Registration No. 333-90867
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
---------------
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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 Identification No.)
organization) Number)
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
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98730
(360) 697-9260
(Name, address, including zip code, and telephone number, including area code,
of registrant's principal place of business and 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. [ ]
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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 SEC, acting pursuant to said Section 8(a), may
determine.
<PAGE>
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 JULY 5, 2000
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 a minimum of 400,000 and a maximum of 3,000,000 of our
shares in a direct participation offering. The shares will be sold by our
officers and directors. Until we have sold at least 400,000 shares, we will not
accept subscriptions for any shares. You must buy shares in increments of 100
shares. All proceeds of this offering will be deposited in an interest-bearing
escrow account. If we are unable to sell at least 400,000 shares before the
offering ends, we will return all funds, with interest, to subscribers promptly
after the ending of this offering. The offering will remain open until all
shares offered are sold or nine months after the date of this prospectus, except
that we will have only 180 days to sell at least the first 400,000 shares. We
may decide to cease selling efforts prior to such date if we determine that it
is no longer beneficial to continue the offering.
Prior to this offering, there has been no public market for the shares. The
initial public offering price is $6.25 per share.
THE SHARES OFFERED IN THIS OFFERING INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION WITH THE POSSIBILITY OF THE LOSS OF YOUR ENTIRE INVESTMENT.
YOU SHOULD CAREFULLY READ THE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
THAT YOU SHOULD CONSIDER 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.
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<TABLE>
<CAPTION>
Price per share Underwriting discounts Proceeds, before
Number of Shares to public and commissions expenses, to us
---------------- --------- --------------- ----------------
<S> <C> <C> <C> <C>
Minimum. . . . . 400,000 $6.25 - $ 2,500,000
Maximum. . . . . 3,000,000 $6.25 - $ 18,750,000
</TABLE>
The date of this prospectus is , 2000
<PAGE>
The following is a graphic illustration of our Internet business model. The
model depicts the relationship between us, through our operating websites,
HomepageSales.com, DownloadSales.com, HomePageware.com, ClickSales.com and
SignupSales.com, and our Internet advertising and marketing customers, who pay
us for specified actions by our website visitors. The model also depicts the
relationship between us, through these operating websites, and our website
visitors, who receive free software and other products and services in exchange
for agreeing to use one of our websites as their browser's starting page:
[Graphic representation of the relationship between (a) Online Media Buyers
and Merchants, (b) HomepageSales.com, DownloadSales.com, HomePageware.com,
ClickSales.com and SignupSales.com and (c) Internet Users]
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<PAGE>
PROSPECTUS SUMMARY
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.
We provide flexible marketing solutions for our Internet advertising and
marketing clients. We intend to leverage our developing homepage subscriber base
and our targeting capabilities to offer our internet advertising and marketing
clients customized, targeted advertising solutions designed to improve
advertisement response rates and reduce their cost of acquiring new customers.
We also licence localized versions of our software products for distribution in
Asia to software customers who cannot obtain our software for free on our
websites.
Our principal executive offices are located at 1223 NW Finn Hill Road,
Poulsbo, Washington 98730. Our telephone number is (360) 697-9260 and our fax
number is (360) 598-2450. Our corporate website is www.eAcceleration.com. The
information contained in this website or any of our websites, including
Hompageware.com, HomepageSales.com, DownloadSales.com, ClickSales.com and
SignupSales.com, is not a part of this prospectus. All Internet addresses
included in this prospectus are inactive textual references only.
THE OFFERING
Shares offered . . . . . . . . . . . Common stock
Minimum . . . . . . . . . . . . . . 400,000 shares
Maximum . . . . . . . . . . . . . . 3,000,000 shares
Price per share . . . . . . . . . . . $6.25
Shares outstanding after this offering
Minimum . . . . . . . . . . . . . . 34,700,000 shares
Maximum . . . . . . . . . . . . . 37,300,000 shares
Use of proceeds . . . . . . . . . . . We plan to use the net proceeds from
this offering for the following
purposes:
- new product development;
- marketing and advertising;
- facilities;
- personnel;
- computer equipment;
- computer software; and
- working capital and general
corporate purposes.
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. WE HAVE ADJUSTED THE NUMBER OF OUTSTANDING SHARES AND OPTIONS
ACCORDINGLY. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, WE
REFER TO EACCELERATION CORP. AND ACCELERATION SOFTWARE INTERNATIONAL CORPORATION
COLLECTIVELY AS "EACCELERATION", "WE", "US" OR "OUR".
3
<PAGE>
Summary financial information
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
1998 1999 1999 2000
---- ---- ---- ----
(unaudited)
STATEMENTS OF INCOME DATA:
<S> <C> <C> <C> <C
Revenues. . . . . . . . . . . . . . . . . . . $1,919,149 $ 4,759,469 $ 566,060 $ 1,931,118
Costs and expenses:
Software development and products . . . . . 919,895 1,053,754 200,156 330,640
Sales and marketing . . . . . . . . . . . . 369,336 2,395,129 256,233 1,267,421
General and administrative. . . . . . . . . 409,071 641,707 107,665 233,767
Reduction of reserves for claims. . . . . . (28,542) - - -
---------- ----------- --------- -----------
Total expenses. . . . . . . . . . . . . . . . $1,669,760 $ 4,090,590 $ 564,054 $ 1,831,828
========== =========== ========= ===========
Income from operations. . . . . . . . . . . . 249,389 668,879 2,006 99,290
Other income, net . . . . . . . . . . . . . . 43,092 4,656 1,322 775
---------- ----------- --------- -----------
Net income. . . . . . . . . . . . . . . . . . $ 292,481 $ 673,535 $ 3,328 $ 100,065
========== =========== ========= ===========
Basic and diluted earnings
per share . . . . . . . . . . . . . . . . . $ 0.01 $ 0.02 $ - $ -
========== =========== ========= ===========
Pro forma financial data:
Pro forma net income. . . . . . . . . . . . $ 444,533 $ 66,043
=========== ===========
Pro forma basic and diluted
earnings per share. . $ 0.01 $ -
=========== ===========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At March 31, 2000 (unaudited)
Actual As adjusted
------ -----------
Minimum Maximum
------- -------
<S> <C> <C> <C>
Current assets. . . . . . . . . . . . . . . . 1,332,114 2,737,122 18,887,122
Property and equipment. . . . . . . . . . . . 118,501 118,501 118,501
Total assets. . . . . . . . . . . . . . . . . 2,016,482 3,421,490 19,571,490
Current liabilities . . . . . . . . . . . . . 842,740 842,740 842,740
Total stockholders' equity. . . . . . . . . . 1,173,742 2,578,750 18,728,750
</TABLE>
The pro forma financial data reflects income tax expenses of $229,002
and $57,865, for the periods ended December 31, 1999 and March 31, 2000,
respectively, based on the assumption that we were taxed as a C-Corporation
instead of as a pass-through entity as provided under Subchapter S corporation
status. See the notes to our consolidated financial statements.
For the minimum number of shares under the offering, the as adjusted
balance sheet data at March 31, 2000 assumes net proceeds of $2,000,000, net of
$500,000 in offering expenses. For the maximum number of shares under this
offering, the as adjusted balance sheet of March 31, 2000 assumes net proceeds
of $18,150,000, net of $600,000 in offering expenses.
We plan to make a distribution of accumulated earnings, and paid-in
capital to the extent available, while an S-corporation to our existing
stockholders immediately prior to the first closing of this offering of up to
the amount that our total shareholders' equity exceeds $578,750 as of the date
of such distribution. Accordingly, the as adjusted balance sheet reflects a cash
distribution of $594,992, assuming this offering was completed on March 31,
2000, although the actual distribution may differ.
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<PAGE>
Risk factors
THE SHARES OFFERED IN THIS PROSPECTUS ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. PRIOR TO MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS ALL OF THE INFORMATION CONTAINED
IN OTHER SECTIONS OF THIS PROSPECTUS.
THE MAJORITY OF OUR CONTRACTS WITH OUR INTERNET ADVERTISING CUSTOMERS 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 June 15, 2000, 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 period could result in an immediate
and significant decline in our revenues and cause our business to suffer.
A SIGNIFICANT PERCENTAGE OF OUR INTERNET ADVERTISING AND MARKETING REVENUES
ARE DERIVED FROM ONLY A SMALL NUMBER OF INTERNET ADVERTISING AND MARKETING
CUSTOMERS, AND THE INABILITY TO CONTINUE OUR RELATIONSHIP WITH ANY OF THEM COULD
ADVERSELY AFFECT US.
During 1999, one Internet advertising and marketing client, MediaRing,
Inc., accounted for 10% of our total revenues. By late 1999 and continuing into
2000, we substantially reduced our volumes with MediaRing, Inc. During the three
months ended March 31, 2000, MediaRing did not account for any of our revenues.
During such period, another company, CoolSavings, accounted for 25% of our total
revenues. The loss of any of our other major Internet 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.
WE ARE DEPENDENT ON PURCHASING INTERNET ADVERTISING SPACE CURRENTLY
PROVIDED BY ONLY A SMALL NUMBER OF INTERNET ADVERTISING SUPPLIERS, MOST OF WHICH
HAVE MONTH-TO-MONTH AGREEMENTS WITH US. MANY OF THESE SUPPLIERS HAVE REPORTED
SIGNIFICANT FINANCIAL LOSSES, AND MAY NOT CONTINUE OPERATIONS. THE LOSS OF A
SIGNIFICANT NUMBER OF THESE SUPPLIERS COULD ADVERSELY AFFECT US.
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have month-to month agreements with us. For the year
ended December 31, 1999, four advertising vendors, BURST! Media, Adauction.com,
Adsmart and Flycast, accounted for 29%, 19%, 19% and 12%, respectively, of our
total Internet media purchases. For the three months ended March 31, 2000, three
advertising vendors, Adsmart, Adauction.com and BURST! Media accounted for 35%,
21% and 15%, respectively, of our total Internet media purchases. Although we
have established redundant relationships with our suppliers in order to mitigate
our exposure, the unavailability of adequate supplies could adversely affect us.
Additionally, many of these suppliers have reported significant financial losses
and may not continue operations in the long term. If there are fewer suppliers
available, prices of advertising space could increase significantly, which could
have a materially adverse effect on our operations.
5
<PAGE>
WE HAVE NO AGREEMENTS WITH ANY UNDERWRITERS OR BROKER-DEALERS, AND WE MAY
BE UNABLE 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. We may have one or more closings of the
offering. The first closing may not occur until we are able to sell at least
400,000 shares. Each closing represents the time that investors' subscriptions
are accepted and those shares are issued to investors. After that, we could have
additional closings whenever we receive and accept new subscriptions. After the
creation of a public trading market for the shares following the completion of
at least the first closing under this offering, we hope that a number of
broker-dealers may become 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 will commence.
WE MIGHT ONLY SELL THE MINIMUM NUMBER OF SHARES IN WHICH CASE THE GROWTH OF
OUR BUSINESS WOULD BE GREATLY LIMITED, OR LESS THAN THE MINIMUM NUMBER OF
SHARES, IN WHICH CASE WE WOULD BE UNABLE TO ACCEPT ANY SUBSCRIPTIONS.
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 than the maximum amount of 3,000,000
shares offered in this offering are sold, we may not be able to develop and
market our products and services and increase our market share in markets in
which we compete as aggressively as if more shares were sold. We would also not
be able to take advantage of acquisition or investment opportunities as
aggressively. Additionally, we would not be able to expand our operations, build
a new facility or significantly increase the size of our work force and
infrastructure to the extent we could if we sold more shares.
We may also be unsuccessful in selling at least 400,000 shares in this
offering, particularly because our officers and directors are selling the shares
in a direct participation offering, without the use of an underwriter. If we
fail to sell at least 400,000 shares in this offering, we will be unable to
accept any subscriptions in the offering. We could also decide, in our
discretion, to not have a closing. Although your funds will be returned to you
promptly by our escrow agent, with interest, you will not have the use of these
funds for other purposes during the time period that your funds were held in
escrow, which could be in excess of nine months.
6
<PAGE>
THE SHARES YOU PURCHASE IN THE OFFERING WILL BE IMMEDIATELY AND
SIGNIFICANTLY DILUTED.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of our common stock. Purchasers of
our common stock in this offering will experience immediate and substantial
dilution. Dilution represents the difference between the price of a share sold
in this offering and the pro forma net tangible book value per share after the
offering. The dilution will be $6.19 per share or 99% of the offering price per
share if the minimum number of 400,000 shares are sold in the offering and $5.76
or 92% of the public offering price if the maximum number of 3,000,000 shares
are sold in the offering.
OUR TWO EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMMON
STOCK AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF ALL
STOCKHOLDERS.
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.
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.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE AS WE CONTINUE TO INCREASE OUR DEPENDENCE
ON INTERNET ADVERTISING AND MARKETING REVENUE.
Our quarterly results of operations have varied in the past and are likely
to continue to vary significantly from quarter to quarter in the future as we
increase our emphasis on Internet advertising and marketing revenue. As a
result, 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 some 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.
7
<PAGE>
BECAUSE WE ARE UNDERGOING A SIGNIFICANT SHIFT IN OUR EMPHASIS FROM SOFTWARE
DISTRIBUTION TO INTERNET ADVERTISING AND MARKETING, OUR OPERATING HISTORY MAY
NOT BE INDICATIVE OF 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.
WE DO NOT HOLD COLLATERAL TO SECURE PAYMENT FROM OUR ONLY SOFTWARE LICENSING
CUSTOMER FROM WHOM WE DERIVE A SIGNIFICANT PERCENTAGE OF OUR TOTAL REVENUE, AND
IF WE FAIL TO RECEIVE PAYMENT FROM THIS CUSTOMER, OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
We do not hold collateral to secure payment on our software licensing
agreement with Sourcenext Corporation, our Asian distributor. Under this
agreement, Sourcenext is obligated to pay us up to $3.6 million through May
2002. Therefore, a default in payment on a significant scale could materially
adversely affect our results of operations and financial condition.
IF WE ARE UNABLE TO CONTINUE TO DELIVER AND DESIGN AND SOFTWARE PRODUCTS TO OUR
SOFTWARE DISTRIBUTION CUSTOMER AS REQUIRED BY OUR AGREEMENT WITH THIS CUSTOMER,
OUR REVENUES WILL BE SIGNIFICANTLY DECREASED.
Under our distribution agreement with Sourcenext, our software distribution
customer, in addition to other payments, Sourcenext is obligated to pay us
$75,000 per product delivered, for up to 24 products within two years. If we are
unable to design, complete and deliver such products, we could fail to receive a
significant amount of our software distribution revenue.
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING,
AND 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. Our
business strategy includes possible growth through acquisitions or significant
investments, and we may use a substantial portion of the offering proceeds to
buy or invest in businesses we have not yet identified. We cannot assure you
that we will use these proceeds effectively.
8
<PAGE>
IF WE ESTABLISH A BROKER-DEALER SUBSIDIARY, WE WILL BE SUBJECT TO SUBSTANTIALLY
INCREASED POTENTIAL REGULATORY AND ECONOMIC LIABILITY.
Our proposed broker-dealer subsidiary may be restricted by the NASD, other
regulatory bodies and its clearing firm with respect to its ability to
participate in underwritings, and we have no present intention to underwrite any
securities offerings. If we decide to start underwriting offerings, we would
face numerous challenges and restrictions. The broker-dealer subsidiary may
incur losses if it is unable to resell any securities it is committed to
purchase or if it is forced to liquidate its commitments at less than the agreed
purchase price. In addition, we would be subject to substantial potential
liability for material misstatements or omissions in prospectuses and other
communications with respect to any underwritten offerings. We do not expect that
any potential liabilities relating to our proposed broker-dealer subsidiary's
role as an underwriter would be covered by insurance.
