b) and (c)
above, to any other person for the purposes of increasing distribution and
sales of the Software outside of United States and Canada; provided however,
that any such sub-license, transfer or assignment shall be subject to
Developer's rights contained in this Agreement and shall not in any way relieve
Distributor of its obligations to Developer hereunder.
2.02 Launch Plan. Distributor will use its best efforts to market and sell the
Software in a manner to maximize the sales potential of the Software. If
Distributor has at least 50,000 copies of the Software placed in the Retail
Channel in the United States and Canada with retailers which represent not less
than 70% of computer software retail sales as determined by PC Data within
three months following the Commencement Date (as defined in Section 10.01), the
"Launch Plan" will be deemed to have been met, and Distributor will have the
rights in Germany described in Section 2.01(b). Distributor acknowledges that
EU trade rules prohibit absolute exclusivity, but if the Launch Plan is met,
Developer will not appoint any other distributor of the Software in the Retail
Channel for Germany.
2.03 Reservations from Grant.
(a) Developer reserves all rights not specifically granted in Section 2.01,
including, without limitation, all rights to OEM Bundling and Site Licenses and
non-exclusive rights to Direct Marketing, as well as any and all rights to
Developer products other than the Software. All OEM Bundling, Site Licenses and
Direct Marketing undertaken by the Developer shall use the name SuperFassst!
(or others names that are different from the name selected by Distributor). The
version of the Software available on a large scale via OEM Bundling will not be
at a higher revision level than the version available in retail updated by free
Internet upgrades. Developer shall release major new revisions not less than
six (6) months apart.
(b) In the event that Distributor cannot resolve the pre-existing liabilities
of Ballard Synergy Corporation to Computer City and Micro Central (in an
arrangement approved by Developer) for amounts not more than $60,000 in cash
payments plus not more than $60,000 in Developer's foregone revenues (e.g.,
product credit) before February 15, 1997, Developer retains the right to
distribute to Computer City and Micro Central not more than 8,000 units of a
premium priced retail version of the Software combined with other software,
whose distribution price shall not be less than $38. Such distribution by the
Developer shall be done in a way to minimize any negative impact on the sales
and marketing of the Software.
2.04 Market Data. Distributor shall, where available, provide Developer with
(a) quarterly Software sales numbers through distributors, resellers, sales
representatives and End Users (b) marketing and merchandising programs
completed and planned, (c) any other information of benefit to Developer in
cooperating with Distributor and developing modifications to the Software or
new products.
2.05 Minimum Performance Requirements. Distributor shall purchase a minimum of
one hundred
2
<PAGE>
thousand (100,000) copies of the Software from Developer during the six (6)
month period following the Commencement Date, defined in Section 10.01, and one
hundred twenty five thousand (125,000) copies for each subsequent six (6) month
period, during the term of this Agreement.
2.06 Distributor Responsibilities. Distributor shall, at its cost, produce
retail packaging, media label artwork, user's manuals, localization of non-code
resources to German if German language rights are granted as per 2.01(b), and
sales and marketing materials for the Software and shall use its best efforts
to pursue aggressive sales and marketing to realize the maximum sales potential
for the Software. All such packaging and materials shall be provided to
Developer for its review and approval, such approval not to be unreasonably
withheld or delayed. Failure by Developer to approve or disapprove a component
within seven (7) business days shall be deemed to be approval for that
component. For SuperFassst! the parties have agreed at minimum that (a)
Distributor shall not use "SuperFassst!" as the product name, but rather will
use a different name of its choice, (b) reference to the "SuperFassst!
Technology" will appear in reasonable prominence on the front of the box, (c)
Developer's corporate logo and "created by" attribution will appear in
reasonable prominence on the back of the box and (d) the appropriate legal
trademark and copyright notices will appear in fine print on the box.
2.07 Distributor Representations. Distributor represents to Developer that it
has full right and authority to enter into this Agreement and to perform its
obligations under this Agreement. This Agreement and Distributor's performance
hereunder, do not conflict with or cause a breach under any agreement, license
or other instrument, or law, rule, order or regulation to which the Distributor
is bound or subject.
Section 3. Production of Software
3.01 Production. Developer shall, at its cost and at a facility of its
selection, reproduce the executable code of Software on a electronic media
(with media label artwork provided per Section 2.06) in a form suitable for use
in retail packaging and shall deliver same to location(s) specified by
Distributor. Developer shall use its best efforts to make available a
reasonably secure floppy based version of the Software. The parties agree to
fully cooperate to minimize delivery costs and production costs, such
production costs shall not exceed $1 per media. Under no circumstances shall
Distributor replicate or otherwise duplicate Software, on CD-ROM discs or
otherwise, or obtain such replicated or duplicated Software from any source
other than Developer. Possession by Distributor of a "Gold Disc" or other
medium commonly used to replicate or duplicate software shall not be construed
as evidence that Distributor has any right to replicate or duplicate Software.
3.02 Orders. Distributor will place written purchase orders with the Developer
for the Software with at least five (5) days production lead time and shipping
instructions and shall pay for such orders, including shipping and any other
associated charges in accordance with Section 6.03.
