Registration No. 333-90867
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
---------------
AMENDMENT NO. 3
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 MAY 23, 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".
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<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 May 1, 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.
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, AND 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>
A LARGE PERCENTAGE OF OUR REVENUES ARE DERIVED FROM ONLY ONE SOFTWARE
DISTRIBUTION CUSTOMER UNDER AN AGREEMENT THAT ONLY GUARANTEES PAYMENT THROUGH
MAY 2000.
In 1998, two software distribution customers, Pointe Control and Syncronys
Softcorp., accounted for 85% and 14% of our revenues, respectively. Our
agreement with Syncronys is no longer in effect. Since 1999, Pointe Control has
been our only software distribution customer, and it accounted for 42% of our
total revenues in 1999, and 16% of our total revenue in the three months ended
March 31, 2000. Although our distribution agreement with Pointe Control expires
in October 2000, the agreement only guarantees payments to us through May 2000.
We are currently negotiating with Sourcenext Corporation, a Japanese affiliate
of Pointe Control, to enter into a distribution agreement that would provide for
terms similar to those of the Pointe Control agreement, including a similar
stream of revenue. Although we expect to be able to enter into such an agreement
with Sourcenext, there is no assurance that this will occur. The loss of this
software distribution revenue could result in a materially adverse effect on our
business, operating results and financial condition.
IF WE DO NOT ENTER INTO A REPLACEMENT SOFTWARE DISTRIBUTION AGREEMENT, WE MAY BE
UNSUCCESSFUL IN EFFECTIVELY TRANSITIONING OUR SOFTWARE DISTRIBUTION RESOURCES TO
OUR INTERNET ADVERTISING AND MARKETING BUSINESS.
If we fail to enter into a distribution agreement with Sourcenext that is
substantially similar to our agreement with Pointe Control, we intend to
transition our personnel and other resources that had been utilized for the
fulfillment of our obligations under the Pointe Control agreement to projects
relating to increasing our Internet advertising and marketing revenues. This may
not result in an increase in Internet advertising and marketing revenues or
profits commensurate with what we generated under the Pointe Control agreement,
especially in the two to six month period following the beginning of such
transition. This could result in a materially adverse effect on our business,
operating results and financial condition.
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.
6
<PAGE>
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 OR LESS THAN THE MINIMUM NUMBER
OF SHARES.
We can have a closing and accept subscriptions for the sale of shares to
investors if at least 400,000 shares have been sold, which is the minimum number
of shares that may be sold in this offering. In the event such minimum amount,
or any amount which is significantly less 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.
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.
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<PAGE>
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 AND 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.
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 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. We
cannot assure you that we will use these proceeds effectively. We plan to use
the proceeds from this offering for:
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<PAGE>
- new product development;
- marketing and advertising;
- facilities;
- personnel;
- computer equipment and software; and
- working capital and general corporate purposes.
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.
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
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<PAGE>
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".
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:
- - 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.
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<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 distribution agreement with Pointe Control, we
granted an unlimited license to sell the software in Japan as specified in the
agreement. 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. As discussed in the first quarter
comparison below, we are negotiating with Sourcenext, a Japanese affiliate of
Pointe Control, to enter into a new contract for the distribution of software in
Japan under terms similar to those in the Pointe Control agreement. Although we
believe that it is likely that we will enter into such an agreement, there is no
assurance that this will occur.
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 $4.78 per
share in the case of options granted to non-employees and $5.63 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 $5.63
per share based on our offering price of $6.25 per share, less a customary ten
percent de minimus discount, which we believe is proper because the shares
issuable upon exercise of the options are "restricted securities" under the
Securities Act and may, in fact, never become registered or otherwise freely
tradeable. In addition, at the time of grant, there was, and upon the
effectiveness of our registration statement, there still will be, no assurance
that a public market for the shares will ever develop. 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 $5.63, 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 $5.63 fair value at the time of grant, or
$4.78. 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"
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<PAGE>
valuation model that considers volatility, among other factors. Accordingly, we
recorded approximately $128,751 of compensation expense during 1999. We will
record future compensation expense of approximately $1,156,665 related to these
stock options evenly over the remaining average vesting period as of December
31, 1999 of approximately 4.75 years.
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.
We are currently negotiating with Sourcenext Corporation, a Japanese
affiliate of Pointe Control, to enter into a distribution agreement that would
provide for terms similar to those under the Pointe Control agreement, including
a stream of revenue that is similar to the revenue generated from Pointe
Control. Although we believe it is likely that we will enter into such an
agreement with Sourcenext, there is no assurance that we will be able to do so.