IF WE ESTABLISH A BROKER-DEALER SUBSIDIARY, WE WILL BECOME SUBJECT TO CAPITAL
MAINTENANCE REQUIREMENTS WHICH COULD HINDER OUR ABILITY TO CARRY OUT OUR
BUSINESS EFFICIENTLY.
If we create a broker-dealer subsidiary, we will be subject to, among other
requirements, the financial capital minimums requirements of Rule 15c3-1 under
the Exchange Act, which is known as the "net capital rule". The net capital rule
is designed to monitor the general financial integrity and liquidity of a
broker-dealer by imposing strict requirements on the amount of indebtedness
which a broker-dealer may incur relative to its equity capital. In computing net
capital, various adjustments are made to net worth which exclude assets which
are not readily convertible into cash, and take a conservative perspective of
other assets such as a broker- dealer's position in securities. The requirements
provide that the broker-dealer shall maintain a minimum level of net capital and
a minimum ratio of net capital to aggregate indebtedness. The particular levels
vary in application depending upon the nature of the activity undertaken by the
broker-dealer and the length of time it has been in business.
The net capital rule would impose restrictions on our proposed
broker-dealer subsidiary's operations and it could, in turn, impose restrictions
on our operations. Compliance with the net capital rule may limit our operations
and those of our proposed broker-dealer subsidiary, which require the intensive
use of capital, such as underwriting commitments and principal trading
activities, and will limit our ability to pay dividends. We will also have to
enter into a membership agreement with the NASD that may similarly limit the our
activities.
OUR SHARES COULD BECOME A "PENNY STOCK", IN WHICH CASE IT WOULD BE MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
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 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:
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<PAGE>
- deliver a standardized risk disclosure document 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 become subject to the penny stock rules, investors
may find it more difficult to sell their shares.
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, financial performance, operating performance 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 uncertainties include among other things, the matters described in the
"Risk factors" and 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.
10
<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 $2,000,000 if the minimum
number of 400,000 shares are sold or $18,150,000 if the maximum number of
3,000,000 shares are sold. These proceeds are intended to be utilized
substantially in the dollar amounts and percentage of total proceeds set forth
below:
<TABLE>
<CAPTION>
Application of proceeds Minimum Maximum
----------------------- ------- -------
<S> <C> <C> <C> <C>
New product development $425,000 21.3% $4,000,000 22.0%
Marketing and advertising 550,000 27.5% 5,000,000 27.5%
Facilities 325,000 16.3% 3,000,000 16.5%
Personnel 275,000 13.8% 3,000,000 16.5%
Computer equipment 100,000 5.0% 400,000 2.2%
Computer software 50,000 2.5% 200,000 1.1%
Working capital and general
corporate purposes 275,000 13.8% 2,550,000 14.0%
---------- -----------
$2,000,000 $18,150,000
</TABLE>
"New product development" costs includes those associated with developing
and/or acquiring new proprietary software, new technologies and new web
properties. We currently have under development twelve new software products,
seven of which are still in the conceptual stage, and seven new websites, some
of which are still in the conceptual stage. We estimate our development costs
for these new projects could reach approximately four million dollars. We expect
to develop additional new products internally, and we also may license or
acquire new products. If we sell only the minimum number of shares in this
offering, our ability to develop and license new products described above will
be curtailed.
"Marketing and advertising" costs consist primarily of costs associated
with our efforts to increase traffic flow to our web properties. Such efforts
may include any or all of the following:
- Internet advertising, including banner advertisement;
- radio advertising;
- television advertising; and
- print advertisements.
In the event that we sell exactly or close to the maximum number of shares
in this offering, we plan to significantly increase our advertising expenditures
in all of the types of media listed above. If we sell only the minimum number of
shares in this offering, we would expect to increase our advertising
expenditures to a much lesser degree and will continue to concentrate our
advertisements on Internet banner or other types of Internet advertisements.
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<PAGE>
"Facilities" costs consist of the following:
- leasehold improvements;
- furniture;
- equipment; and
- the development of additional facilities to house our operations.
In the event that we sell exactly or close to the maximum number of shares
in this offering, we plan to acquire property in Kitsap County, Washington or
elsewhere in the Puget Sound area in the State of Washington on which we would
have a state-of-the-art facility built for us that would be large enough to
house our entire business operations for the next several years, and would
accommodate expansion for the foreseeable future through the subsequent building
of additional facilities on such property. Alternatively, we would expect to
lease up to 50,000 square feet of space in the Puget Sound area that could house
our operations for the next several years. If only the minimum number of shares
are sold in the offering, we expect to seek to lease a considerably smaller
facility, or perhaps an additional facility which together with our current
facilities could house our business operations for the next several years.
"Personnel" costs include the costs associated with hiring and training,
and the ongoing salaries and benefits of, personnel necessary to satisfy our
operational and growth needs. In the event that we sell exactly or close to the
maximum number of shares in this offering, we believe that we will significantly
increase our operations. As a result, we would expect that our personnel needs
would increase significantly, including the possible need for additional
executive officers. If we sell the minimum number of shares in this offering, we
will likely increase our operations by a smaller amount and our personnel needs
will grow to a lesser degree.
"Computer equipment" costs consist of additional office computer equipment
and web service-related equipment. In the event we sell exactly or close to the
maximum number of shares in this offering, and we significantly increase our
operations and move our operations into a newly-built facility, we plan to add
or replace computer equipment to meet our growing needs. If we sell the minimum
number of shares is this offering, our needs for additional computer facilities
will diminish.
"Computer software" costs consist of internal-use programs either purchased
or developed in-house to facilitate our operations. In the event we sell exactly
or close to the maximum amount of shares in this offering, we will be able to
develop or purchase software which could increase our efficiency and
productivity, as well as help to coordinate our expanding operations. If we only
sell the minimum number of shares in this offering, such upgrading of our
software will be greatly curtailed.
"Working capital and general corporate purposes" costs include costs
associated with possible acquisitions and the following costs necessary for our
ongoing operations:
- rents;
- utilities;
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<PAGE>
- financing account receivables;
- existing employee salaries;
- existing employee benefits, and
- professional and consulting fees.
The amounts set forth above are estimates. While our intentions with regard
to the use of the proceeds of this offering are described above, we do not
guarantee that the proceeds of this offering will be used as described in this
prospectus. 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.
As such, our board of directors and management will have broad discretion,
subject to their fiduciary duties, in the use of the proceeds from the sale of
the shares offered in this offering. We expect that 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;
- changes in competitive, technological or other conditions in
our industry; or
- if our estimates of the cost of our proposed uses of the
proceeds of this offering ultimately turn out to be inaccurate.
As discussed above, if the minimum amount is raised, our expansion plans will be
limited. In the event that an amount between the minimum and maximum amounts is
raised, we intend to allocate such proceeds approximately proportionately to the
above uses, but may, dependent on circumstances, allocate the use of such
proceeds in a different manner.
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 or otherwise. If a business opportunity arises, we may use a portion
of our working capital for that purpose or for making equity investments in
companies that may use a portion of the proceeds from our investment to retain
our Internet advertising and marketing services to promote their products and
services.
We are not currently involved in any negotiations for purchasing any
material business or group of assets or making any investments as described
above. We have no specific plans, arrangements, understandings or commitments
with respect to such acquisition or investment at the present time, and it is
uncertain as to when or if any such acquisition will be made. We expect that any
business that we would acquire would be in the Internet, software, marketing,
advertising or new media businesses; however, no assurance can be given in this
regard. In the event we sell exactly or close to the maximum number of shares in
this offering, we will have a significant degree of flexibility relating to such
acquisition or investment opportunities, while if we sell the minimum amount of
shares in this offering, our ability to take advantage of business opportunities
as they become available will be more limited.
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<PAGE>
Additionally, we are preliminarily considering using a portion of our
working capital to form or acquire a broker-dealer subsidiary, following the
completion of this offering, that would assist other companies in raising
capital through direct participation offerings. We have not entered into any
agreements relating to any such enterprise nor do we have current plans to do
so, and we do not know if we will ever do so in the future.
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 twelve months. Pending use of the
proceeds from this offering as described 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, equity or debt
securities of other companies or businesses or short-term, interest-bearing
deposits in banks.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000, and as
adjusted, to give effect to the sale of the minimum number of 400,000 shares of
common stock offered and to the sale of the maximum number of 3,000,000 shares
of common stock offered in this offering, at an assumed public offering price of
$6.25 per share. Estimated offering costs of $500,000 for the minimum number of
shares and $600,000 for the maximum number of shares were applied to the net
proceeds.
<TABLE>
<CAPTION>
March 31, 2000 (unaudited)
----------------------------------
Actual As adjusted
------ ---------------------
Minimum Maximum
------- -------
Stockholders' equity:
<S> <C> <C> <C>
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. . . . . . . . . . . . 439,533 2,575,280 18,725,020
Retained earnings . . . . . . . . . . . . . . . . 730,779 - -
---------- ---------- -----------
Total stockholders' equity . . . . . . . . . . . $1,173,742 $2,578,750 $18,728,750
========== ========== ===========
</TABLE>
We plan to make a distribution of accumulated earnings, and paid-in
capital to the extent available, while we are still an S-corporation to our
existing stockholders immediately prior to the first closing of this offering of
up to the amount that our total shareholders' equity exceeds $578,750 as of the
date of such distribution. Accordingly, the as adjusted capitalization reflects
a cash distribution of $594,992, assuming the offering was completed on March
31, 2000, although the actual distribution may differ. Since as of March 31,
2000, the amount to be distributed to our existing stockholders was less than
the total retained earnings, the remainder of the retained earnings, or
$135,787, would have been reclassified from retained earnings to additional
paid-in capital.
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<PAGE>
DILUTION
Our net tangible book value at March 31, 2000 is $671,660 or $.02 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 March 31, 2000. After giving
effect to the sale of 400,000 shares in the event that the minimum number of
shares offered in this offering are sold or 3,000,000 shares in the event that
the maximum number of shares offered in this offering are sold, the as adjusted
net tangible book value at March 31, 2000 would be $2,076,668, or $.06 per share
in the event that the minimum number of shares offered in this offering are
sold, or $18,226,668, or $.49 per share in the event that the maximum number of
shares offered in this offering are sold.
This represents an immediate increase in net tangible book value of $.04
per share to the existing stockholders in the event the minimum number of shares
are sold or $.47 per share to the existing stockholders in the event the maximum
number of shares are sold, and an immediate dilution of $6.19 per share to new
investors in the event that the minimum number of shares offered in this
offering are sold or $5.76 per share to new investors in the event that the
maximum number of shares offered in this offering 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
in this offering before deduction of offering expenses. . . . . . . . $6.25 $6.25
----- -----
Net tangible book value per share before offering. . . . . . . . . .02 .02
Increase per share attributable to new investors . . . . . . . . . .04 .47
----- -----
As adjusted net tangible book value per share after offering. . . . . .06 .49
----- -----
Dilution per share to new investors . . . . . . . . . . . . . . . . $6.19 $5.76
===== =====
Percentage that new investors' shares are diluted . . . . . . . . . . 99% 92%
</TABLE>
The following tables summarize the relative investments of investors in 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. . . . . . . . . . . . . . . . . $578,750 $2,500,000 $ 3,078,750
Percentage of consideration paid. . . . . . . . . . . . . 18.7% 81.3% 100%
Average consideration per share of common
stock. . . . . . . . . . . . . . . . . . . . . . . . . . - $6.25 $.09
</TABLE>
<TABLE>
<CAPTION>
Current Public
Minimum 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. . . . . . . . . . . . . . . . . $578,750 $18,750,000 $19,328,750
Percentage of consideration paid. . . . . . . . . . . . . 3.0% 97.0% 100%
Average consideration per share of common
stock. . . . . . . . . . . . . . . . . . . . . . . . . . - $6.25 $.52
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read with the historical financial
statements, and accompanying notes, 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 1998, our revenues were derived primarily from our software development and
licensing contracts with Pointe Control for distribution in Asia. In 1996, we
began offering our software, and in 1998, our 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, we 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.
Under the terms of our former distribution agreement with Pointe Control and
current distribution agreement with Sourcenext, we granted an unlimited license
to sell the software in Japan as specified under such agreements. This does not
materially affect our operations attributed to offering software free on our
websites. This license only applies to localized, Japanese versions of the
software, and not the English versions which are available for free on our
websites. Additionally, users in Japan cannot generally run the free
English-language versions on their operating systems.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
REVENUES
Our revenues increased $2,840,320 or 148% from $1,919,149 in 1998 to
$4,759,469 during 1999, primarily due to the development in 1999 of our Internet
advertising and marketing revenues of $2,744,869. Domestic revenues from
software licensing were not significant during 1998 and 1999. We had one license
agreement that resulted in the recognition of $1,050,000 and $1,964,550 of
revenues during 1998 and 1999, respectively. Revenues derived in Asia during
1998 and 1999 were generated from Pointe Control.
In November 1995, we entered into a master agreement with Pointe Control to
produce various software products. In 1996, we amended the agreement to provide
for the production of additional software products produced on CD ROM. In
February 1998, we amended the terms of the agreement to provide for receipt of
payment based on CD-ROMs sold by Pointe Control. Revenues for these products
were recorded when the products were sold by Pointe Control and the cash was
received, generally within thirty days from the date of sale. On August 14,
1998, we further amended our agreement to provide for the delivery of a master
license for a specified product for which we were paid $375,000 upon delivery
and $375,000 over four months. We delivered the master license in August 1998
and revenues were recorded upon delivery. At such
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<PAGE>
time we had no significant obligations remaining, and all payments were
guaranteed as defined under the agreement at the time of shipment.
On January 20, 1999, we further amended the contract to provide for the
production and license of ten specified software products in which master
licenses were or will be granted. This amendment specified certain payments to
us totaling $2.2 million beginning February 7, 1999 through December 7, 1999,
with a final payment of $200,000 due January 2000. We actually received $1.875
million during 1999 under an oral agreement between the parties. This amendment,
dated January 20, 1999, was further amended on October 14, 1999 to amend the
required payments and provide for additional payments from November 7, 1999 to
May 7, 2000 of $150,000 per month. Total payments due under these two amendments
were $2.625 million.
Revenues under the January 20, 1999 and October 14, 1999 amendments
relating to the design, production and delivery of these software products are
recorded under the percentage of completion method as discussed in Note 2 to our
financial statements included in this prospectus. In 1999, we recorded revenues
of $2.014 million under this amended agreement. The agreement was estimated to
be 77% complete at December 31, 1999 and 91% complete at March 31, 2000. No
amounts have been deferred in connection with this arrangement at December 31,
1999. Unbilled revenues included in accounts receivable amounted to $149,547 at
December 31, 1999. As of March 31, 2000, this contract represented our sole
source of revenues from software licensing. We have entered into a replacement
agreement with Sourcenext, which is discussed in the first quarter comparison
below.
We target our Internet advertising expenditures to cost-effectively
generate user traffic to our websites. We intend to continue purchasing
advertising only when we expect it to have a positive margin. We bill our
Internet-based customers on a performance basis, based on agreed upon criteria,
such as downloads, click-throughs, registrations or similar user actions. 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. We may acquire or make
investments in complementary software or Internet-related businesses, including
equity investments in companies that might use a portion of the proceeds from
our investment to retain our Internet advertising and marketing services to
promote their products and services.
During 1999, we commenced Internet revenue sharing programs with seven
other companies, under which we are to receive a portion of such other
companies' sales originating from our websites ranging from 3% to 50%. Our
revenues derived from revenue sharing programs during 1999 have been
inconsequential.