3.03 Software Returns. Distributor shall have the right not more than once per
month to return Software media to the Developer for credit (up to a monthly
maximum of half of the average monthly volume of Software media delivered to
Distributor for the previous three months) who shall issue to Distributor an
RMA for such returns. This Section 3.03 together with Section 7.01 are
Distributor's sole and exclusive return rights.
Section 4. End User Restrictions
Distributor shall distribute the Software only in its original, unopened
packages and subject to a "shrink-wrap" or other appropriate license agreement,
which shall be subject to approval by Developer, such approval not to be
unreasonably withheld or delayed.
Section 5. Restrictions on Distributor
Distributor agrees not to reverse assemble, decompile, or otherwise attempt to
derive source code from the
3
<PAGE>
Software, modify the Software or translate the software. Distributor
further agrees to comply with all laws, foreign and domestic in connection with
the marketing and selling of the Software.
Section 6. Payment
6.01 Payment Amount. Distributor shall pay Developer an amount equal to
twenty-five percent (25%) of the Gross Revenues realized by Distributor for the
sale of the Software ("Payment Amount"). Gross Revenues shall mean the amount
booked less returns as per Section 3.03 and 7.01, less return reserve in
accordance with GAAP (the current amount is approximately 10% to 15% of units)
and such return reserve will be utilized before the returns allowed in Section
3.03 and 7.01, less freight out and less industry standard cash discounts not
to exceed 3%. Both parties agree on an initial Payment Amount of at least five
($5) dollars per unit of Software delivered to Distributor, less the returns
specified in 3.03 and 7.01. Distributor will notify Developer of any price
changes, however any pricing reduction shall be agreed to in writing by both
parties, acting reasonably to maximize long term revenues. The Payment Amount
is in addition to reimbursement to Developer of the cost of the Software media
and shipping charges
6.02 Advance Payment. Distributor shall, no later than December 20, 1996, pay
Developer a non-refundable two hundred and fifty thousand dollars ($250,000) as
an advance against the Payment Amount and reimbursement for the cost of the
Software media.
6.03 On-Going Payments. Upon depletion of the Advance Payment, the Distributor
shall pay the Developer in respect of the Payment Amount and the cost of the
Software media $3.00 per CD-ROM disc (or other media) delivered to the
Distributor net 15 days with the balance due net 75 days. In the event that the
Distributor fails to pay net 15 more than three times in any given year or is
ever more than 30 days late, then Developer shall have the option to change
terms to COD rather than net 15 days.
6.04 Reconciliations and Audit. Distributor shall maintain accurate books and
records pertaining to the production and distribution of Software. Distributor
shall provide an account reconciliation within thirty (30) days after the end
of each calendar quarter, for the sales made during such quarter. Each
reconciliation shall be accompanied by a detailed statement showing the basis
on which such payment was calculated. Upon fifteen days notice by Developer,
Distributor shall provide access to its books and records during ordinary
business hours to an independent certified public accounting firm, retained by
Developer on a non-contingency basis to review Distributor's books to verify
such calculations. Such verification shall occur no more than twice annually.
Such verification shall be at Developer's expense, unless the verification
reflects an underpayment of seven and a half percent (7.5%) or more of the
amount that should have been paid for the period audited, in which case
Distributor shall bear the expense of such audit. Interest of one and one-half
percent (1.5%) per month shall be paid on payments not timely made.
6.05 Transactions with Affiliates. All transactions by Distributor with
Affiliates shall be at fair market prices for comparable transactions between
unrelated parties, including a reasonable profit on such transactions.
6.06 Letter of Credit. Distributor shall, not later than December 20, 1996,
provide Developer with a formal letter of credit (in a form acceptable to
Developer, such acceptance not to be unreasonably withheld or delayed) drawn on
a major US Bank in the amount of six hundred thousand dollars ($600,000). The
Developer may, ninety (90) days after the first anniversary of the Commencement
Date, draw down an amount equal to the difference between eight-hundred fifty
thousand dollars ($850,000) and the actual Payment Amounts paid to Developer,
provided that the principal amount of the Letter of Credit may be reduced in
accordance with Section 9.05.
6.07 Distributor Options. Prior to December 20, 1996, Distributor shall grant
Developer or its designees 200,000 options on terms not less favorable than
provided in Distributor's stock option plan, to purchase Distributor's common
stock at the closing bid price as of the date hereof which shall vest and be
exercisable as
4
<PAGE>
follows:
(a) 25,000 options upon achieving aggregate unit sales of the
Software equal to or in excess of 62,500 units;
(b) an additional 25,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 125,000 units;
(c) an additional 25,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 187,500 units;
(d) an addition 25,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 250,000 units;
(e) an additional 50,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 350,000 units; and
(f) an additional 50,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 450,000 units.
6.08 Bundled Transactions. Where Software is bundled with another software
product, the portion of the gross revenues attributed to the Software shall be
based upon and apportioned in accordance with the retail prices of the
constituent parts of the bundle. In no event will Distributor or any of its
resellers bundle the Software with other products (whether "hard" bundled or
"soft" bundled and whether with software or hardware) without Developer's prior
written consent.