Revenues generated from such an agreement with Sourcenext would be calculated
using the percentage of completion method. In the absence of an agreement with
Sourcenext, once we no longer have any significant obligations under the Pointe
Control agreement, which we expect to be in June 2000, we are considering using
all or a significant portion of our resources that have historically been used
to fulfill our obligations to Pointe Control in an attempt to increase the
effectiveness of our Internet advertising and marketing business model. To this
end, such resources would be used to design or modify Internet-related programs
in order to help increase the number of users of our websites. We expect that
any revenues resulting from this use of our resources will be in the form of
additional Internet advertising and marketing revenues, and would be accounted
for in the same manner as all of our Internet advertising and marketing
revenues.
Our revenues derived from Internet revenue sharing programs during the three
months ended March 31, 2000 have been inconsequential.
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<PAGE>
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. 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
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<PAGE>
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 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.
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 provides for bonus payments of $400,000
for several of the our software products if any of such products' sales reach
"top product" status. "Top product" status is 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 receives two points for
being in the top ten on the industry report's best sellers list, and one point
for being ranked eleven
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<PAGE>
through twenty on this list. Once a product has accumulated 18 points, it has
achieved "top product" status. The maximum possible bonus under the Pointe
Control agreement is $2,000,000. It is very unlikely that any "top product"bonus
amounts will be received or recognized as revenues under the Pointe Control
agreement and as a result, we do not expect bonuses under the Pointe Control
agreement to be a significant component of future earnings.
In the year ended December 31, 1999, 42% of our total revenue was a result
of our agreement with Pointe Control. In the three months ended March 31, 2000,
16% of our total revenue was a result of our agreement with Pointe Control. The
agreement expires in October 2000 and, while we still have obligations under
this agreement and Pointe Control retains licensing, trademark and other rights
relating to distributing our products in Japan during the term, we do not expect
any further payments from Pointe Control. We believe that our costs associated
with meeting these obligations will correspond with the amount of revenue that
we have not yet recognized under the agreement using the percentage of
completion method of revenue recognition. We expect to fund any additional costs
from our working capital. We are currently negotiating with Sourcenext, a
Japanese affiliate of Pointe Control, to enter into a new distribution agreement
with terms similar to that of our agreement with Pointe Control, which would
replace our agreement with Pointe Control and provide a two-year stream of
revenue similar to that under the Pointe Control agreement. Although we believe
that it is likely that we will enter into such an agreement, there is no
assurance that we will do so. Failure to enter into such an agreement could have
a materially adverse effect on our results of operations, cash flows and
liquidity, especially in the next two to six months during which time we would
transition our personnel and other resources that are currently dedicated to
fulfilling our obligations under the Pointe Control agreement to projects
relating to increasing our Internet advertising and marketing revenues.
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
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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 $4.78 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.
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 Pointe Control, an
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. Our agreement with Syncronys is no longer in effect and we will likely
receive no further payments under our agreement with Pointe Control.
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 is
the distributor of the software listed in the most recent amendment to the
agreement products developed by us and localized into Japanese versions by us
and Sourcenext. Under the terms of the agreement, so long as Pointe Control
complies with minimum performance requirements set forth in the agreement, it
retains exclusive rights to distribute localized versions of the software during
the term in Japan.
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.
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%,
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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.
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.
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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.
COMPETITION
We believe that competition in our website and software businesses are
based on factors that include the following:
- brand recognition;
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- 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 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.
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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 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.
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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
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
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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 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.
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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.
EMPLOYEES
As of April 23, 2000, we had a total of 49 employees, two of which work for
us part time. Five employees work in sales and marketing, one of which works
part time, 33 in technology and development, and eleven 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.
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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 nominee:
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
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 and as
director of Interactive Financial Services Group, Inc. since December 1998. He
is also a
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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.
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 an additional individual 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 $4,000 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 another non-employee
director who will be nominated and elected prior to effectiveness, 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 another non-employee
director who will be nominated and elected prior to effectiveness, 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>
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 will receive
his remaining salary for February 2000 plus moving expenses, and will receive
$26,000 upon the earlier of June 30, 2000 or the first closing of this offering
and $17,000 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 $4.78 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 stockholders. The 1999 plan provides for the
grant of "incentive stock options" within the meaning of the Section 422 of the
Internal Revenue Code of 1986, "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 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
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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 May 22, 2000, we have options to purchase an aggregate of 682,500
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 $4.78 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 $4.78 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 May 22, 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
All officers, directors 34,300,000 100% 98.9% 92.0%
and director nominees
as a group (4 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 $4.78 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, and will receive $26,000 on the earlier of June 30, 2000 or upon the
first closing of this offering and $17,000 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 $4.78 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, 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 agreement together with a paper copy of the
final prospectus that we send to such investor; and
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- 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 below, 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, electronically in the
same manner. You may also refuse to consent to receive any or all of
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<PAGE>
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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- 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 intend to comply with the guidelines enumerated
in Rule 3a4-1. 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. 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.