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<PAGE>
SOFTWARE DEVELOPMENT AND PRODUCT EXPENSES
Software development and product costs increased $133,859 or 15% from
$919,895 during 1998 to $1,053,754 during 1999, due to our expansion during
1999. We increased our head count from 18 employees on January 1, 1998 to 20
employees on December 31, 1999.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased by $2,025,793 or 548% from
$369,336 during 1998 to $2,395,129 during 1999. Internet advertising expenses
were incurred in 1999 to expand and promote our software products and increase
traffic to our websites. Total advertising expenses incurred in 1998 totaled
$28,542 for retail software sales. Total Internet advertising expenses incurred
in 1998 were $367,796, and increased by $1,545,399 or 420% to $1,913,195 in
1999. These expenses were incurred in order to support increased Internet
advertising revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $232,636 or 57% from $409,071
during 1998 to $641,707 in 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.
Between July 1, 1999 and December 31, 1999, we granted stock options to
employees and non-employees which currently have an exercise price of $5.31 per
share in the case of options granted to non-employees and $6.25 per share in the
case of options granted to employees. The board of directors has determined that
the fair value of our common stock with respect to 1999 option grants was equal
to our offering price of $6.25 per share. The stock options granted to employees
are intended to be incentive stock options qualified under Section 422 of the
Internal Revenue Code. These options vest over a period of ten years from the
date of grant and have an exercise price of $6.25, which is the fair value of
our common stock at the time of grant. The stock options granted to directors
and to all other non-employees are non-qualified stock options which vest over a
period of five years from the date of grant and have an exercise price of no
less than 85% of the $6.25 fair value at the time of grant, or $5.31. In no case
may we grant any stock options that have an exercise price of less than 85% of
fair value.
We record compensation expense for options granted to employees if the
exercise price is less than the fair value of the underlying common stock.
Because options issued to employees were granted at the estimated fair value, no
compensation relating to these options was charged to operations in 1999.
Options issued to non-employees are valued based on the "Black Scholes"
valuation model that considers volatility, among other factors. Accordingly, we
recorded approximately $128,750 of compensation expense during 1999. We will
record future compensation expense of approximately $1,157,000 related to these
stock options evenly over the remaining average vesting period as of December
31, 1999 of approximately 4.75 years.
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<PAGE>
OTHER INCOME AND EXPENSES
Other income and expenses include settlement gains from disputes with a
former customer. We also received interest income on our interest bearing cash
accounts.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000.
REVENUES
Our revenues increased $1,365,058 or 241% from $566,060 during the three
months ended March 31, 1999 to $1,931,118 during the comparable period in 2000,
primarily due to the increase of $1,406,688 or 671% in our Internet advertising
and marketing revenues to $1,616,440 from $209,752 in the comparable period in
1999. This increase more than offset a decline in our revenues that were
recognized from software licensing of $41,630 or 12% from $356,308 during the
three months ended March 31, 1999 to $314,678 during the comparable period in
2000. Software license revenues were derived from a license agreement with
Pointe Control in Asia during the three-month periods ended March 31, 1999 and
March 31, 2000 using the percentage of completion method. We had no domestic
revenues from software licensing during the three- month periods ended March 31,
1999 or March 31, 2000.
As of May 26, 2000, we entered into a distribution agreement with
Sourcenext Corporation that replaced our distribution agreement with Pointe
Control. Sourcenext is a Japanese company that was the beneficiary of our
previous distribution agreement with Pointe Control. The agreement with
Sourcenext provides for the production and license of 24 specified new software
products and 24 consecutive monthly payments of $75,000 beginning in June 2000.
Additionally, we will receive $75,000 for each of the 24 products that we
deliver under the terms of this agreement during this 24-month period. Revenues
under this contract will be accounted for under the percentage of completion
method.
Our revenues derived from Internet revenue sharing programs during the
three months ended March 31, 2000 have been inconsequential.
SOFTWARE DEVELOPMENT AND PRODUCT EXPENSES
Software development and product costs increased $130,484 or 65% from
$200,156 during the three months ended March 31, 1999 to $330,640 in the
comparable period in 2000, due to our expansion during the three-month period
ended March 31, 2000, including an increase in employees as compared to this
prior year period. We expect our web development activities to continue to
increase significantly as we increase our emphasis on generating Internet
advertising and marketing revenues.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased by $1,011,188 or 395% from
$256,233 during the three months ended March 31, 1999 to $1,267,421 during the
comparable period in 2000.
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<PAGE>
Internet advertising expenses incurred in the 1999 period were $214,801,
and increased by $874,660 or 407% to $1,089,461 in the 2000 period, primarily in
order to generate traffic to our websites to support increased Internet
advertising and marketing revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $126,102 or 117% from
$107,665 during the three months ended March 31, 1999 to $233,767 in the
comparable period of 2000, 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.
FUTURE PROFITABILITY
As we continue to increase our emphasis on Internet advertising and
marketing revenue and focus on significantly increasing the flow of traffic to
our websites, 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.
LIQUIDITY AND CAPITAL RESOURCES.
During the periods reported, we generated sufficient cash flows from
operations to support our business. During 1998 and 1999, we generated cash
flows from operations of $103,184 and $926,043, respectively. Increases in
accounts receivable required the use of additional operating cash flows in 1998
and 1999.
At March 31, 2000, we had cash and cash equivalents of $337,300 and working
capital of $489,374. We intend to continue to utilize our resources in 2000 for
software development, developing, marketing and advertising our Internet
presence, 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 software. However, our working
capital requirements may change depending upon numerous factors, including,
among others, 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 twelve 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 be available to us.
We may be required to raise additional funds after this offering,
especially if we only sell the minimum number of shares and, as a result, do not
have the proceeds necessary to implement our business plans to the extent we
most desire. There can be no assurance that additional
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<PAGE>
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.
Under our distribution agreement with Sourcenext, in addition to 24
consecutive monthly payments of $75,000, we will receive during such 24-month
period $75,000 for each of the 24 products that we deliver under the terms of
the agreement. Based on our historical success in producing new software
products under the Pointe Control agreement, we believe that it is likely that
we will continue to produce and deliver the products as required by the
Sourcenext agreement. We cannot make any assurances that we will be successful,
however, and in the event we do not produce new products in a timely manner, we
will not receive, or continue to receive, the conditional $75,000 payments per
product. Failure to receive a significant amount of the payments from Sourcenext
would have a materially negative effect on our financial position, operations
and cash flows.
In 1999, MediaRing, Inc., an Internet advertising and marketing client,
accounted for 10% of our total revenue and 18% of our Internet advertising and
marketing revenue. MediaRing did not account for any of our revenue in the first
three months of 2000 because it began to be more economically beneficial for us
to enter into agreements with other advertisers instead. During the first three
months of 2000, another company, CoolSavings, accounted for 25% of our total
revenue and 30% of our Internet advertising revenue. If one or more of our large
customers ceases operations or otherwise abruptly ceases or reduce their
business with us, our results of operations, cash flows and liquidity could be
adversely affected.
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have month-to month agreements with us. For the year
ended December 31, 1999, four advertising vendors, BURST! Media, Adauction.com,
Adsmart and Flycast, accounted for 29%, 19%, 19% and 12%, respectively, of our
total Internet media purchases. For the three months ended March 31, 2000, three
advertising vendors, Adsmart, Adauction.com and BURST! Media accounted for 35%,
21% and 15%, respectively, of our total Internet media purchases. Additionally,
many of these suppliers have reported significant financial losses and may not
continue operations in the long term. Although we have established redundant
relationships with our suppliers in order to mitigate our exposure, the
unavailability of adequate advertising space through the termination of our
agreements with suppliers or the significant increase in the cost of supplies
would likely hinder our ability to attract users to our websites and as a
result, would have an adverse effect on our results of operations, cash flow and
liquidity.
Our agreement with Pointe Control provided for bonus payments of $400,000
for several of the our software products if any of such products' sales reached
"top product" status. "Top product" status was based on sales totals as
determined by a weekly Japanese online industry report set forth in the
agreement. Under the Pointe Control agreement, a product received two points for
being in the top ten on the industry report's best sellers list, and one point
for being ranked eleven through twenty on this list. Once a product had
accumulated 18 points, it had
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<PAGE>
achieved "top product" status. The maximum possible bonus under the Pointe
Control agreement would have been $2,000,000. No bonus amounts have been or will
be recognized as revenues under the Pointe Control agreement. Under the
Sourcenext agreement, which includes a definition of "top product" that is
substantially similar to the definition in the Pointe Control agreement, we also
can receive a total of $2,000,000 in bonuses.
Although we believe that there is a good possibility that we will receive
"top product" status for at least one of our products under the Sourcenext
agreement, there is no assurance that this will occur, and we do not expect
bonuses under the Sourcenext agreement to be a significant component of future
earnings.
FOREIGN CURRENCY TRANSACTIONS
Our revenues from Asia are denominated in U.S. dollars. Accordingly, we do
not incur transaction gains and losses related to foreign currencies.
INCOME TAXES AND S-CORPORATION DISTRIBUTION
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
reported 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 years ended December 31,
1998 and 1999 included in the financial statements included in this prospectus
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 immediately prior to
the first closing of this offering, we will make a distribution to our existing
stockholders equal to the amount that our total stockholders' equity exceeds
$578,750 on the date of such distribution.
CONSULTING AGREEMENT
As of July 1999, we entered into a consulting agreement with Millennium
Capital Quest relating to services consisting of advise on various alternatives
in raising capital, public relations and marketing, and advice regarding
corporate structuring and management structuring. We paid a total of $37,500 to
Millennium and granted to Millenium an option to purchase 34,300 shares of our
common stock that currently has an exercise price of $5.31 per share. The
consulting agreement was terminated in May 2000, and under the terms of the
termination agreement, Millennium will receive no additional payments,
remuneration or reimbursements. Neither Millennium nor any affiliate of
Millennium is participating in this offering.
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SEASONALITY
The computer software and Internet advertising and marketing 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. We
expect that our results of operations from Internet advertising and marketing
operations will be an inverse function of these fluctuations, because we
increase our advertising expenditures when the advertising rates, in general,
are lower. 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.
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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 programs are intended to provide flexible, 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.
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 the parent
company of Acceleration Software. Prior to the first closing under this
offering, we plan to merge Acceleration Software International Corporation into
eAcceleration and remain a Delaware corporation.
We initially provided crisis intervention computer software programming
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, 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. As the Internet revolution developed, we developed
Webcelerator, a software product which accelerates the performance of web
browsers. We have also developed several additional software products.
In 1996, we also began developing our Internet business model, under which
we provide our software products, as well as 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 our Internet
advertising and marketing 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.
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Since February 1999, our Internet business model has generated profitable
operations while we experienced a significant increase in unique website
visitors. The number of "unique website visitors" in a month is a measure of how
many individuals visit a particular website within the month. If an individual
visits the website more than once during a month, he or she only counts as one
unique visitor during that month. The number of our total domestic and
international unique website visitors and our ranking among all web properties
on the Internet between February 1999 and August 1999, according to PC Data
Online, were as follows:
<TABLE>
<CAPTION>
Month Number of unique visitors Ranking
----- ------------------------- -------
<S> <C> <C>
February 828,000 286
March 1,084,000 210
April 1,970,000 98
May 1,947,000 89
June 2,313,000 63
July 3,416,000 42
August 4,181,000 54
</TABLE>
Comparable information for the months following August 1999 is not available.
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
Internet continues to expand rapidly.
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.
The usage of the Internet 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
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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 interactive content
and services, which could materially and adversely affect the acceptance of our
services, which would, in turn, materially and adversely affect our business,
financial condition and results of operations.
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.
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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.
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 the estimate of the total revenues in the global online
direct marketing and advertising market of $3.4 billion for 1999, according to
the eAdvertising Report, and our Internet advertising and marketing revenues of
approximately $2.0 million over the six-month period ended December 31, 1999, we
believe that we have achieved a market share of over one tenth of one percent of
aggregate
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worldwide Internet advertising revenues. Based on industry reports such as
the eAdvertising Report, we believe that the overall total amount of money spent
on Internet advertising will increase in the future.
We intend to use a portion of the proceeds of this offering to establish an
aggressive advertising and marketing program, which we expect to result in an
increase in our Internet advertising market share. Based on our current success
with limited resources, and the anticipated implementation of our intended
marketing plan with significantly increased resources, we hope that our market
share will increase to up to one percent over the next several years; however,
no assurance can be given in this regard and if we fail to successfully
implement our business strategy, our business will suffer.
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
We intend to achieve our objective through the following key strategies,
which we expect to implement over the next three to twelve months:
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 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.
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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.
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 $900,000 and
$1,017,000 on research and development during 1998 and 1999, respectively.
ACQUISITIONS
We intend to explore possible acquisitions of and investments in
complimentary software or Internet-related businesses, including equity
investments in companies that may, in turn, use a portion of the proceeds from
our investment to retain our Internet advertising and marketing services to
promote their products and services. We expect that any such acquisition or
investment would be funded from our working capital. We have no specific plans,
arrangements, understandings or commitments with respect to any such acquisition
or investment at the present time, and it is uncertain as to when or if any such
acquisition or investment will be made. We are not currently involved in any
discussions or negotiations relating to any material acquisition or investment.
Any such future acquisitions would be accompanied by the risk of
ineffectively assimilating the personnel of the acquired companies with our
personnel and the potential impairment of relationships with our employees and
customers as a result of any integration of new management personnel. Any future
acquisitions could also be accompanied by problems with ineffectively
assimilating the operations of the acquired company with our operations, due in
part to the small size and relative inexperience of our management team in such
matters. As a result, future acquisitions could disrupt our ongoing business and
cause our management team to divert its efforts and our resources from our
existing businesses, sites and technologies. Our management team may also be
unable to maximize our financial and strategic position through the successful
incorporation of the acquired technology into our products and services while
maintaining uniform standards, controls, procedures and policies. Finally, if we
decide to issue shares of common stock or securities convertible into such
shares in connection with an investment or acquisition, this would dilute the
percentage ownership of our common stock held by our stockholders.
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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 five employees located at our principal office. 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
marketing solution, in which our clients are only charged when
pre-defined actions specified by our clients are generated, such as
downloads, click-throughs, registrations or similar user actions. 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 provide 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, download management assistance, computer games and
allows the creation and playback of MP3 files, which are audio
"recordings" with high quality sound, small, compressed files, at
low or no price to users.
- 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.
PRODUCTS AND SERVICES
SOFTWARE PRODUCTS
We currently publish the following software products, among others:
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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 increases
performance speed. It operates on the Windows 95 and Windows 98 operating
systems, and we expect that it will 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 third party software, including online games and
entertainment software, as homepageware. This free homepageware generates
traffic to our websites, enabling us to generate Internet advertising revenue
from our websites. Several of our products are licensed to Sourcenext
Corporation, our Asian distributor. We ceased licensing these products
domestically in 1998, and we currently do not plan to license these products
domestically or in any other English-speaking country where our software is
available for free, other than directly to end users.
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 software
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products. Such announcements of currently planned or other new products may
cause a number of customers to defer purchasing our existing products or deter
them from downloading our free s oftware from our websites.
We expect to introduce new and expanded products and services in order to
generate additional revenues, attract more businesses, advertisers, subscribers
and 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, that any
such efforts would be successful or that the mix of such products or services
will be profitable. Furthermore, any new service that we launch that is not
favorably received by consumers could damage our reputation. 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.
Software products as complex as those that we license or offer for free on
our websites 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 or after we have allowed users to download them from our
websites. As a result of such defective products and any delays involved in
correcting the defects, we could experience a loss of or delay in market
acceptance.
WEBSITES
We currently 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
over four million total domestic and international unique users visited our
homepageware.com, webcelerator.com and mirror websites in August 1999, according
to data provided by PC Data Online, a web measuring service. Comparable
information is not yet available for months following August 1999.
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 period
for 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 under 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 technology used in connection with this website.