Section 7. Developer's Warranty
7.01 Warranty. Developer warrants that the media on which the Software is
delivered will be free of defects in material and workmanship for a period of
ninety (90) days from delivery to Distributor. Software that an end user
returns (accompanied by a Distributor certification for each shipment) will be
treated as defective media. As the sole remedy for this warranty, Developer
shall either replace the defective media or repay the full amount it received
for the Software plus shipping charges to the Distributor at Distributor's
option. This Section 7.01 together with Section 3.03 are Distributor's sole and
exclusive return rights.
7.02 Limitation of Liability and Remedies. EXCEPT AS SET FORTH IN THIS
AGREEMENT, DEVELOPER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
AND SPECIFICALLY EXCLUDES ANY WARRANTY THAT THE SOFTWARE IS FIT FOR ANY
PARTICULAR PURPOSE AND FURTHER SPECIFICALLY EXCLUDES ANY IMPLIED WARRANTIES OF
MERCHANTABILITY. THE STATED WARRANTIES, COVENANTS AND REMEDIES SET FORTH IN
THIS AGREEMENT ARE IN LIEU OF ALL OTHER OBLIGATIONS OR LIABILITIES ON THE PART
OF DEVELOPER FOR DAMAGES OR OTHER RELIEF, INCLUDING, BUT NOT LIMITED TO,
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES THAT IN ANY WAY ARISE OUT OF OR IN
CONNECTION WITH THE USE AND/OR THE PERFORMANCE OF THE SOFTWARE. IN NO EVENT
EXCEPT FOR (A) FRAUD BY THE DEVELOPER, (B) FAILURE, REFUSAL OR INABILITY OF THE
DEVELOPER TO PROVIDE THE SOFTWARE MEDIA AND (C) THE INDEMNIFICATION OBLIGATIONS
OF SECTION 13, SHALL THE LIABILITY OF DEVELOPER TO DISTRIBUTOR PURSUANT TO THIS
AGREEMENT EXCEED THE AMOUNT RECEIVED BY DEVELOPER FROM DISTRIBUTOR WITH RESPECT
TO THE SOFTWARE.
5
<PAGE>
Section 8. Additional Obligations of Distributor
8.01 Promotion of Software or Technology. Distributor shall, at its own
expense, vigorously promote the distribution of the Software. Such promotion
shall include, but shall not be limited to, advertising the Software in
publications, participating in trade shows, establishing appropriate
distribution channels and merchandising programs, and directly soliciting
orders from customers for Software. Developer shall provide Distributor with
500 copies of the Software per year free of charge for NFR and promotional
purposes.
8.02 Competitive Sales. During the term of this Agreement and for three months
after termination, Distributor shall not market or sell any product directly
competitive with the current version of the Software or a significant subset
thereof. In addition, during the term of this Agreement and for twelve months
after termination, Distributor shall not use the tradename of the Software or
artwork uniquely associated with the Software to market or sell any software
product directly competitive with the current version of the Software or a
significant subset thereof.
Section 9. Additional Obligations of Developer
9.01 New Developments. Developer shall provide Distributor reasonable notice of
new developments in connection with the Software.
9.02 Marketing Assistance. Developer shall provide Distributor with market data
which is obtained by Developer and relates to the Software and which may
benefit Distributor in distributing the Software.
9.03 Technical Acceptance. Developer shall at its sole expense be responsible
for running industry standard quality assurance tests on Superfassst! prior to
providing it to Distributor for release. Developer shall fully cooperate with
Distributor in its due diligence approval of SuperFassst! and the behavior of
the underlying technology, ("Technical Acceptance"). For the initial release,
Technical Acceptance shall be deemed to have been satisfied upon Developer's
receipt of the Advance Payment described in 6.02 and the Software shall also be
deemed to be Technically Superior. For future formal releases, Technical
Acceptance shall be deemed to have been satisfied upon reasonable agreement
between the parties.
9.04 Users Manual. Distributor shall at its sole expense, but with the
reasonable cooperation and input of Developer, be responsible for preparing the
users manual for the Software. Developer shall provide Distributor with the
electronic form of the current Superfassst! user manual.
9.05 Technical Superiority. Developer shall maintain the Technical Superiority
of SuperFassst! Software and its underlying technology. Technical Superiority
shall mean not less than 25% performance improvement over Windows 95 and its
subsequent releases ("OS Competitor") and/or competitive software products
("Product Competitor") on tests proposed by Developer and accepted by an
independent testing laboratory (to be mutually agreed by the parties, acting
reasonably). As soon as practicable after release of a new OS Competitor or
Product Competitor, the then current version of the Software and such product
shall be provided to an independent testing laboratory. In the event that the
Software is determined by that testing laboratory not to be Technically
Superior, then Developer shall have forty-five (45) days to deliver to
Distributor a version of the Software which is Technically Superior or
otherwise delivers mutually agreed to added functionality to restore the
leadership positioning of the Software in the Retail Channel, failing which the
sole recourse is to reduce the principal amount of the Letter of Credit
referred to in Section 6.06 by either (a) equal to the Payment Amount referred
to in Section 6.01 multiplied by the unit sell through of the Product
Competitor as reported in PC Data or (b) $500 per day from the release date of
the OS Competitor as reported in PC Data, such reductions shall stop after the
first anniversary of the Commencement Date.
9.06 Support. Developer shall at its sole expense be responsible for providing
reasonable professional end-user technical support for the Software with access
by way of toll-free phone, fax, mail and e-mail.
6
<PAGE>
Developer shall at its sole expense be responsible for correcting bugs or
providing reasonable workarounds for the Software as and when the need arises.
Distributor shall give Developer notice of all Software "bugs" promptly upon
discovery and, in the case of Fatal or Severe bugs, within forty-eight (48)
hours after discovery.
9.07 Performance Validation. Developer shall provide Distributor detailed
benchmark procedures and results to characterize the performance of the
Software across a wide spectrum of computers. Technical descriptions of the
black box behavior of the Software will be provided in a white paper sanitized
of proprietary information to convey the expected performance behavior of the
Software.
9.08 Developer Representations. Developer represents to Distributor that it has
full right and authority to enter into this Agreement. This Agreement and
Developer's performance hereunder, do not conflict with or cause a breach under
any agreement, license or other instrument, or law, rule, order or regulation
to which the Developer is bound or subject. Developer further represents to
Distributor that it has good and valid title to the Software code and to grant
the License, free and clear of any claims, encumbrance, rights and obligations.
9.09 Gold Master Escrow. Developer shall from time to time place a true,
correct and complete gold master copy of the executable code of the Software
and all major revisions thereto with Data Base, Inc. as escrow agent, in
accordance with an industry standard escrow agreement approved by Distributor,
such approval not be be unreasonably withheld or delayed. In the event that the
Developer goes into bankruptcy or insolvency and as a result thereafter fails,
refuses or is unable to provide the Software media to the Distributor in
accordance with orders placed by Distributor under Section 3 and does not cure
such failure within 20 days after notice by Distributor specifying the failure
and specifically stating that Distributor intends to obtain the Software from
the escrow agent, Developer hereby irrevocably directs such escrow agent to
deliver such gold master copy of the Software to the Distributor who shall use
such copy exclusively for use in accordance with the Agreement.
9.10 Product Liability Insurance. Developer shall obtain (and during the term
of this Agreement shall maintain) product liability insurance with respect to
Software limited by $1,000,000 per occurance and a maximum of $3,000,000
liability. Developer will name Distributor as an Additional Insured on such
policy and will utilize such insurance against any product liability claim with
respect to the Software. Distributor agrees to provide Developer with notice of
any such claim as promptly as possible and in any event within the time periods
required of an Additional Insured in accordance with the policy.
Section 10. Term, Renewal and Termination
10.01 Term. The License shall be for a term of three (3) years from the earlier
of (a) the date of first availability of the Software at any reseller or (b)
February 15, 1997 (the "Commencement Date") unless terminated earlier under the
provisions of this Agreement. This term shall automatically renew for two (2)
additional one (1) year periods provided Distributor has met the Minimum
Performance Requirements set forth in Section 2.05. Failure by Distributor to
meet the Minimum Performance Requirements shall not constitute a breach of this
Agreement. Failure of Distributor to obtain written approval of the Letter of
Credit described in 6.06 prior to December 20, 1996 shall give Developer the
the option to terminate this Agreement.
10.02 Conversion to Non-Exclusive Distributorship. In the event Distributor
fails to meet Minimum Performance Requirements of Section 2.05, Developer shall
have the option to make the License completely non-exclusive; provided
Distributor is notified at least three months before the Software will be
available in the Retail Channel via another party, such notice can be given
during the Distributor's exclusive period if reasonable projections indicate
likely failure to meet the Minimum Performance Requirements. In the event an
alternate source of the Software is in the Retail Channel before the first
anniversary of the Commencement Date, the principal amount of the Letter of
Credit (under Section 6.06) shall be reduced by an amount equal to the Payment
Amount referred to in Section 6.01 multiplied by the unit sell through of such
Software as reported in PC Data.
7
<PAGE>
10.03 Breach and Termination. Prior to terminating this Agreement, requesting
arbitration, filing suit or taking similar action upon a breach of this
Agreement by either party, the non-breaching party shall give the breaching
party notice of the basis for asserting such breach. If the breaching party
fails to cure such breach within thirty (30) days, and the breach is a material
breach, the non-breaching party may terminate this Agreement. If the breach is
the non-payment of any amounts due under this Agreement, the breach shall be
deemed to be a material breach, and the breaching party shall have fifteen (15)
days to cure such breach. Sections 8.02, 11, 12, 13 and 14 shall survive
termination or expiration of this Agreement for any reason.