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We sell performance-based advertising on our homepageware.com,
webcelerator.com and mirror websites, which sales 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 400,000 subscribers. One of these
newsletter is the IPO GroundFloor Newsletter, a newsletter that we own and
publish that focuses on providing information to subscribers relating to initial
public offerings in which individual retail investors may be able to purchase
shares. We attempt to generate subscribers for these newsletters, as well as
third party newsletters, by promoting them on our websites. We do not currently
derive any material revenues from our newsletters, including the IPO GroundFloor
Newsletter.
POTENTIAL OWNERSHIP OF A BROKER-DEALER
Since the initial distribution of this prospectus, we have received
numerous inquiries about this offering and methods of conducting direct
participation public offerings. We are preliminarily considering forming a
broker-dealer subsidiary, following the completion of this offering, that would
assist other companies in raising capital through direct participation
offerings. We could use this broker-dealer as a way to make equity or other
investments in companies whose businesses are complementary to ours, or who
would, in turn, use our Internet marketing services. This could be a way to
supplement our revenues. We believe this would be a logical extension of our
current business strategy because we could use our Internet advertising and
marketing expertise to promote our broker- dealer clients' offerings. We have
not entered into any agreements relating to any such enterprise nor do we have
current plans to do so, and we do not know if we will ever do so in the future.
In the event that we form a broker-dealer subsidiary, it may negatively
affect our business and financial condition, as a whole. We would become subject
to significant additional regulations by the SEC, the NASD and other regulatory
bodies and will be responsible for significantly increased filing and reporting
obligations on both the federal and state levels as well as significant capital
maintenance requirements that could effect our operations. We also would become
subject to the increased possibility of liability, particularly if this proposed
subsidiary acts as an underwriter in public offerings. Additionally, if we enter
into this new business, substantial amounts of management and financial
resources would likely be diverted from the rest of our historical business
which could also negatively affect our business and financial condition as a
whole.
CUSTOMERS
Our advertising and marketing clients pay us commissions each time a member
takes an action defined by our clients in response to an online advertising or
promotion. We have approximately 75 current Internet advertising and marketing
clients. Our five largest Internet advertising and marketing clients accounted
for 34% of our Internet advertising and marketing revenues in 1999 and 62% in
the
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first quarter of 2000. In 1998, two software customers, Pointe Control, a
Japanese distributor, and Syncronys Softcorp, a domestic distributor, accounted
for 85% and 14%, respectively, of our revenue. In 1999, Pointe Control accounted
for 42% of our total revenue and we did no business with Syncronys Softcorp. In
the first quarter of 2000, Pointe Control accounted for 16% of our total
revenue. As of May 26, 2000, we replaced our agreement with Pointe Control with
an agreement with the beneficiary of the Pointe Control agreement, Sourcenext.
Our agreement with Syncronys is no longer in effect.
In 1999, MediaRing, Inc., an Internet advertising and marketing client,
accounted for 10% of our total revenue and 18% of our Internet advertising and
marketing revenue. MediaRing did not account for any of our revenue in the first
three months of 2000 because it began to be more economically beneficial for us
to enter into agreements with other advertisers instead. During the first three
months of 2000, another company, CoolSavings, accounted for 25% of our total
revenue and 30% of our Internet advertising revenue. If one or more of our other
large customers ceases operations or otherwise abruptly ceases or reduces their
business with us, our results of operations, cash flows and financial condition
could be adversely affected.
All of our software products that are distributed in Japan must be
"localized", that is, modified to meet the needs of non-English speaking users,
including all of the changes necessary to meet functionality requirements while
becoming more culturally acceptable to the users. As we develop new software or
possibly distribute software to additional regions in the future, the costs
associated with localization could increase. Additionally, we cannot guarantee
that the localization of our software, which is currently effectuated for
Japanese users by us and Sourcenext, will be acceptable to such users.
FOREIGN OPERATIONS
As of March 31, 2000, substantially all of our foreign revenues were
derived from our agreement with Pointe Control, relating to the distribution by
Pointe Control of some of our software products in Japan. Under this
distribution agreement, which was designed to be a flexible agreement that
allows the parties to adapt to the evolving software market, Pointe Control was
the distributor of the software products listed in the most recent amendment to
the agreement, developed by us and localized into Japanese versions by us and
Sourcenext. Under the terms of the agreement, so long as Pointe Control complied
with minimum performance requirements set forth in the agreement, it retained
exclusive rights to distribute localized versions of the software during the
term in Japan. As of May 26, 2000, we replaced our agreement with Pointe Control
with a substantially similar agreement with Sourcenext.
Our revenues from non-U.S. Internet advertising and marketing clients have
historically been a very small percentage of our Internet advertising and
marketing revenues. These revenues have been growing in recent months. We
typically demand payment in advance from non-U.S. Internet advertising and
marketing clients.
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SUPPLIERS
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have month-to-month agreements with us. For the year
ended December 31, 1999, four advertising vendors, BURST! Media, Adauction.com,
Adsmart and Flycast, accounted for 29%, 19%, 19% and 12%, respectively, of our
total Internet media purchases. For the three months ended March 31, 2000, three
advertising vendors, Adsmart, Adauction.com and BURST! Media accounted for 35%,
21% and 15%, respectively, of our total Internet media purchases. Additionally,
many of these suppliers have reported significant financial losses and may not
continue operations in the long term. Although we have established redundant
relationships with our suppliers in order to mitigate our exposure, 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 AND RELIABILITY
Our technology is designed to support up to approximately 50 million
visitors per month. To date we have demonstrated that our architecture is
capable of rapid expansion as our total amount of domestic and international
visitors-per-month have increased from approximately 2.5 million in February
1999 to over four million in April 2000 based on information supplied by PC Data
Online. Although we believe our systems can currently accommodate approximately
50 million visitors monthly, our websites could encounter a variety of systems
problems, especially if the number of our users-per-month continues to expand
significantly, including failure of one or more of our three Internet service
providers, hardware failures or 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.
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 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.
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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
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.
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 of our marketing clients 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 privacy concerns could frustrate these
efforts. Also, our relationships with consumers may be adversely affected if the
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.
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 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
temporarily lose the ability to effectively maintain our web sites and services
and as a result lose Internet advertising and marketing clients and visitors to
our websites.
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.
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COMPETITION
We believe that competition in our website and software businesses are
based on factors that include the following:
- brand recognition;
- ease and speed of use; and
- quality and reliability.
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. 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. Thus, advertising on these websites would become less
attractive to Internet advertisers and marketers, and our ability to generate
revenue from Internet advertising and marketing clients would be adversely
affected.
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 competition from online competitors to
increase significantly because
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there are no substantial barriers to entry in our industry. In addition,
our competitors may develop new types of products and services that are more
attractive to consumers and Internet advertisers and marketers than the products
or services we offer. Increased competition could result in price reductions for
online advertising space and marketing services, reduced gross margins and loss
of our market share. We also compete with traditional media such as television,
radio and print for a share of marketers' total marketing budgets.
In addition to the above, we believe that the principal competitive factors
in our website markets are:
- quality and diversity of offers;
- the volume of online visitors;
- duration and frequency of visits;
- the demographic profiles of visitors; and
- performance of advertisements.
SOFTWARE COMPETITION
Competition in the computer software industry is fierce. In addition to the
above, we believe that the principal competitive factors in the software
industry generally include:
- merchandising;
- product features;
- 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 website and software competitors are larger and have greater
financial, technical and marketing resources than us, and no assurance can be
given that we will be able to successfully compete against these competitors.
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
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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.
LITIGATION
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 and in our newsletters. These
types of 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.
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. We believe that we are
fully compliant with all state and federal privacy laws.
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. We believe
that we are fully compliant will all FTC privacy laws.
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
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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 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. We are
currently not aware of any violations by us of any laws or regulations of any
states or other countries or of any material failure to qualify in any states or
countries.
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 a number of 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 eleven United States patents and one foreign patent on
our software products and have eight patent applications pending on our software
products. We have registered several 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
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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.
There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate to prevent third parties from infringing or
misappropriating our patents, copyrights, trademarks, trade dress and similar
proprietary rights without incurring significant costs.
Additionally, we cannot assure you that the steps we have taken to protect
our patents, copyrights, service marks, trademarks, trade dress, trade secrets
and similar intellectual property have been sufficient for us to successfully
defend against any infringement claims, including patent infringement claims, by
any third party. The loss of our ability to use any such intellectual property
right could have a materially adverse effect us. Additionally, any such defense,
whether successful or not, may cause us to incur significant expenses.
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. 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.
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.
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 we expect would
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, although we do not currently intend to do so. 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.
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EMPLOYEES
As of June 30, 2000, we had a total of 55 employees, two of which work for
us part time. Six employees work in sales and marketing, one of which works part
time, 39 in technology and development, and ten in operations and
administration, one of which works part time. 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 $1,874 per
month. The lease for this facility expires in February, 2004. In December 1999,
we entered into an additional lease agreement for an approximately 10,000 square
foot facility in Poulsbo with a four year term that began in February 2000, to
meet our expansion needs. The lease requires monthly payments of $7,643 for
months one through four and $8,492 for months five through twelve. All remaining
payments are to be increased $.30 per square foot. We have the option to
terminate the lease at the end of the second year.
We plan to expand our facilities further in 2001 to accommodate our
anticipated growth. In the event that we sell exactly or close to the maximum
number of shares in this offering, we plan to either acquire property in Kitsap
County, Washington or elsewhere in the Puget Sound area on which we would have a
state-of-the-art facility built for us that would be large enough to house our
entire business operations for the next several years and would accommodate
expansion for the foreseeable future through the subsequent building of
additional facilities on such property. Alternatively, we would expect to lease
up to 50,000 square feet of space in the Puget Sound area that could house our
operations for the next several years. If only the minimum number of shares are
sold in the offering, we expect to seek to lease a considerably smaller
facility, or perhaps an additional facility which together with our current
facilities could house our business operations for the next several years.
Poulsbo, Washington, where our facilities are presently located, is a rural
area outside of Seattle and Tacoma, Washington. In the past we have experienced
temporary outages in our telephone service and electric power. While such
outages have never materially 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following persons are our current executive officers and directors and
director nominees:
Name Age Position
---- --- --------
Clint Ballard 37 president, chief executive officer
and director
Diana T. Ballard 42 chairman of the board, secretary and
treasurer
E. Edward Ahrens 52 chief financial officer
Edward P. Swain, Jr. 64 director nominee
Richard L. Sinnott 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 in
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 was well as in other executive
capacities including president since inception. Ms. Ballard is the wife of Clint
Ballard.
E. EDWARD AHRENS was elected in February 2000 as chief financial officer of
eAcceleration. Mr. Ahrens has been self employed as a certified public
accountant from October 1993 through the present, and in this capacity has been
our regular accountant, providing accounting and controller functions to us
since 1995. Mr. Ahrens continues to maintain his accounting practice on a part-
time basis, while devoting a majority of his time to his position as our chief
financial officer. Mr. Ahrens received a bachelor degree in business
administration -- banking and finance, from North Texas University in 1971.
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, chief
executive officer 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
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and as director of Interactive Financial Services Group, Inc. since
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.
RICHARD L. SINNOTT was nominated in June 2000 to serve as director of
eAcceleration. Mr. Sinnott has served as a legislative consultant in the Seattle
office of Patton Boggs LLP from March 1995 through the present. From 1975 to
March 1995, Mr. Sinnott was a principal in his own government relations
consulting firm, Richard L. Sinnott & Co., based in Washington, D.C. Mr. Sinnott
served as the deputy assistant secretary of policy and deputy assistant
secretary of economic development in the U.S. Department of Commerce between
1969 and 1975. Mr. Sinnott received a B.A. from the University of Notre Dame in
1958.
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 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 Internet-related businesses is intense, and in the
past we have experienced difficulty in hiring qualified personnel. We are 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.
Our board of directors is elected annually by our stockholders. We plan to
elect Edward P. Swain, Jr. and Richard L. Sinnott to serve as non-employee
directors prior to our registration statement relating to this offering becoming
effective. To date, directors have received 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. Following the
first closing of this offering, we will pay $5,250 per fiscal quarter to each of
our outside 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 Edward P. Swain, Jr., and Richard L. Sinnott will
serve as the audit committee immediately upon their 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 Edward P. Swain, Jr., and Richard L. Sinnott will
serve as the compensation committee immediately upon their 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.
We currently have no nominating committee.
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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 Bonus compensation
------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Clint Ballard 1999 $104,000 $194,929 -
President and chief 1998 104,000 198,325 -
executive officer 1997 104,000 * 175,000 -
Diana T. Ballard 1999 $104,000 ** $194,929 -
Chairman of the board, 1998 104,000 ** 198,325 -
secretary and treasurer 1997 104,000 * 175,000 -
------------
<FN>
* In 1997, although we paid $208,000 to Mr. Ballard and we paid Ms. Ballard no
salary, the estimated value of each of their services during that year is deemed
to be $104,000. As a result, the Ballards are each deemed to have been paid
salaries of $104,000 in 1997.
** In 1998 and 1999, we paid Ms. Ballard no salary. The estimated annual value
of her services is $104,000. Accordingly, Ms. Ballard is deemed to have earned
$104,000 in 1998 and 1999, and we accounted for this amount as contributed
capital with a corresponding change to our operations in both years.
</FN>
</TABLE>
Bonuses listed on the table represent S-corporation distributions. The
value of all perquisites provided to either of Mr. or Ms. Ballard did not exceed
the lesser of $50,000 or 10% of his or her salary and bonus.
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 and a bonus of 2.5% of our income before
taxes, depreciation, amortization and extraordinary items with respect to fiscal
years during the term of the agreement. 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, depreciation, amortization and extraordinary items with respect to
fiscal years during the term of the agreement.
Each of these 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 engaging in competition with us for
the term of the employment agreement and for one year after the term and
provisions protecting our proprietary rights and information. Each
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agreement also provides for the payment to the employee of a lump sum equal
to three times the average of the employee's annual compensation for the prior
five years, less $1.00, upon his or her termination in the event of a "change in
control" of eAcceleration of the employment agreement, which is defined in the
agreements to mean any of the following:
- a change in control as defined in Rule 12b-2 under the Securities
Exchange Act of 1934;
- 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
- the members of our 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.
SEVERANCE, SETTLEMENT AND GENERAL RELEASE AGREEMENT
In February 2000, Shane H. Traveller resigned as our chief financial
officer, at which time we elected E. Edward Ahrens to that office. Upon his
resignation, Mr. Traveller entered into a severance, settlement and general
release agreement with us. Under this agreement, Mr. Traveller agreed to provide
consulting services to us relating to marketing, financial, accounting and
administration matters and other activities in which he was involved in while he
was our chief financial officer. Under the agreement, Mr. Traveller received his
remaining salary for February 2000 plus moving expenses, received $26,000 in
June 2000 and will receive $22,300 upon our common stock becoming publicly
traded. Additionally, of his options to purchase 150,000 shares of our common
stock originally granted to him in October 1999, he retained options to purchase
10,000 shares which currently have an exercise price of $5.31 per share which
will become fully vested and exercisable upon our common stock becoming publicly
traded. All other options granted to Mr. Traveller have been canceled.
1999 STOCK OPTION PLAN
We have adopted the 1999 stock option 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 stoc
kholders. 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, "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 of
these types of shares. Incentive stock options may be granted at an
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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 under the award will be
available for issuance under the grant of new awards.