10.04 Waiver of Liability on Termination. Should this Agreement or any portion
thereof lawfully expire, terminate or not be renewed, neither party will be
liable to the other because of such event for reimbursement of costs or
expenses or for damages on account of the loss of prospective profits,
anticipated sales, goodwill or on account of expenditures, inventory,
investments, leases or commitment in connection with the business of Developer
or Distributor, or for any other reason whatsoever flowing from such event.
Such event shall not, however, relieve either party of any obligation incurred
before termination or of liability for breach of any of the provisions of this
Agreement. The parties hereby specifically waive, to the maximum extent
permitted by law, any claims for compensation damages arising out of the lawful
termination or expiration of this Agreement in accordance with its terms.
Section 11. Property Rights
Distributor agrees that Developer owns all right, title and interest in the
Software now or hereafter subject to this Agreement, and in all patents,
trademarks, trade names, inventions, copyrights, know-how, trade secrets, and
any other proprietary information relating to the design, operation or
maintenance of the Software, all technology contained therein and the
Superfassst! trademarks, and advertising, sales, marketing materials and
artwork that Developer creates in connection with the Software. The use by
Distributor of any of these property rights is authorized only for the purposes
set forth in this Agreement, and upon termination of this Agreement for any
reason such authorization shall cease except to the extent necessary for
Distributor to provide maintenance to its existing customers for the Software.
Software source code shall be disclosed by Developer to Distributor only in
Developer's sole discretion. Distributor shall own and at all times continue to
own copyright, trademarks and other intellectual property rights to such names
as Distributor shall market Superfassst! under and to all other advertising,
sales and marketing materials and artwork that Distributor creates in
connection with the Software.
Section 12. Indemnification of Developer
Distributor warrants that it will not make any false or misleading statements
to any End User or potential End User and also that it will not make any
representation or warranty to any customer outside the End User license
agreement. Distributor agrees, at its own expense, to defend and indemnify
Developer, if necessary, against any actions, liabilities, costs, damages,
claims, losses and expenses (including but not limited to attorney's fees)
arising out of Distributor's breach of this warranty. Distributor agrees to
provide Developer with notice of any such claim as promptly as possible.
Section 13. Indemnification of Distributor
Developer agrees to defend, indemnify and hold Distributor harmless from and
against any and all claims, demands, liabilities, actions, judgements, and
expenses, including attorney's fees and expenses reasonably incurred by,
against or of Distributor, arising out of any breach of Section 9.08 or any
product liability claim with respect to the Software. Distributor agrees to
provide Developer with notice of any such claim as promptly as possible.
8
<PAGE>
Section 14. Confidentiality
14.01 Definition. "Confidential Information" shall mean any information, idea,
technology, know-how, invention, algorithm, data, process, technique, program,
computer software, computer code and related documentation, work-in-process,
future development, engineering, manufacturing, marketing, business, technical,
financial or personal matter relating to the parties, their research,
development, present or future products, sales, customers, employees,
opportunities, market, or business, whether in oral, written, graphic or
electronic form, that is treated as confidential by the respective parties and
identified as such at the time of disclosure to the other party. In addition,
the material terms and conditions of this Agreement shall be treated as
Confidential Information.
14.02 Maintaining Confidence. Developer and Distributor, their respective
officers, employees, agents, representatives, and permitted assigns shall hold
in confidence Confidential Information belonging to the other; and shall use
such Confidential Information only during the term of this Agreement and only
as expressly permitted herein. The material terms and conditions of this
Agreement shall be considered Confidential Information. Each party may disclose
such Confidential Information belonging to the other to its employees with a
need to know, provided that such employees are bound to maintain the
confidentiality of such Confidential Information. Non-disclosure obligation
shall not apply to such information if the party can document (a) has entered
the public domain and is generally available to the public as a result of no
act or omission of the party or its employees or agents, (b) is lawfully
received by the party from third parties without restriction and without breach
of any duty of non disclosure by any such third party, or (c) is developed
independently by the party without reference to the Confidential Information.
The parties shall use reasonable efforts to identify and prevent any
unauthorized use or disclosure of Confidential Information, and shall advise
each other in the event one party learns or has reason to believe that any
person has violated or intends to violate the terms of this Agreement, and will
cooperate in seeking injunctive relief against such person.
Section 15. General
15.01 No Assignment. Subject to the provisions of Section 2.01 herein, neither
party may assign all or any part of its interest in or to this Agreement
without the written consent of the other party and any purported assignment
without such consent shall be void.
15.02 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
15.03 Notices. All notices, requests, demands or directions relating to this
Agreement shall be in writing and delivered via courier addressed to the
appropriate party at the address of such party as set out below, or to such
other addresses as may be specified by one party to the other parties by notice
in writing. Any notice, request, demand, direction authorization or other
communication given shall be deemed to have been received by the party to whom
it was given on the third business day following the sending thereof by
courier.
If to Developer: Acceleration Software International Corporation
1223 NW Finn Hill Road
Poulsbo, WA 98370, United States
If to Distributor: Syncronys Softcorp
3958 Ince Blvd.
Culver City, CA 90232, United States
15.04 Arbitration, Jurisdiction and Venue. Any controversy or claim between the
parties arising out of or relating to this Agreement or any alleged breach
thereof shall be resolved by arbitration conducted in greater Seattle,
Washington in accordance with the Commercial Arbitration Rules of the American
Arbitration
9
<PAGE>
Association then in effect by a single arbitrator knowledgeable about the
development, distribution and licensing of computer software. Either party may
submit such controversy or claim for arbitration by giving written notice. The
arbitrator shall apply the law of the State of California as more fully set
forth in Section 15.05. The decision of the arbitrator, including, without
limitation, with respect to specific performance of this Agreement shall be
final and binding upon the parties. The parties may seek from the court a
provisional remedy in connection with an arbitrable controversy or claim and
such application to the court shall not waive any right of arbitration. The
prevailing party in any such arbitration shall be entitled to recover from the
non prevailing party in addition to all other relief, all reasonable costs and
expenses, including, without limitation, attorneys fees and expert witness fees,
actually incurred by such party in connection with such arbitration. Each of the
parties, by executing this Agreement, unconditionally submits to the
jurisdiction of the courts of the State of Washington and of the United States
with respect to the enforcement of this provision or any arbitration award
hereunder and agrees to accept service of process in California.
15.05 Choice of Law. This Agreement shall be governed by and construed under
the laws of the State of California without regard to conflict of laws
principles or the U.N. Convention on Contracts for the International Sale of
Goods.
15.06 Entire Agreement. This Agreement constitutes the entire agreement between
the parties hereto and supersedes all prior agreements, whether written or
oral, made between the parties hereto, and there do not exist any
representations, warranties, terms or conditions, expressed or implied,
statutory or otherwise, and no agreements collateral hereto, other than as
expressly set forth or referred to in this Agreement.
15.07 Inurement. This Agreement and each of the terms and provisions hereof
shall inure to the benefit of and be binding upon the parties hereto and their
respective heirs, executors, administrators, personal representatives,
successors and permitted assigns.
15.08 Severability. If any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable in any respect in any
jurisdiction, the validity, legality and enforceability of such provision or
provisions shall not in any way be affected or impaired thereby in any other
jurisdiction and the validity, legality and enforceability of the remaining
provisions contained herein shall not in anyway be affected or impaired
thereby.
15.09 Further Assurances. The parties hereto shall with reasonable diligence do
all such things and provide all such reasonable assurances as may be required
to consummate the transactions contemplated hereby, and each party hereto shall
provide such further documents or instruments required by the other party as
may be reasonably necessary or desirable to effect the purpose of this
Agreement and carry out its provisions.
15.10 No Joint Venture. Neither party hereto shall use the name, trademark or
other identification of the other party in any manner except as authorized by
the other party. Nothing contained herein shall be construed to (a) give either
party the power to direct or control the day-to-day activities of the other or
(b) constitute the parties as partners, joint ventures, co-owners or otherwise
as participants in a joint or common undertaking. All financial obligations
associated with each party's business is the sole and exclusive responsibility
of that party. Distributor shall not constitute, and shall take no action which
would cause it to be treated as, a "permanent establishment" of Developer
within the meaning of the tax laws of any country.
10
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement effective
as of the date provided above.
SYNCRONYS SOFTCORP
/s/ Daniel G. Taylor
- -----------------------------------------
Per: Daniel G. Taylor, EVP - Marketing
ACCELERATION SOFTWARE INTERNATIONAL CORPORATION
/s/ Clint L. Ballard
- ----------------------------------------
Per: Clint L. Ballard, C.E.O.
11
FINN HILL PARTNERSHIP LEASE
This Lease ("Lease") is made this 31st day of December, 1995 by and between
Finn Hill Partnership (hereinafter "Landlord") and Ballard Synergy Corporation
(hereinafter "Tenant"). In consideration for the mutual promises and covenants
contained herein, and for other good and valuable consideration, the parties
hereby agree as follows:
1. The Landlord leases to the Tenant, and the Tenant rents from the
Landlord the following described premises:
Suite A & C
1223 Finn Hill NW
Poulsbo, Washington
2. The term of the Lease shall be for Thirty Six (36 months) commencing
February 1, 1996 and ending January 31, 1999.
3. The Tenant shall pay to Landlord as rent $16320.00 annually, in equal
monthly installments of $1360.00 per month. payable in advance at 19860 Viking
Ave Nw. Poulsbo, WA 98370. Rent shall be due on the 1st day of the month. Rent
monies not paid within 10 days of their due date shall be subject to a 15%
penalty.
3a. Rent shall be adjusted on a annual basis. There shall not be any
rent increase during the first 24 months of this lease. Rent shall increase
by 5% beginning in month 25.
4. Tenant agrees to pay sum of $1350.00, as a security deposit. This shall
be a security deposit for the performance by Tenant of the provisions of this
Lease, if Tenant is in default, Landlord can use these funds or any portion of
them to compensate the Landlord for all damage sustained by it resulting from
Tenant's default. If Tenant is not in default at the expiration or termination
of this Lease, Landlord shall return the security deposit to Tenant.
5. Tenant shall use and occupy the premises only as a LM business office
subject at all times to the approval of the Landlord, and Governmental
authorities.