As of June 27, 2000, we have options to purchase an aggregate of 629,000
shares of common stock outstanding under the 1999 plan, including options to
purchase 50,000 shares of common stock granted to Edward P. Swain, Jr., which
currently has an exercise prices of $5.31 per share which becomes exercisable in
equal annual installments over five years. Michael J. Clementz, our former
consultant and director-nominee, was granted an option to purchase 50,000
shares, but this option was terminated upon the cancellation of his consulting
arrangement with us in May 2000. We granted E. Edward Ahrens, our chief
financial officer, options to purchase 25,000 shares of common stock in July
1999, while he was providing accounting and controllership functions to us, more
than six months prior to his election as our chief financial officer, These
options currently have an exercise price of $5.31 per share in equal
installments over five years. 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 monetary damages regardless of
whether or not directors have breached their fiduciary duty. The certificate of
incorporation also provides 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 $5,000,000, which will include
reimbursement for costs and fees. We have entered into indemnification
agreements with each of our executive officers and directors. The
indemnification agreements provide for reimbursement for all direct and indirect
costs of any type or nature whatsoever including attorneys' fees and related
disbursements, that are 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the above provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of June 27, 2000, and as adjusted to reflect the sale of the shares of common
stock offered by this prospectus, of:
- each person known by us to beneficially own 5% or more of the shares
of outstanding common stock;
- each of our executive officers, directors and director nominees; and
- all of our executive officers, directors and director nominees 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 Percentage ownership
Name and address of common stock of common stock of common stock
beneficial owner beneficially owned before offering after offering
-------------------- -------------------- --------------------- --------------------
Minimum Maximum
------- -------
<S> <C> <C> <C> <C>
Clint Ballard 34,300,000 100% 98.9% 92.0%
c/o eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
Diana T. Ballard 34,300,000 100% 98.9% 92.0%
c/o eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
E. Edward Ahrens 5,000 * * *
c/o eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
Edward P. Swain, Jr. 0 * * *
c/o eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
Richard L. Sinnott 0 * * *
c/o eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
All officers, directors 34,300,000 100% 98.9% 92.0%
and director nominees
as a group (5 persons)
-------------------
<FN>
* Less than one percent
</FN>
</TABLE>
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The shares beneficially owned by Clint Ballard include 17,150,000 shares
owned by his wife, Diana T. Ballard, and the shares beneficially owned by Diana
T. Ballard include 17,150,000 shares owned by Clint Ballard.
The shares beneficially owned by E. Edward Ahrens represent the vested
portion of the option that we granted to Mr. Ahrens, which may be exercisable
within 60 days.
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RELATED PARTY TRANSACTIONS
In November 1999, we entered into employment agreements with Clint Ballard,
our president and chief executive officer and Diana T. Ballard, our chairman of
the board. The compensation committee of the board of directors, which consists
of Clint and Diana Ballard, has determined that the compensation payable
thereunder reflects the fair value of their services.
In September 1999, we granted options to purchase 50,000 shares of common
stock that currently have an exercise price of $5.31 per share in equal
installments over a five-year period to a consultant and director nominee,
Edward P. Swain, Jr., and a former consultant and director nominee, Michael J.
Clementz. In May 2000, upon the termination of his consulting arrangement with
us, the options granted to Mr. Clementz were terminated.
In October 1999, we granted options to Shane H. Traveller, our former chief
financial officer, to purchase 150,000 shares of common stock which as of
January 2000 had an exercise price of $4.50 per share. In February 2000, Shane
H. Traveller resigned as our chief financial officer. Upon his resignation, Mr.
Traveller entered into a severance, settlement and general release agreement
with us. Under this agreement, Mr. Traveller agreed to provide consulting
services to us relating to marketing, financial, accounting and administration
matters and other activities in which he was involved while he was our chief
financial officer.
Mr. Traveller received his remaining salary for February 2000 plus moving
expenses, received $26,000 in June 2000 and will receive $22,300 upon our common
stock becoming publicly traded. Additionally, of his options to purchase 150,000
shares of our common stock originally granted to him in October 1999, he
retained options to purchase 10,000 shares that currently have an exercise price
of $5.31 per share which will become fully vested and exercisable upon our
common stock becoming publicly traded. All other options granted to Mr.
Traveller have been canceled.
In 1997, we repurchased all shares of the our common stock issued for
$100,000 to a former director, who is the father of Clint Ballard, for a
repurchase price of $115,000.
All transactions between us and any or our officers, directors or five
percent stockholders will be on terms no less favorable to us than would be
available from unaffiliated third parties.
We lacked sufficient disinterested, independent directors to approve past
material transactions at the time the transactions were initiated and such
transactions have not been ratified. Upon our election of independent directors
prior to effectiveness of our registration statement, all future material
related-party transactions and loans, and any forgiveness of loans, will be
approved by a majority of such independent directors who do not have an interest
in the transaction and who have access, at our expense, to our or independent
legal counsel.
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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 following:
- the nature and scope of our operations;
- our current financial condition and financial requirements;
- estimates of our business potential and prospects;
- multiples of our trailing and projected revenues and earnings;
- multiples of our competitors' trailing are projected revenues and
earnings;
- the perceived market demand for our products;
- the market capitalization, revenues and profits of comparable
companies with top 150 Internet websites, including particularly
CyberGold, Inc. and FreeShop.com;
- the economics of the information technology, Internet and software
industries; and
- the general condition of the equities market.
LIMITED STATE REGISTRATION
We will qualify or register the sale 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 any applicable state securities laws, the shares
will be offered or sold through registered or licensed brokers or dealers in any
states where required.
OHIO RESIDENTS. We will only accept a subscription from an investor
residing in the State of Ohio if such investor represents to us in the
subscription agreement that such investor meets at least one of the following
criteria:
- he or she is a natural person whose individual income was at least
$65,000 for the immediately preceding fiscal year, and he or she has a
reasonable expectation of reaching such level in the current fiscal year;
- he or she is a natural person whose individual net worth or joint net
worth with his or her spouse is at least $250,000 at the time of the
subscription, excluding the value of such person's home, cars and
furnishings; or
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- the investor is an "accredited investor" as defined in Regulation D
under the Securities Act of 1933.
TERMS OF SALE OF THE SHARES
We will be selling our shares in a direct participation offering on a
"400,000 share minimum, 3,000,000 share maximum" basis through our officers and
directors, who will be offering our shares and distributing this prospectus
primarily over the Internet. 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 interest bearing escrow account with American Stock Transfer &
Trust Co. If we are unable to sell at least 400,000 shares before the offering
ends, we will return all funds, with interest, to subscribers promptly after the
ending of this offering. We have the right to completely or partially accept or
reject any subscription for shares offered in this offering, for any reason or
for no reason. The offering will remain open until all shares offered in this
offering are sold or nine months after the date of this prospectus, except that
we will have only 180 days to sell at least 400,000 shares. We may decide to
cease selling efforts at any time prior to such date if our board of directors
determines that there is a better use of funds and management time than the
continuation of this offering, including those resulting from:
- a significant change in our business;
- a significant change in the Internet advertising and marketing or
software industries;
- a lack of further investor interest; or
- the existence of a more beneficial financial opportunity.
Within a reasonable time after effectiveness of our registration statement,
we plan to accept all subscriptions as soon as reasonably practicable. We plan
to allocate the shares among the subscribers in our discretion, if necessary. We
will return all unaccepted funds to investors promptly after making such
determination. Among the factors that we plan to consider when making
allocations are:
- whether or not investors consented to receiving copies of our
preliminary prospectus and final prospectus electronically;
- the amount of shares subscribers wish to purchase; and
- place of residence of subscribers.
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We anticipate having one or more closings of this offering, the first of which
cannot be held until we are able to sell at least 400,000 shares. After that, we
could have multiple closings whenever we receive and accept new subscriptions.
INVESTMENT PROCEDURES
We keep the most current version of our prospectus, as filed with the SEC,
posted on one of our websites, located on the Internet at
www.eacceleration.com/ipo, for investors to view or download. We will update the
website to replace the online prospectus with the most recently filed version at
any time that we are required to distribute any prospectus amendments to
investors. We have also posted an indication of interest form on this website,
which allows an investor to indicate if he or she is interested in purchasing
shares in this offering. Indicating interest does not obligate an investor in
any way. If an investor expresses interest, we then ask for additional
information such as
- how many shares he or she would consider purchasing, and
- whether and to what extent the investor is willing to accept
electronic delivery of documents.
If an investor indicates that he or she would like to receive the final
version of this prospectus and any other amendments to this prospectus
electronically, we will e-mail a notice to the investor that informs him or her
that an amendment to this prospectus has been filed with the SEC, which will
include a hyperlink to the website as well as its Internet address.
Additionally, upon request, the investor will receive paper copies of any or all
documents from us. An investor may revoke his or her consent to receipt of
electronic delivery at any time. If an investor revokes consent, we will not
alter our allocation of shares to him or her, and we will deliver paper copies
of such documents to the investor.
Prior to effectiveness of this registration statement, no one may purchase
any shares in this offering. Following effectiveness, in order to purchase
shares in this offering, an investor must complete, date, execute and deliver to
American Stock Transfer & Trust Co., our escrow agent, a paper copy of our
subscription agreement, together with either a check in the amount corresponding
to the cost of the shares to be purchased made payable to "eAcceleration Corp.,
Subscription Escrow Account", or a wire transfer of funds for that amount. An
investor may not necessarily be able to purchase all of or any of the shares
that he or she has requested, depending on availability and our discretion. The
address and wire transfer instructions for our escrow agent is indicated in the
subscription agreement. Following effectiveness, subscription agreements will be
available as follows:
- On the website where we have posted our final prospectus;
- Unless an investor has specifically requested electronic
delivery of the final prospectus and has not revoked such consent, we
will include the subscription
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<PAGE>
agreement together with a paper copy of the final prospectus that we
send to such investor; and
- An investor can request a paper copy of the subscription
agreement and prospectus by calling us, writing to us, or e-mailing
us at the number or address listed in this prospectus or on our
websites.
We have posted the following "pop-up" screen on our website where we have
posted our prospectus that explains our subscription procedure and the use of
our indication of interest form, substantially in the following question and
answer format:
THANK YOU FOR EXPRESSING INTEREST IN OUR OFFERING. THE FOLLOWING QUESTIONS AND
ANSWERS ARE DESIGNED BETTER HELP YOU UNDERSTAND OUR SUBSCRIPTION PROCESS:
WHAT IS THE INDICATION OF INTEREST FORM?
- When you click on the "Indicate Interest" button, you will
be asked to complete an indication of interest form, in which we will
request information relating to you and your interest in purchasing
shares in this offering including:
- your email address, name, phone numbers, address and state of
residence;
- the number of shares you are interested in purchasing; and
- whether you will consent to delivery of our prospectus and other
documents electronically.
WHY SHOULD I COMPLETE THE INDICATION OF INTEREST FORM?
- It helps us approximate the overall level of interest in our offering
so that we can allocate our resources appropriately; and
- It enables you to inform us of your interest in purchasing
shares so that we can ensure that you receive copies of any additional
preliminary prospectuses and our final prospectus, and, once we
are able to start selling our shares, a copy of our
subscription agreement.
HOW CAN I RECEIVE COPIES OF YOUR PROSPECTUS ELECTRONICALLY?
- We post a copy of our most recent prospectus on this website. Through
the indication of interest form, you may consent to receive subsequent
preliminary prospectuses and our final prospectus electronically. If you do
consent, when we are required to distribute a copy of any prospectus to
you, we will send you an e-mail notifying you when there is an updated
prospectus available on our website. The e-mail will contain a hyperlink to
the website containing the prospectus as well as the website address. You
may also consent to receive our additional filings, including proxy
statements, annual reports and quarterly reports,
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<PAGE>
electronically in the same manner. You may also refuse to consent to
receive any or all of our filings electronically, in which case we will
send you paper copies of all documents, if you subscribe an your
subscription is accepted.
CAN I REVOKE MY CONSENT TO RECEIVE ELECTRONIC DELIVERY OF THESE DOCUMENTS?
- Yes. You may notify us that you wish to revoke your consent to
electronic delivery of any or all of our documents at any time by calling
us at (360) 697-9260, writing to us at 1223 NW Finn Hill Road, Poulsbo,
Washington 98370, or e-mailing us at [email protected]. If you revoke
your consent, we will not alter our allocation of shares to you, and we
will deliver paper copies of necessary documents to you.
DOES COMPLETING THE INDICATION OF INTEREST FORM OBLIGATE ME TO BUY SHARES?
- No. You are under no obligation to purchase any shares. However, if you
decide after effectiveness of the registration statement to purchase
shares, you will not become obligated until all of the following have
occurred:
- you have received a copy of our final prospectus in paper form or
electronically;
- you have completed, signed and sent the subscription agreement to the
escrow agent; and
- you sent in a check or wired funds to the escrow agent.
Once those things have occurred, you will be legally bound to buy the
shares for which you have subscribed. We will then decide which subscriptions to
accept and for how many shares, and will promptly notify you. Any payment that
you make for shares which we elect not to sell to you will be promptly refunded
to you. We will keep all amounts paid for accepted subscriptions.
HOW DO I GET A COPY OF THE SUBSCRIPTION AGREEMENT?
- Once the registration statement has been declared effective by the
SEC, our subscription agreement will be made available to you as follows:
- it will be located in a printable format on the website where we have
posted our final prospectus;
- unless you have specifically requested electronic delivery
of the final prospectus and have not revoked you consent, we will
include the subscription agreement together with a paper copy of the
final prospectus that we send to you; or
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<PAGE>
- if you have not previously indicated your interest to us,
you can request a paper copy of the subscription agreement and
prospectus by calling us at (360) 697-9260, writing to us at 1223 NW
Finn Hill Road, Poulsbo, Washington 98370, or e-mailing us at
[email protected].
WHEN WILL I RECEIVE NOTIFICATION OF ACCEPTANCE OF MY SUBSCRIPTION?
- Until we have sold at least 400,000 shares in this offering, we can
not accept any subscriptions. Additionally, we have the right to completely
or partially accept or reject any subscription for shares offered in this
offering, for any reason or for no reason. Among the factors we will
consider may be, but are not limited to, the following:
- whether or not you consented to receiving copies of our preliminary
prospectus and final prospectus electronically;
- the amount of shares you wish to purchase; and
- your place of residence.
USE OF A BROKER-DEALER
We currently have no arrangements with any broker-dealers to offer or sell
any of the shares, and we will not enter into any arrangement with any broker
dealers to sell the minimum number of shares in this offering. Once we have sold
at least the minimum number of shares in this offering, we may utilize 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 NASD and registered, if required, to conduct sales in those
states in which it would sell the shares. We will not pay in excess of 10% as a
sales commission for any sales of the shares, nor will our sales commission
expenses combined with other offering expenses exceed 20% of the gross proceeds
of this offering.
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 our 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 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 be in compliance with all of the following:
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- he or she must not be subject to a statutory disqualification;
- he or she must not be compensated in connection with such
selling participation by payment of commissions or other payments
based either directly or indirectly on such transactions;
- he or she must not be an associated person of a broker-dealer;
- he or she must restrict participation to transactions involving offers
and sale of the shares;
- he or she must 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
- he or she must restrict participation to written communications or
responses to inquiries of potential purchasers.
Our officers and directors will offer shares in the offering without
registering as broker- dealers in compliance with Rule 3a4-1. We anticipate that
Clint Ballard, our president and chief executive officer and Diana T. Ballard,
our chairman of the board will be the only officers or directors selling shares
in reliance on Rule 3a4-1, as further restricted by the laws of the states in
which we have registered our shares for sale.
KEY TERMS OF ESCROW AGREEMENT
Under the terms of our escrow agreement with American Stock Transfer:
- proceeds from the sale of the shares will be deposited into
an interest bearing account until the minimum offering amount is sold;
- in the event the proceeds are insufficient to meet the
400,000 share minimum requirement, proceeds will be returned directly
to investors by the escrow agent with interest and without deduction
for expenses, including escrow agent fees;
- the escrowed proceeds are not subject to claims by our
creditors, affiliates, associates or underwriters until the proceeds
have been released to us under the terms of the escrow agreement; and
- the regulatory administrator of any state in which the
offering is registered has the right to inspect and make copies of the
records of the escrow agent relating to the escrowed funds in the
manner described in the escrow agreement.