6. The Tenant shall not make any alterations in, additions to or
improvements to the premises without the prior written consent of the Landlord.
<PAGE>
7. The Landlord, at his own expense, shall furnish the following utilities
or amenities for the benefit of the Tenant: Sewer, and Building Insurance.
8. The Tenant, at his own expense, shall furnish the following: Telephone,
garbage and pay a prorata share of the buildings water and electrical bill.
9. The Tenant shall purchase at his own expense public liability insurance
in the amount not less than $300,000 as well as fire/legal liability and hazard
insurance for the contents and shall provide satisfactory evidence thereof to
the Landlord and shall continue the same in force and effect throughout the
Lease term hereof.
10. The Tenant shall not permit or commit waste to the premises.
11. The Tenant shall comply with all rules, regulations, ordinances codes
and laws of all governmental authorities having jurisdiction over the premises.
12. The Tenant shall not permit or engage in any activity which will effect
an increase in the rate of insurance for the Building in which the premises is
contained nor shall the Tenant permit or commit any nuisance thereon.
13. The Tenant shall not sub-let or assign the premises nor allow any other
person or business to use or occupy the premises without the prior written
consent of the Landlord, which consent may not be unreasonably withheld.
14. At the end of the term of this Lease, the Tenant shall surrender and
deliver up the premises in the same condition (subject to any additions,
alterations or improvements, if any) as presently exists, reasonable wear and
tear excluded.
15. Upon default in any tern or condition of this Lease, the Landlord shall
have the right to undertake any or all other remedies permitted by Law. The
occurrence of any one or more of the following shall constitute a material
default and breach of the Lease by Tenant:
a: Vacation or abandonment of the Premises.
b: Failure by Tenant to make any payment required as and when due, where
such failure shall continue after three (3) days written notice from Landlord.
<PAGE>
c: Failure by Tenant to observe or perform any of the covenants, conditions
or provisions of this Lease, other than the making of any payment, where such
failure shall continue for a period of (30) thirty days after written notice
form Landlord
d: The making by Tenant of any general assignment or general arrangement
for the benefit of creditors; the filing by or against Tenant of a petition in
bankruptcy, including reorganization or arrangement; the appointment of a
trustee or receiver to take possession of substantially all of Tenants assets
located at Premises of Tenant's interest in this Lease.
16. This Lease shall be binding upon, and inure to the benefit of, the
parties, their heirs, successors, and assigns.
17. Tenant shall faithfully observe and comply with the rules and
regulations that Landlord shall from time to time promulgate. Any rules that
shall be promulgated after the execution of this lease, shall be mutually agreed
upon. The additions and modifications to those rules shall be binding upon
Tenant upon mutualreement. Landlord shall not be responsible to Tenant for the
nonperformance of any said rules by any other tenants or occupants.
18. Tenant shall have the right to use, in common with other tenants and
occupants of the Building, the parking facilities, and common areas.
19. Tenant shall pay, or cause to be paid, before delinquency, any and all
personal property taxes levied or assessed and which become payable during the
term hereof upon Tenant's leasehold improvements, equipment, furniture, fixtures
and personal property located in the Premises. In the event any or all of the
Tenant's leasehold improvements, equipment, furniture, fixtures and personal
property shall be assessed and taxed with the Building, Tenant shall pay to
Landlord its share of such taxes within ten (10) days after delivery to Tenant
by Landlord of a statement in writing setting forth the amount of such taxes
applicable to Tenant's personal property.
20. REMOVED
<PAGE>
21. Option for space B. Tenant shall have an option for the rental of
additional space, known as suite B. This suite shall become available on May 1,
1996, by giving notice not later than 30 days prior to May 1, 1996 of the
tenants desire to occupy said space. There shall be an additional charge of
$340.00 per month for this additional space under the terms and conditions
outlined above.
Signed this 5th day of June 1996.
/s/ Clint Ballard /s/ Larry Ward
- --------------------------------- ---------------------------------
Clint Ballard Larry Ward Landlord
CEO
Prior to occupancy Landlord agrees to do the following:
1. Re-gravel existing driveway.
Create an additional gravel parking area 20 x 60
2. Remove exterior debris, relocate trailer to rear property line.
3. Repair or rebuild entry decks as needed.
4. Repair and increase security on the overhead garage style doors.
5. Install trim in areas now complete, that are missing trim.
6. Complete VCT tile in common area entry.
7. Paint downstairs walls.
Landlord agrees to complete the SE quarter of the building consisting of the
entry office and that area adjoining the downstairs bathroom at anytime during
the first 24 months of this lease for $4000.00. This is to consist of sheetrock,
tape, texture, paint and indoor/outdoor carpet, two interior doors and window
sills. Tenant shall retain the option of upgrading carpeting, and agrees to pay
the difference in cost.
<PAGE>
5/20/96
TO: Diana Ballard
Ballard Synergy
1223 NW Finn Hill
Poulsbo, Wash 98370
FROM: Larry Ward
Finn Hill Partnership
19860 Viking Ave NW
Poulsbo, Wash 98370
Re: Tenant Improvements
Dear Diana,
This is to acknowledge our conversation regarding your assumption of suite B.
Beginning on June 1, 1996., Per section 21 of our lease, your rent will increase
by $340.00. You are hereby authorized to make the tenant improvements you
outlined, at your expense. Specifically, creating a doorway between the two
spaces, adding phone and electrical wiring.
Regarding the tenant improvements that you have previously been authorized and
performed at your own expense, I am attaching your list of things that you would
like to get done.
Tenant improvements as we have discussed and agreed are to be done at your
direction and expense. Of the attached list of items, the Finn Hill Partnership
will take responsibility for the following items, including the expense of
performing these items:
Items:3,4,5,9,13,15,16,19,22,26 and 27.
The remaining items are primarily trim and finish items that have not been
completed as part of your tenant improvements. I have agreed to recommend
suppliers and sub-contractors that you can hire to perform these services. It is
clearly understood that I am only acting in an advisory capacity, that you are
free to accept or reject the people that I recommend, and all work contracted by
you shall be your responsibility. I agree to do everything I can to help you
accomplish the work items on the attached list.
/s/ Diana Ballard /s/ Larry Ward
- ------------------------------ ------------------------------
Diana Ballard Larry Ward
<PAGE>
1/24/96
LEASE AMENDMENT
BALLARD SYNERGY/FINN HILL PARTNERSHIP
This Lease ("Lease") which was made between Finn Hill Partnership (hereinafter
"Landlord") and Ballard Synergy Corporation (hereinafter "Tenant"). In
consideration for the mutual promises and covenants contained herein, and for
other good and valuable consideration, the parties hereby agree to amend as
follows:
22. Tenant shall have the option to extend this lease for a period not to
exceed 60 months, by giving landlord written notice not less than month 34 of
this tenancy. In extending said lease tenant agrees to an increase of 5% of the
monthly rent that is in effect during month 34 of this lease beginning in month
37 and extending through the life of the lease
Signed this day of , 19 .
------ -------------------
/s/ Diana T. Ballard /s/ Larry Ward
- ------------------------------------ ---------------------------------
Diana T. Ballard Larry Ward
Chairwoman Landlord
<PAGE>
Finn Hill Partnership
19860 Viking Ave. NW
Poulsbo, Washington 98370
Mr. Clint Ballard, CEO
Acceleration Software
1223 NW Finn Hill Rd.
Poulsbo, Washington 98370
Dear Mr. Ballard,
We are in receipt of your September 30th letter exercising your option under the
terms of our lease, specifically item 22.
We are pleased that you have exercised that option.
Sincerely,
/s/ Larry Ward
- ----------------------------
Larry Ward
Managing Partner
<PAGE>
[LOGO]
OPERATIONS DEPARTMENT
1223 NW Finn Hill Road
Poulsbo, Washington 98370
Fax: (360) 595-2450 Phone: (360) 697-9260
September 30, 1998
Finn Hill Partners
ATTN: Mr. Larry Ward
19860 Viking Avenue NW
Poulsbo, WA 98370
Dear Larry:
Along with the October rent payment, at this time we are submitting written
notice per item 22 of the lease agreement. We would like to exercise our option
to extend the lease for a period of 60 months.
Sincerely,
/s/ Clint Ballard
- ------------------------------------
Clint Ballard, CEO
Acceleration Software International
(formerly Ballard Synergy)
cc: Diana T. Ballard, President
Consent of Independent Accountants
We hereby consent to the use in the Prospectus, constituting part of this
Registration Statement on form SB-2 of our report dated September 10, 1999, for
the matter described in Notes 1 and 8, as to which the date is November 1, 1999,
relating to the financial statements of eAcceleration Corp. which appears in
such Prospectus. We also consent to the reference to us under the heading
experts, in such Prospectus.
/s/ McKennon Wilson & Morgan LLP
Irvine, California
November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE EIGHT
MONTH PERIOD ENDED AUGUST 31, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> Year 8-Mos
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1999
<PERIOD-START> Jan-01-1998 Jan-01-1999
<PERIOD-END> Dec-31-1998 Aug-31-1999
<CASH> 239,193 300,897
<SECURITIES> 0 0
<RECEIVABLES> 241,667 469,681
<ALLOWANCES> 0 (30,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 480,860 771,763
<PP&E> 280,193 302,606
<DEPRECIATION> (215,417) (231,707)
<TOTAL-ASSETS> 609,917 938,639
<CURRENT-LIABILITIES> 141,613 440,225
<BONDS> 0 0
0 0
0 0
<COMMON> 3,430 3,430
<OTHER-SE> 464,874 494,984
<TOTAL-LIABILITY-AND-EQUITY> 609,917 938,639
<SALES> 1,919,149 2,331,610
<TOTAL-REVENUES> 1,919,149 2,331,610
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> (43,092) (3,257)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,557 465
<INCOME-PRETAX> 396,481 360,360
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 396,481 360,360
<EPS-BASIC> .01 .01
<EPS-DILUTED> .01 .01
</TABLE>