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LOCK-IN AGREEMENT
Clint Ballard and Diana T. Ballard hold all 34,300,000 outstanding shares
of our common stock and are not subject to any contractual restriction on the
sale of any such shares, other than a lock-in agreement with us. Under the
lock-in agreement, beginning on the day the offering is completed, they are
prohibited from transferring or pledging 34,191,059 of their shares of our
common stock, although they retain all of their power to vote these shares.
According to its terms, the lock-in agreement will terminate upon any of
the following occurrences:
- the second anniversary of the completion date of the offering:
- the date all funds have been sent back to investors if the offering
was terminated; or
- the date the shares become "covered securities" as defined in Section
18 of the Securities Act. "Covered securities" include:
- securities listed or authorized for listing on the
Nasdaq National Market, The American Stock Exchange or the New
York Stock Exchange; and
- securities sold in any of several types of
offerings that are exempt from the registration requirements of
the Securities Act.
During the term of the lock-in agreement, beginning on the first anniversary of
the date the offering is completed, two and one-half percent of the shares
covered under the agreement shall be released from the lock-in provisions each
quarter.
OFFICER AND DIRECTOR PURCHASES
Our officers and directors have no current plans to purchase shares in the
offering, however they may purchase up to an aggregate of 20,000 shares in the
offering.
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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 under this offering, will
be validly issued, fully paid and non-assessable.
VOTING RIGHTS. Each share of our common stock entitles the holder 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. Accordingly, the
holders of more than fifty percent of our voting power can elect all of our
directors.
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 to distribute dividends. 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 eAcceleration 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 in this offering are sold, or 37,300,000 shares of common stock
outstanding if the maximum number of shares offered in this offering are sold.
Of these shares, the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except for
any shares purchased by an "affiliate" of eAcceleration, which will be subject
to the limitations of Rule 144 adopted under the Securities Act. In general, a
person who has a control relationship with eAcceleration is defined as
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an "affiliate." All of the remaining shares are deemed to be "restricted
securities", as that term is defined in Rule 144 under the Securities Act.
In general, under Rule 144, commencing 90 days after the date of this
prospectus, a person, including an affiliate 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 one percent 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 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 the limitations described above.
All of the shares of stock presently outstanding have been held at least
two years by Clint Ballard and Diana T. Ballard. Accordingly, commencing
following the completion of the offering, these 34,300,000 shares will be
eligible for resale under Rule 144 at the rates and subject to the conditions
discussed above and the terms of the lock-in agreement described 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 reduce the market price of the shares
and the value of your shares.
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, 27,500 shares of common stock issuable upon exercise of other stock
options previously granted and 34,300 shares of common stock issuable upon
exercise of an option granted outside of our plans. All of such shares may be
issued without any action or approval by our stockholders. The issuance of these
shares would dilute the percentage ownership of our common stock held by our
stockholders.
LACK OF PUBLIC MARKET FOR OUR SHARES. There has not been a public market
for our common stock and the price of our shares may be very volatile. We are
not sure if and when the shares 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. Because no underwriter has sold any shares to
their customers or received options, warrants or shares in this offering, there
is currently little incentive for a financial institution to provide aftermarket
support of the shares. Due to this lack of aftermarket support, the price of our
stock following the offering may decrease, and investors may be unable to resell
their shares at or above the initial public offering price.
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Additionally, 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 common stock.
After closing this offering, we intend to apply for inclusion of the shares
on the Nasdaq SmallCap Market or the Nasdaq National Market, depending on how
much we raise in this offering. Under Nasdaq criteria, an issuer seeking initial
inclusion of its securities on Nasdaq is required to meet threshold levels
established by Nasdaq relating to assets, market capitalization, net income,
market value of public float, minimum bid price and number of market makers,
among others. We currently do not meet all of Nasdaq's requirements, and we are
dependent on the receipt of proceeds of this offering to satisfy some of these
requirements. There is no assurance that the shares will ever be approved for
inclusion on Nasdaq, and if so, when such listing will occur. The inability to
have the shares listed on Nasdaq in a timely manner could materially hinder the
development of a public trading market for the shares.
Nasdaq also imposes maintenance requirements that, like the initial listing
requirements, require us to meet threshold levels established by Nasdaq relating
to assets, market capitalization, net income, market value of public float,
minimum bid price and number of market makers, among others. Although the
required maintenance levels are somewhat less stringent than the initial listing
requirements, there is no assurance that the shares will not become delisted at
a future time if the Nasdaq-imposed maintenance thresholds are not satisfied at
all times. 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.
We may elect to apply for inclusion of the shares on The American Stock
Exchange rather than Nasdaq. AMEX has its own listing and maintenance
requirements and if we apply for listing on AMEX, we will face similar
uncertainties relating to becoming listed, and in the event we become listed,
relating to maintenance and delisting.
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; provided, that any issuance of serial preferred stock must be approved by
a majority of our independent directors, who do not have an interest in the
transaction and who have access, at our expense, to our legal counsel or to
independent legal counsel.
Subject to approval by the independent directors, 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
62
<PAGE>
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
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 preferred stock series 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.
Anti-takeover provisions
Our certificate of incorporation contains 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 a number of transactions including mergers and sales or transfers of all
or substantially all of our assets.
The Delaware Corporation Law further contains anti-takeover provisions.
Section 203 of the Delaware Corporation Law provides, with a number of
exceptions, that as a Delaware corporation, we may not engage in any of a broad
range of business combinations with an "interested stockholder", that is, a
person who owns 15% or more of our outstanding voting stock, for a period of
three years from the date that such person became an interested stockholder
unless:
- the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by
our board of directors before the person becomes an interested
stockholder;
- the interested stockholder acquires 85% or more of our
outstanding voting stock excluding shares owned by persons who are
both our officers and directors, and shares held by employee stock
ownership plans; or
- 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.
63
<PAGE>
TRANSFER AGENT
The transfer agent for the common stock will be American Stock Transfer &
Trust Co., 40 Wall Street, New York, New York 10005.
EXPERTS
Our financial statements as of December 31, 1999 and for each of the years
in the two-year period ended December 31, 1999, appearing in this prospectus and
registration statement have been audited by McKennon, Wilson & Morgan, LLP,
independent auditors, as set forth in their report on such financial statements,
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 in this offering will be passed upon for
us by Kaufman & Moomjian, LLC, Mitchel Field, New York.
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 SEC with respect to the shares offered by
this prospectus. We have authorized no one to provide you with any information
other than that provided in the prospectus. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in the prospectus is accurate as of any date other than the
date on the front cover of the document.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedule filed with the registration
statement. For further information about us and the shares offered by this
prospectus, reference is made to the registration statement and its exhibits and
schedules. A copy of the registration statement and its exhibits and schedules
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
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<PAGE>
site. An electronic format of this prospectus is also available on our
Internet website, at http://www.eacceleration.com/ipo. The other information
contained on this website or any other website is not part of this prospectus.
The Internet addresses contained in this paragraph and throughout this
prospectus are inactive textual references only.
As of the date of this prospectus, we will become subject to the
informational requirements of the Securities Exchange Act of 1934, 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 websites set
forth above.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated financial statements:
Consolidated balance sheets - December 31, 1999 and March 31, 2000
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated statements of income for each of the years in the
two-year period ended December 31, 1999 and the three months
ended March 31, 1999 and 2000 (unaudited) . . . . . . . . . . . . . . . F-4
Consolidated statements of stockholders' equity for each of the
years in the two-year period ended December 31, 1999 and the three
months ended March 31, 2000 (unaudited) . . . . . . . . . . . . . . . . F-5
Consolidated statements of cash flows for each of the years in the
two-year period ended December 31, 1999 and the three months ended
March 31, 1999 and 2000 (unaudited) . . . . . . . . . . . . . . . . . . F-6
Notes to consolidated 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, 1999, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1999. 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, 1999, and the results of their operations and their cash
flows for each of the years in the two-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ McKennon, Wilson & Morgan LLP
Irvine, California
March 16, 2000, except for
Notes 7, 8 and 11, for which the
date is June 30, 2000
F-2
<PAGE>
EACCELERATION CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
----------------- --------------
(unaudited)
Current assets:
<S> <C> <C
Cash and cash equivalents $ 329,483 $ 337,300
Accounts receivable, net of allowance for doubtful
accounts of $46,750 and $50,000, respectively 717,943 881,252
Unbilled receivables 139,547 4,225
Other current assets 108,891 109,337
------------- -----------
Total current assets 1,295,864 1,332,114
Property and equipment, net 102,141 118,501
Patents and trademarks, net 80,216 77,050
Deferred offering costs 333,546 425,032
Long-term receivable 52,415 63,785
------------- -----------
$ 1,864,182 $ 2,016,482
============= ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable $ 745,034 $ 725,949
Accrued liabilities 134,799 116,791
------------- -----------
Total current liabilities 879,833 842,740
------------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, par value $.0001; 100,000,000
shares authorized; 34,300,000 shares issued
and outstanding at December 31, 1999 and
March 31, 2000 (unaudited) 3,430 3,430
Additional paid-in capital 350,205 439,533
Retained earnings 630,714 730,779
------------- -----------
Total stockholders' equity 984,349 1,173,742
------------- -----------
$ 1,864,182 $ 2,016,482
============= ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-3
<PAGE>
EACCELERATION CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31
1998 1999 1999 2000
---- ---- ---- ----
(unaudited)
Revenues:
<S> <C> <C> <C> <C>
License $ 1,919,149 $ 2,014,600 $ 356,308 $ 314,678
Internet - 2,744,869 209,752 1,616,440
----------- ----------- ----------- -----------
1,919,149 4,759,469 566,060 1,931,118
----------- ----------- ----------- -----------
Cost and expenses:
Software development
and products 919,895 1,053,754 200,156 330,640
Sales and marketing 369,336 2,395,129 256,233 1,267,421
General and administrative 409,071 641,707 107,665 233,767
Reduction in reserves
for claims (28,542) - - -
----------- ----------- ----------- -----------
1,669,760 4,090,590 564,054 1,831,828
----------- ----------- ----------- -----------
Income from operations 249,389 668,879 2,006 99,290
----------- ----------- ----------- -----------
Other income (expense):
Interest income 49,499 5,219 1,733 1,122
Interest expense (6,557) (563) (411) (347)
Other 150 - - -
----------- ----------- ----------- -----------
43,092 4,656 1,322 775
----------- ----------- ----------- -----------
Net income $ 292,481 $ 673,535 $ 3,328 $ 100,065
=========== =========== =========== ===========
Basic and diluted earnings
per common share $ 0.01 $ 0.02 $ - $ -
=========== =========== =========== ===========
Pro forma financial data (unaudited):
Pro forma net income $ 444,533 $ 66,043
=========== ===========
Pro forma basic and dilutive
earnings per common share $ 0.01 $ -
</TABLE>
See accompanying notes to consolidated financial statements
including "Note 2 - Income Taxes" and " Pro Forma Financial Data."
F-4
<PAGE>
eACCELERATION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For Each of the Years in the Two-Year Period Ended December 31, 1999 and for
the Three Months Ended March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Stockholders'
Shares Amount Capital Retained Earnings Stock Equity
------ ------ ------- ----------------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 34,300,000 $ 3,430 $ 113,454 $ 419,939 $ (115,000) $ 421,823
Distributions to stockholders - - - (350,000) - (350,000)
Fair value of officer services - - 104,000 - - 104,000
Net income - - - 292,481 - 292,481
---------- -------- ---------- ------------ ----------- -----------
Balances, December 31, 1998 34,300,000 3,430 217,454 362,420 (115,000) 468,304
Value of stock options issued
to non-employees - - 128,751 - - 128,751
Distributions to stockholders - - - (390,241) - (390,241)
Cancellation of treasury stock - - (100,000) (15,000) 115,000 -
Fair value of officer services - - 104,000 - - 104,000
Net income - - - 673,535 - 673,535
---------- -------- ---------- ------------ ----------- -----------
Balances, December 31, 1999 34,300,000 3,430 350,205 630,714 - 984,349
Fair value of officer services
(unaudited) - - 26,000 - - 26,000
Value of stock options issued
to non-employees (unaudited) - - 63,328 - - 63,328
Net income (unaudited) 100,065 100,065
---------- -------- ---------- ------------ ----------- ----------
Balances, March 31, 2000
(unaudited) 34,300,000 $ 3,430 $ 439,533 $ 730,779 $ - $1,173,742
========== ======== ========== ============ =========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements
F-5
<PAGE>
eACCELERATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
1998 1999 1999 2000
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 292,481 $ 673,535 $ 3,328 $ 100,065
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 54,073 52,833 4,861 12,422
Increase in allowance for doubtful accounts - 46,750 5,000 3,250
Provision for write down of inventory 13,053 - - -
Value of stock options issued - 128,751 - 63,328
Fair value of officer services 104,000 104,000 26,000 26,000
Changes in operating assets and liabilities:
Accounts receivable (241,667) (523,025) 167,105 (166,560)
Unbilled receivables - (139,547) 135,322
Other current assets (11,012) (108,891) - (446)
Long term receivable - (52,415) - (11,369)
Accounts payable (7,507) 695,598 34,590 (19,084)
Accrued liabilities (8,691) 62,982 65,616 (18,008)
Other current liabilities (91,546) (14,528) 42,989 -
----------- ----------- ----------- -----------
Net cash provided by operating activities 103,184 926,043 349,489 124,920
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment (32,306) (77,211) (27,262) (25,617)
Patent and trademark expenditures (35,927) (28,922) - -
----------- ----------- ----------- -----------
Net cash used in investing activities (68,233) (106,133) (27,262) (25,617)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Deferred Offering Costs - (333,546) - (91,486)
Payments on capital lease obligations (15,514) (5,833) (5,833) -
Distributions to stockholders (350,000) (390,241) (20,000) -
Repurchase of common stock - - - -
----------- ----------- ----------- -----------
Net cash used in financing activities (365,514) (729,620) (25,833) (91,486)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (330,563) 90,290 296,394 7,817
Cash and cash equivalents at beginning of period 569,756 239,193 239,193 329,483
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 239,193 $ 329,483 $ 535,587 $ 337,300
=========== =========== =========== ===========
Supplemental disclosure of cash flow information-
Cash paid during the period for interest $ 6,557 $ 563 $ 411 $ 347
========== =========== =========== ===========
</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 start page. 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
Internet users on a per click-through, per download or per sign-up basis. The
Company provides co-branding and marketing services 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 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
F-7
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recognition," and 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition."
Revenue from license fees and from sales of software products is recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant Company obligations with regard to implementation
remain, the fee is fixed or determinable and collectibility is probable.
Payments received from distributors of these products are recorded as deferred
revenues until revenues are recognized as set forth above. Maintenance and
support of software is not significant.
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. At the time a
contract is known to result in a loss at completion, the Company records a
charge to operations. Billings in excess of costs on uncompleted contracts are
reflected as deferred revenues. Costs in excess of billings on uncompleted
contracts are recorded as unbilled revenue included in accounts receivable.
Advertising revenues consist of web banner advertising and anchor positions. A
banner, the most common form of advertisement on the web, directly links a
consumer to the advertiser's website or promotion through a box on the website
which may be transitory. An anchor position, consisting of an advertiser's
position on the Company's website, consists of a link to the advertiser's
website which remains in a designated position until the advertising position is
removed from the website. Banner advertising and anchor position revenues can be
based on impressions, click-throughs, sign-ups, or downloads. Revenues from
contracts based on impressions, click-throughs, sign-ups and downloads are
recognized in the period in which visitors execute these pre-defined actions.
The rates for impressions range up to $5.00 per thousand actions and the rates
for click-throughs range up to $400.00 per thousand actions. Sign-ups are billed
at the rate of up to $22.50 each and downloads are billed at the rate of up to
$5.00 each.
During 1999, the Company commenced Internet revenue sharing programs with eight
companies, under which the Company is to receive a portion of such companies'
sales originating from our websites ranging from 3% to 50%. The Company's
revenues derived from revenue sharing programs during the year ended December
31, 1999 and the three-month period ended March 31, 2000 (unaudited) have been
inconsequential.
ALLOCATION OF EXPENSES AND RELATED DISCLOSURE
In accordance with Securities and Exchange Commission ("SEC"), Staff Accounting
Bulleting ("SAB") Topic 1:b.1 "Allocation of expenses and related disclosure in
financial statements", the
F-8
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company has reflected in operations the estimated fair value of unpaid and
unearned services by its chairman amounting to $104,000 for the years ended
December 31, 1998 and 1999 and $26,000 for the three months ended March 31, 2000
(unaudited). Such amounts are reflected as contributed capital since the
estimated fair value of these services will not be paid by the Company.
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 three 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. Advertising costs relating to the Offering are
expensed as incurred. In the event the Offering is unsuccessful, the Company
will charge these costs to operations.
F-9
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 to five years.
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 sheet. The Company's financial instruments consist of cash
and cash equivalent accounts and other receivables and accounts payable. The
carrying amounts of the Company's financial instruments generally approximate
their fair values as of December 31, 1999 and March 31, 2000 (unaudited).
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.
F-10
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 34,300,000 34,300,000 34,300,000 34,300,000
Effect of dilutive stock options - 107,088 - 156,152
---------- ---------- ---------- ----------
Weighted average shares outstanding - Dilutive 34,300,000 34,407,088 34,300,000 34,456,152
========== ========== ========== ==========
</TABLE>
Stock options outstanding in 1998 had no material impact on weighted average
shares outstanding during 1998.
INCOME TAXES
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 consolidated
financial statements. Upon the first closing of the Offering, the Company's
S-corporation status will be terminated.
PRO FORMA FINANCIAL DATA
Included in the accompanying consolidated statements of income are 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,
assuming that 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. Unaudited pro forma income tax expense for the year
ended December 31, 1999 and the three months ended March 31, 2000 is $229,002
and $34,022, respectively.
The Company entered into two employment agreements on November 1, 1999 (see Note
7). Each employment agreement provides for the payment of a bonus based on 2.5%
of the Company's pretax income which is defined as income before taxes,
interest, depreciation, amortization and extraordinary items in the immediately
preceding fiscal year. The accompanying pro forma financial data does not
include the effects of these two bonuses because the agreements will not be
effective until the first closing of this offering, and no bonuses will be paid
based on 1999 income. If such bonuses were to be paid under the agreements, the
pro forma bonus expense for the year ended December 31, 1999 and the three
months ended March 31, 2000, would have been $36,347 and $5,642, respectively.
F-11
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. See Note 10 for discussion of
revenue concentrations.
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.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial data as of March 31, 2000, and for the three
months ended March 31, 1999 and 2000, 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 of March 31, 2000, and the results of their operations and their cash
flows for the three months ended March 31, 1999 and 2000.
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.
F-12
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999 with the impact on
the accompanying consolidated financial statements being reflected in Note 10.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes standards for the
accounting and reporting of derivative instruments and hedging activities,
including certain derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry all derivative instruments at fair value
on their balance sheets. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging activity and the underlying
purpose for it. The Company does not believe that the adoption of SFAS No. 133
will have a significant impact on the Company's consolidated financial
statements or related disclosures.
F-13
<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, 1999:
December 31,
1999
----
Equipment $ 301,531
Furniture and fixtures 15,886
Vehicles 39,987
----------
357,404
Less accumulated depreciation (255,263)
-----------
$ 102,141
==========
During the years ended December 31, 1998 and 1999, depreciation expense totaled
$49,103 and 39,846 respectively.
NOTE 4 PATENTS AND TRADEMARKS
Patents and trademarks consist of the following as of December 31, 1999:
December 31,
1999
----
Patents $ 108,990
Trademarks 5,973
----------
114,963
Less accumulated amortization (34,747)
-----------
$ 80,216
==========
F-14
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5- DEFERRED OFFERING COSTS
The Company capitalizes its direct Offering costs. At December 31, 1999 and
March 31, 2000, deferred Offering costs consist of the following:
December 31, March 31,
1999 2000
---- ----
Legal fees and expenses $ 164,054 $ 248,446
Accounting fees and expenses 73,371 80,465
Blue Sky fees and expenses 48,466 48,466
Printing and engraving 10,470 10,470
Other 37,185 37,185
---------- ----------
Total $ 333,546 $ 425,032
========== ==========
Advertising expenses of $20,000 and approximately $90,000 (unaudited) relating
to the Offering incurred in 1999 and the three months ended March 31, 2000,
respectively have been expensed as incurred. At December 31, 1999 and March 31,
2000, amounts due for direct costs incurred in connection with the Offering were
$169,993 and $205,865 (unaudited), respectively.
NOTE 6- LONG-TERM RECEIVABLE
During 1999 the Company entered into an agreement with an unrelated party to
provide download and Internet advertising services. The Company earns $5.00 per
download based on advertising and download services, as defined. The Company has
the option to receive payment in cash or common stock at a rate of five dollars
per share commencing March 2001. The contract expires on the earlier of (a) July
1, 2005 or (b) two years from a milestone date if such milestone is not achieved
by the Company. In addition, the Company may earn options to purchase up to
110,000 shares of this entity's common stock, if such milestones are achieved.
If this receivable is paid in common stock, the investment will be recorded
under the cost method because the investment does not constitute a material
holding in the investee and the common stock to be received is not publicly
traded. Management will evaluate the carrying value quarterly to determine if
impairment of such asset exists.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company currently leases two facilities that hold all of the Company's
operations. One of these leases was extended in February 1999 for an additional
five years. As a result of this extension, the lease expires in the year 2005.
The lease requires monthly payments of $1,874.
F-15
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Company entered into a lease agreement with a four-year
term for an additional 10,000 square-foot facility. The lease requires monthly
payments of $7,643 for months one through four and $8,492 for months five
through 12. All remaining payments are increased by $0.30 per square foot
annually. The Company has the option of terminating the lease at the end of the
second year.
The Company's future annual minimum lease payments under all noncancelable
operating leases at December 31, 1999, are as follows:
Year Ending
December 31,
------------
2000 $ 122,503
2001 127,174
2002 31,236
2003 22,491
2004 22,491
Thereafter 1,874
---------
$ 327,769
=========
Total rent expense for the years ended December 31, 1998 and 1999 and for the
three-month periods ended March 31, 1999 and 2000, amounted to $20,628, $23,539,
$6,295 (unaudited) and $31,426 (unaudited) respectively.
LITIGATION
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.
EMPLOYMENT AND CONSULTING CONTRACTS
As of July 12, 1999, the Company entered into a consulting agreement with
Millennium Capital Quest relating to services consisting of advice on various
alternatives in raising capital, public relations and marketing, and advice
regarding corporate structuring and management structuring. The terms of the
contract included, among others, payments of up to an aggregate of $187,500 and
a grant of options, at an exercise price of $5.31 per share, as amended, to the
consultant to purchase 34,300 shares of common stock of the Company. The
consultant has received $37,500 under the terms of the consulting agreement. The
consulting agreement was terminated in May 2000, and under the
F-16
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
terms of the termination agreement, the consultant will receive no
additional payments, remuneration or reimbursements. In addition, the consultant
retained 34,300 options at an exercise price of $5.31 per share of common stock.
Twenty percent of the options became exercisable upon the execution of the
termination agreement and the remaining options become exercisable in equal
annual increments over four years commencing on May 1, 2001 and these options
expire April 30, 2010. Neither the consultant nor any affiliate of the
consultant is participating in the Offering.
On November 1, 1999, the Company entered into employment agreements with its two
shareholders. Each of these agreements are for a period of five years and each
provides compensation annually in the amount of $104,000 and a bonus based on
2.5% of earnings before income taxes depreciation, amortization and
extraordinary items of the immediately preceding year. Such agreements become
effective on the date of the first closing of the initial public offering, and
no bonuses will be paid on 1999 income.
NOTE 8 - STOCKHOLDERS' EQUITY
CONTINGENT SHAREHOLDER DISTRIBUTION, AND CONSTRUCTIVE DIVIDEND AND CAPITAL
CONTRIBUTION
Upon the closing of the Offering, the Company will make a distribution of total
stockholders' equity in excess of $578,750 from retained earnings to its two
stockholders. The stockholders have elected not to distribute the balance of
$578,750 upon the termination of its S-Corporation status (see Note 2).
Accordingly, upon the first closing of the Offering, the Company will record a
reduction in total stockholders' equity equal to the difference between total
stockholders' equity and $578,750. After such distribution, the Company will
record any amounts remaining in retained earnings as a constructive dividend,
and will increase additional paid-in capital by this amount as a deemed
contribution of capital.
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, vest over
four years and expire ten years from the date of grant. As of December 31, 1998,
the Company had 27,500 options outstanding and exercisable.
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 up to
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 schedule of when the options become
exercisable. Incentive stock options may only be issued to employees and
generally vest evenly over ten years from the date of
F-17
<PAGE>
grant and may not, in any case, vest beyond ten years from the date of
grant. Non-qualified stock options issued to non-employees vest evenly and
become exercisable over a period of five years from the date of the grant.
Forfeitures are returned to the plan and become available for grant. Vesting of
the employee options and non-employee options can only be accelerated in the
event that there is a merger, consolidation or transfer of substantially all of
the assets of the Company, and the successor to such transaction does not assume
the obligations relating to the options. Incentive stock options have an
exercise price of no less than the estimated fair value of the underlying shares
of the Company's common stock at the date of grant and non-qualified stock
options have an exercise price of not less than 85% of the estimated fair value
of the underlying stock on the date of grant. The Company shall not issue any
options or warrants with an exercise price of less than 85% of fair value of the
underlying shares of its common stock on the date of the grant. The Board of
Directors has established the estimated fair value of the Company's common stock
as of July 1, 1999 to be equal to the Offering price of $6.25 per share.
From July 1, 1999 to December 31, 1999, the Company granted employees options,
net of cancellations, to purchase an aggregate of 717,500 shares of common stock
each of which currently have an exercise price of $6.25 per share. The Company
also granted non-employees options to purchase 251,800 shares of common stock,
each of which currently have an exercise price of $5.31 per share. Non-employees
consist of non-employee directors providing advisory services relating to
strategic planning, operations and capitalization, as well as other consultants
providing technical consulting services relating to online marketing and online
media, software testing, servers and bandwidth and programming, accounting
services, legal services relating to patents and trademarks and financial public
relations and marketing services. All non-employee grants, except those issued
to Millennium Capital Quest, were granted under the 1999 Plan, and are subject
to the terms discussed above.
With respect to options issued to employees as discussed above, on October 31,
1999, the Company granted to its then chief financial officer options to
purchase 150,000 shares. As a result of his resignation as chief financial
officer in February 2000 (see Note 11) and his agreement to serve as a
consultant to the Company, these options were amended so that he currently has
options to purchase 10,000 shares of the Company's common stock at an exercise
price of $5.31 per share, which shall become fully vested and exercisable upon
the shares of the Company's common stock becoming publicly traded. In connection
with the amendment to this stock option grant, the Company will charge
operations $43,270 for the estimated fair value of the options to purchase
10,000 shares of Common Stock upon the close of the Offering.
Options to purchase an aggregate of 251,800 shares of common stock issued to
non-employees were valued based on the Black-Scholes valuation model. The fair
value of each option granted to non-employees is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
for grants in 1999: no dividend yield, an expected volatility of 99%, a
risk-free interest rate of 6.0%, and an expected option life of five years.
Future annual aggregate
F-18
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
compensation for non-employee stock options to be charged to future
operations over the five-year vesting period as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31
-----------
<S> <C>
2000 $ 253,311
2001 253,311
2002 253,311
2003 253,311
2004 143,422
-----------
$ 1,156,666
===========
</TABLE>
Compensation charges during the year ended December 31, 1999 and the three
months ended March 31, 2000 were $128,751 and $63,328, respectively.
Stock option activity under the 1995 Plan and 1999 Plan was as follows:
<TABLE>
<CAPTION>
Range of
Number Exercise
of Shares Prices
------------- ---------
<S> <C> <C>
Outstanding, January 1, 1998 27,500 $ 0.70
Options granted - -
--------- ----------
Outstanding, December 31, 1998 27,500 $ 0.70
Options granted 1,069,300 5.31-6.25
Options canceled (100,000) 5.31-6.25
--------- ----------
Outstanding, December 31, 1999 996,800 $0.70-6.25
Options granted (unaudited) 10,000 5.31
Options canceled (unaudited) (212,500) 6.25
---------- ----------
Outstanding, March 31, 2000 (unaudited) 794,300 $0.70-6.25
========= ==========
</TABLE>
F-19
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Option Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Exercise Price Outstanding at Contractual Life Exercise December 31, Exercise
Prices December 31, 1999 (Years) Price 1999 Price
-------------- ----------------- ---------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.70 27,500 5.71 $ 0.70 27,500 $ 0.70
5.31 251,800 10.00 5.31 - -
6.25 717,500 10.00 6.25 - -
------- ------
996,800 9.79 5.86 27,500 0.70
======= ======
</TABLE>
PRO FORMA DISCLOSURE
Had compensation cost for the Company's employee stock options been determined
consistent with SFAS No. 123 (see Note 2), the Company's reported net income of
$673,535 and net income per share of $0.02 for the year ended December 31, 1999
would have been decreased to $529,932 and $0.02 per share, respectively, on a
pro forma basis. For the three months ended March 31, 2000 the Company reported
net income of $100,065. This would have been decreased to $37,950 on a pro forma
basis. There was no pro forma effect on 1998 net income or basic and dilutive
earnings per share. The fair value of each option granted to employees is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions for grants in 1999: no dividend
yield, an expected volatility of 99%, a risk-free interest rate of 6.0%, and an
expected option life of five years.
INITIAL PUBLIC OFFERING
In October 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 Note 9 for treasury stock transaction with a related party.
NOTE 9 - 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.
F-20
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - SEGMENT AND OTHER INFORMATION
Geographical revenue information is based on the origin of the sales. Revenues
by geographic region are as follows for the years ended December 31, 1998 and
1999 and for the three month periods ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Asia $ 1,636,000 $ 2,014,600 $ 356,308 $ 314,678
United States 283,149 2,744,869 209,752 1,616,440
----------- ----------- --------- ----------
Total revenues $ 1,919,149 $ 4,759,469 $ 566,060 $1,931,118
=========== =========== ========= ==========
</TABLE>
During the year ended December 31, 1998, revenues from two unaffiliated
customers accounted for 85% and 14% respectively, of total revenues. During the
year ended December 31, 1999, revenues from one of these unaffiliated customers
accounted for approximately 42% of the Company's total revenues and all of its
software licensing revenues. During the three months ended March 31, 1999 and
2000, revenues from this unaffiliated customer accounted for approximately 63%
and 16%, respectively, of the Company's total revenues and all of its software
licensing revenues.
During the year ended December 31, 1999, another unaffiliated company accounted
for 10% of total revenues. During the three months ended March 31, 2000, another
unaffiliated company accounted for 25% of total revenues.
SYNCRONYS CONTRACT
On February 15, 1997, the Company entered into a distribution agreement for
certain of its pre- packaged software products in the United States. In
connection therewith, the Company generated revenues from sales for which a
significant right of return existed up to 90 days from the date of shipment.
Revenues were recorded to the extent the products were shipped, no right of
return existed and the cash was received. The Company deferred revenues from
billings for products shipped in 1997 totaling approximately $263,481 due to
certain uncertainties with respect to collection of such amount since the
customer disputed the contract and refused payment. In May 1998, the Company
received its final payment in the amount of approximately $301,178, including
interest. No shipments of products were made to this distributor subsequent to
August 31, 1997. The Syncronys contract is no longer in effect.
F-21
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POINTE CONTROL CONTRACT
In November 1995, the Company entered into a master agreement with Pointe
Control, Inc. to produce various software products. In 1996, the Company amended
the agreement to provide for the production of additional software products
produced on CD ROM. In February 1998, the Company amended the terms of the
agreement to provide for receipt of payment based on CDs sold by Pointe Control.
Revenues for these products were recorded when the products were sold by Pointe
Control and the cash was received, generally within thirty days from the date of
sale. On August 14, 1998, the Company further amended its agreement to provide
for the delivery of a master license for a specified product in which the
Company would be paid $375,000 upon delivery and $375,000 over four months. The
master was delivered in August 1998 and revenues were recorded upon delivery. No
significant obligations remained with the Company, and all payments were
guaranteed and collected as defined under the contract at the time of delivery.
On January 20, 1999, the Company further amended the contract to provide for the
production and license of ten (10) specified software products in which a site
license will be granted. This amendment specified certain payments to the
Company totaling $2.2 million beginning February 7, 1999 through December 7,
1999, with a final payment of $200,000 due January 2000. The Company actually
received $1.875 million during 1999 due to a verbal agreement between the
parties. The amendment dated January 20, 1999, was further amended on October
14, 1999 to amend the payments and provide for additional payments from November
7, 1999 to May 7, 2000 of $150,000 per month. Total payments under these two
amendments are $2.625 million. Revenues under the January 20, 1999 and October
14, 1999, amendments to design, produce and deliver these software products are
recorded under the percentage of completion method as discussed in Note 2.
During the year ended December 31, 1999 and the three months ended March 31,
2000, the Company recorded revenues of $2.014 million and $314,678 (unaudited),
respectively, under this contract, as amended. The contract was estimated to be
77% and 89% (unaudited) complete at December 31, 1999 and March 31, 2000,
respectively. No amounts have been deferred in connection with this arrangement
at December 31, 1999 and March 31, 2000. Unbilled revenues included in accounts
receivable amounted to $139,547 and $4,225 (unaudited) at December 31, 1999 and
March 31, 2000, respectively. As of March 31, 2000 this contract represented the
Company's sole source of revenues from software licensing. This agreement also
provided for bonus payments of $400,000 for several of the Company's software
products if any of such products' sales reached "top product" status based on
sales totals as determined by a weekly Japanese online industry report. A
product received two points for being in the top ten on the industry report's
best sellers list and one point for being listed 11th through 20th. Once a
product had accumulated 18 points, it achieved "top product" status. The maximum
possible bonus was $2,000,000.
As of May 26, 2000, this contact was replaced. See Note 11
F-22
<PAGE>
eACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - SUBSEQUENT EVENTS
In February 2000, Shane H. Traveller resigned as the Company's chief financial
officer. Upon his resignation, Mr. Traveller entered into a severance,
settlement and general release agreement with the Company. Under this agreement,
Mr. Traveller agreed to provide consulting services to the Company relating to
marketing, financial, accounting and administration matters and other activities
in which he was involved while he was the Company's chief financial officer.
Under the agreement, Mr. Traveller received his remaining salary for February
2000 plus moving expenses, received $26,000 in June 2000 and will receive
$22,300 upon the Company's common stock becoming publicly traded. Additionally,
of his options to purchase 150,000 shares of the Company's common stock
originally granted to him in October 1999, he retained options to purchase
10,000 shares at an exercise price of $5.31 per share, as amended, which will
become fully vested and exercisable upon the Company's common stock becoming
publicly traded. All other options issued to Mr. Traveller have been canceled.
In February 2000, April 2000 and May 2000, the Company filed amendments to its
registration statement in connection with the Offering of the Company's common
stock.
As of May 26, 2000 the Company replaced its agreement with Pointe Control with a
distribution agreement with Sourcenext Corporation, the beneficiary of the
Pointe Control agreement. The Sourcenext agreement provides for 24 consecutive
monthly payments of $75,000 beginning in June 2000. Under the agreement, the
Company will also receive an additional $75,000 per product for a total of 24
products that the Company delivers under the terms of the agreement, during the
same 24- month period. Additionally, the Sourcenext agreement provides for up to
five bonus payments of $400,000 each if sales if certain of the Company's
software products reach "top product" status, which is defined in the Sourcenext
agreement in substantially the same manner as in the Pointe Control agreement.
See Note 7 for discussion of the termination of the Millennium contract as of
May 1, 2000.
F-23
<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
Prospectus summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Forward looking statements . . . . . . . . . . . . . . . . . . . . . . . 10
Use of proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management's discussion and analysis . . . . . . . . . . . . . . . . . . 17
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Principal stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 49
Related party transactions . . . . . . . . . . . . . . . . . . . . . . . 51
Plan of distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Description of capital stock . . . . . . . . . . . . . . . . . . . . . . 60
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Legal matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Where you can find more information. . . . . . . . . . . . . . . . . . . 64
Index to financial statements. . . . . . . . . . . . . . . . . . . . . . F-1
----------------------
================================================================================
================================================================================
eAcceleration Corp.
3,000,000 shares
of
common stock
------------------
PROSPECTUS
-------------------
UNTIL , 2000 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT
EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
_____________, 2000
================================================================================
<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 reasonably incurred in connection with such action, including
attorney's fees. 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 incurred in the defense or settlement of such
suit, including attorneys' fees, 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 $2,000,000, which will include
reimbursement for costs and fees. The Registrant has entered into
indemnification agreements with each of its executive officers and directors.
The indemnification 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.
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<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee. . . . . . . . . . . . . . . $ 5,213
Blue Sky Fees and Expenses. . . . . . . . . . . . 60,000 *
Accounting Fees and Expenses. . . . . . . . . . . 95,000 *+
Legal Fees and Expenses . . . . . . . . . . . . . 300,000 *+
Advertising . . . . . . . . . . . . . . . . . . . 100,000 *
Printing and Engraving. . . . . . . . . . . . . . 35,000 *
Miscellaneous . . . . . . . . . . . . . . . . . . 4,787 *
Total . . . . . . . . . . . . . . . . . . . . . . $600,000 *
========
----------
<FN>
* Estimated
+ No amounts resulting from these expenses will be paid by the Registrant that
will cause the total expenses of the distribution to exceed 20% of the gross
proceeds of the distribution.
</FN>
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On July 1, 1999, we granted to Andrew Bourland, Yuri Shalimov, E. Edward
Ahrens, Scott Ellentuck, Steven Koda and Vladimir Panfilovich options to
purchase an aggregate of 117,500 shares of common stock, each of which currently
has an exercise price of $5.31 per share. Mr. Bourland was granted an option to
purchase 12,500 shares. He provided advice to us at the time of grant relating
to online marketing and online media. Mr. Shalimov was granted an option to
purchase 5,000 shares. He performed services to us at the time of grant relating
to software testing. Mr. Ahrens was granted an option to purchase 25,000 shares.
Mr. Ahrens, our current chief financial officer, was performing accounting
services for us at the time of the grant. Mr. Ellentuck was granted options to
purchase 12,500 shares. He performed services for us at the time of grant
relating to servers and bandwidth. Mr. Koda was granted an option to purchase
12,500 shares. He performed patent and trademark-related legal services for us
at the time of grant. Mr. Panfilovich was granted an option to purchase 50,000
shares. He performed services for us at the time of grant relating to
programming. The issuance of these options were private transactions exempt from
registration under Rule 701 under the Securities Act.
On this date, we also granted to 19 employees options to purchase an
aggregate of 450,000 shares of common stock each of which currently has an
exercise price of $6.25 per share. The issuance of these options were private
transactions exempt from registration under Rule 701 under the Securities Act.
On July 12, 1999, we approved the grant to a consultant, Millennium Capital
Quest, an option to purchase 34,300 shares of the common stock, which currently
has an exercise price of $5.31 per share. At the time of grant, Millennium
provided advice to us on various alternatives in raising capital, public
relations and marketing, and advice relating to corporate and management
structuring. The issuance of this option was a private transaction exempt from
registration under Section 4(2) of the Securities Act. At the time of grant,
Millenium was a sophisticated investor and was provided access to such
information regarding the business and finances of the Registrant, and was
provided
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<PAGE>
the opportunity to discuss with the Registrant's management the business,
affairs and financial condition of the Registrant and such other matters with
respect to the Registrant as would concern a reasonable person considering
investing is the shares of the Registrant. The option was granted on May 1,
2000.
On July 21, 1999, we granted to two employees options to purchase an
aggregate of 25,000 shares of common stock, each of which currently has an
exercise price of $6.25 per share. The issuance of these options were private
transactions exempt from registration under Rule 701 under the Securities Act.
On July 26, 1999, we granted to an employee an option to purchase 12,500
shares of common stock which currently has an exercise price of $6.25 per share.
The issuance of this option was a private transaction exempt from registration
under Rule 701 under the Securities Act.
On August 30, 1999, we granted to five employees options to purchase an
aggregate of 62,500 shares of the common stock, each of which currently has an
exercise price of $6.25 per share. The issuance of these options were private
transactions exempt from registration under Rule 701 under the Securities Act.
On September 15, 1999, we granted to an employee an option to purchase
5,000 shares of the common stock which currently has an exercise price of $6.25
per share. The issuance of this option was a private transaction exempt from
registration under Rule 701 under the Securities Act.
On September 16, 1999, we granted to a consultant and director nominee,
Edward P. Swain, Jr., an option to purchase 50,000 shares of common stock which
currently has an exercise price of $5.31 per share. Mr. Swain provided
consulting services to us at the time of grant including services relating to
strategic planning, operations and capitalization. The issuance of this option
was a private transaction exempt from registration under Rule 701 under the
Securities Act.
On September 27, 1999, we granted to a former consultant and director
nominee, Michael J. Clementz, an option to purchase 50,000 shares of common
stock which was terminated as of May 19, 2000 upon the termination of his
consulting arrangement with us. This option had an exercise price of $4.78 per
share prior to expiration. Mr. Clementz provided consulting services to us at
the time of grant including services relating to strategic planning, operations
and capitalization. The issuance of this option was a private transaction exempt
from registration under Rule 701 under the Securities Act.
On October 5, 1999, we granted to an employee an option to purchase 12,500
shares of the common stock which currently has an exercise price of $6.25 per
share. The issuance of this option was a private transaction exempt from
registration under Rule 701 under the Securities Act.
As of October 31, 1999, we granted to our then chief financial officer,
Shane H. Traveller, who is currently a consultant, an option that currently
entitles him to purchase 10,000 shares of our common stock, and currently has an
exercise price of $5.31 per share. Under our agreement with Mr. Traveller, Mr.
Traveller provides advise to us relating to marketing, financial, accounting and
administration matters. The issuance of this option was a private transaction
exempt from registration under Rule 701 of the Securities Act.
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<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, as
amended.*
10.3 Employment Agreement between the Registrant and Diana T. Ballard, as
amended.*
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 the Registrant and American Stock
Transfer & Trust Co.*
10.7 Distribution Agreement between the Registrant and Pointe Control, as
amended.*
10.8 Software License and Distribution Agreement between the Registrant and
Syncronys Softcorp.*
10.9 Lease Agreement, as amended, between the Registrant and Finn Hill
Partnership.*
10.10 Lease Agreement between the Registrant and Olympic Place II, L.L.C.*
10.11 Consulting Agreement between the Registrant and Millennium Capital
Quest, as amended.*
10.12 Severance, Settlement and General Release Agreement between the
Registrant and Shane H. Traveller, as amended and restated.*
10.13 Form of Lock-in Agreement among the Registrant, Clint Ballard and Diana
T. Ballard.*
10.14 Stockholders Agreement among the Registrant, Clint Ballard and Diana
T. Ballard.*
10.15 Form of Insertion Order for Media Ring, Inc.*
10.16 Form of BURST! Media LLC Advertising Contract.*
10.17 Form of Insertion Order for Adauction.com, Inc.*
10.18 Form of Campaign Insertion Order for Adsmart.*
10.19 Form of Web Advertising Services Agreement between Flycast
Communications Corporation and the Registrant. *
10.20 Amendment and Termination Agreement between the Registrant and
Millennium Capital Quest.*
10.21 Form of sample Insertion Order for tombstone banner advertisements.*
10.22 Distribution Agreement between Registrant and Sourcenext Corporation.
10.23 Amendment to Severance, Settlement and General Release Agreement
between the Registrant and Shane H. Traveller.
10.24 Amendment to Amendment and Termination Agreement between the Registrant
and Millennium Capital Quest.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.*
99.1 Consent of Edward P. Swain, Jr.*
99.2 Consent of Richard L. Sinnott.+
-------------
* Previously filed.
+ To be filed.
II-4
<PAGE>
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 as a new registration statement for the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
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.
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<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 Amendment No. 4
to this Registration Statement to be signed on its behalf by the undersigned, in
the City of Poulsbo, State of Washington on the 5th day of July, 2000.
eAcceleration Corp.
By: /s/ Clint Ballard
-------------------------------------
Clint Ballard
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 4 to this Registration Statement was signed by the following
persons in the capacities indicated on July 5, 2000.
SIGNATURES TITLE
/s/ Clint Ballard President, Chief Executive Officer and Director
---------------------------- (Principal Executive Officer)
Clint Ballard
/s/ Diana T. Ballard Chairman of the Board, Secretary,
----------------------------- Treasurer and Director
Diana T. Ballard
/s/ E. Edward Ahrens Chief Financial Officer
------------------------------ (Principal Financial and Accounting Officer)
E. Edward Ahrens
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<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, as
amended.*
10.3 Employment Agreement between the Registrant and Diana T. Ballard, as
amended.*
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 the Registrant and American Stock
Transfer & Trust Co.*
10.7 Distribution Agreement between the Registrant and Pointe Control, as
amended.*
10.8 Software License and Distribution Agreement between the Registrant and
Syncronys Softcorp.*
10.9 Lease Agreement, as amended, between the Registrant and Finn Hill
Partnership.*
10.10 Lease Agreement between the Registrant and Olympic Place II, L.L.C.*
10.11 Consulting Agreement between the Registrant and Millennium Capital
Quest, as amended.*
10.12 Severance, Settlement and General Release Agreement between the
Registrant and Shane H. Traveller, as amended and restated.*
10.13 Form of Lock-in Agreement among the Registrant, Clint Ballard and Diana
T. Ballard.*
10.14 Stockholders Agreement among the Registrant, Clint Ballard and Diana
T. Ballard.*
10.15 Form of Insertion Order for Media Ring, Inc.*
10.16 Form of BURST! Media LLC Advertising Contract.*
10.17 Form of Insertion Order for Adauction.com, Inc.*
10.18 Form of Campaign Insertion Order for Adsmart.*
10.19 Form of Web Advertising Services Agreement between Flycast
Communications Corporation and the Registrant. *
10.20 Amendment and Termination Agreement between the Registrant and
Millennium Capital Quest.*
10.21 Form of sample Insertion Order for tombstone banner advertisements.*
10.22 Distribution Agreement between Registrant and Sourcenext Corporation.
10.23 Amendment to Severance, Settlement and General Release Agreement
between the Registrant and Shane H. Traveller.
10.24 Amendment to Amendment and Termination Agreement between the Registrant
and Millennium Capital Quest.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.*
99.1 Consent of Edward P. Swain, Jr.*
99.2 Consent of Richard L. Sinnott.+
-------------
* Previously filed.
+ To be filed.
II-7