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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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60 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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<PAGE>
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
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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 and 11, for which the date
is May 1, 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>
EACCELERAION 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:
<TABLE>
<CAPTION>
December 31,
1999
----
<S> <C>
Equipment $ 301,531
Furniture and fixtures 15,886
Vehicles 39,987
----------
357,404
Less accumulated depreciation (255,263)
----------
$ 102,141
==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
1999
----
<S> <C>
Patents $ 108,990
Trademarks 5,973
----------
114,963
Less accumulated amortization (34,747)
----------
$ 80,216
==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---- ----
<S> <C> <C>
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
=========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $ 122,503
2001 127,174
2002 31,236
2003 22,491
2004 22,491
Thereafter 1,874
---------
$ 327,769
=========
</TABLE>
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 $4.78 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>
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 $4.78 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>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $5.63 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 $4.78 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.
The Board of Directors has established the estimated fair value of the Company's
common stock as of July 1, 1999, to be $5.63 per share, based on the Offering
price per share of $6.25, less a customary ten percent de minimus discount which
the Board believes is proper because the shares issuable upon exercise of the
options are "restricted securities" under the Securities Act. This estimated
fair value was used to establish the exercise prices of its stock options and as
such, no compensation was charged to operations with respect to options granted
to employees in 1999.
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 $4.78 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.
F-18
<PAGE>
EACCELERATIN CORP.
NOTS TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 which
considers volatility, among other factors (see below under "Pro Forma
Disclosure" for discussion of these factors). Future annual aggregate
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 4.78-5.63
Options canceled (100,000) 4.78-5.63
--------- ----------
Outstanding, December 31, 1999 996,800 $0.70-5.63
Options granted (unaudited) 10,000 4.78
Options canceled (unaudited) (212,500) 5.63
--------- ----------
Outstanding, March 31, 2000 (unaudited) 794,300 $0.70-5.63
========= ==========
</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 Exercise
Prices December 31, 1999 (Years) Price 31, 1999 Price
- -------------- ----------------- ----------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.70 27,500 5.71 $ 0.70 27,500 $ 0.70
4.78 251,800 10.00 4.78 - -
5.63 717,500 10.00 5.63 - -
------- ------
996,800 9.79 5.28 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, and 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. This contract currently represents the Company's
sole source of revenues from software licensing. This agreement also provides
for bonus payments of $400,000 for several of the Company's software products if
any of such products' sales reach "top product" status based on sales totals as
determined by a weekly Japanese online industry report. A product receives 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 has accumulated 18
points, it has achieved "top product status." The maximum possible bonus is
$2,000,000.
The Company is currently negotiating with Sourcenext Corporation, a Japanese
affiliate of Pointe Control, to enter into a distribution agreement with terms
similar to those in the Pointe Control agreement, which would replace the Pointe
Control agreement and provide a two-year stream of cash flows similar to the
cash flows under the Pointe Control agreement. Although the Company's
F-22
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
management believes that the Company will reach an agreement with Sourcenext,
there is no assurance that this will occur. Failure to do so could have a
materially adverse effect on the Company's results of operations, cash flows and
financial condition. This is especially likely in the next two to six months
during which time the Company would transition its personnel and other resources
that are currently dedicated to fulfilling its obligations under the Pointe
Control agreement to projects relating to increasing the Company's Internet
advertising and marketing revenues.
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 will receive his remaining salary for
February 2000 plus moving expenses, and will receive $26,000 upon the earlier of
June 30, 2000 or the first closing of this offering and received $17,000 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 $4.78 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 and April 2000, the Company filed amendments to its
registration statement in connection with the Offering of the Company's common
stock.
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
----------------------
================================================================================
<PAGE>
================================================================================
[LOGO]
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.
II-1
<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 $4.78 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 $5.63 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 $4.78 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, we
reasonably believed the principals of Millennium had sufficient knowledge and
experience in financial and business matters that they were capable of
II-2
<PAGE>
evaluating the merits and risks of the grant and the options and, in connection
with their role as consultant to us, received such information relating to us
consistent with Rule 502(b)(2) under the Securities Act. 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 $5.63 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 $5.63 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 $5.63 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 $5.63
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 $4.78 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 $5.63
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 $4.78 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.
II-3
<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.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.
99.1 Consent of Edward P. Swain, Jr.*
- -------------
* Previously 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.
II-5
<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. 3
to this Registration Statement to be signed on its behalf by the undersigned, in
the City of Poulsbo, State of Washington on the 23nd day of May, 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. 3 to this Registration Statement was signed by the following
persons in the capacities indicated on May 23, 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
II-6
<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.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.
99.1 Consent of Edward P. Swain, Jr.*
- -------------
* Previously filed.
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into
effective as of November 9, 1996,("Effective Date") by and between Acceleration
Software International Corporation, a Washington corporation ("Developer"), and
Pointe Control, a Washington corporation ("Distributor").
RECITALS
A. Distributor is in businesses related to development, distribution and
sale of software and other technology-related products (including
computer-related products and services), and, with their shareholders other
parties, may form other related entities to further engage in such business.
B. Developer and Distributor desire that Distributor distribute certain
of Developer's existing and future software and other technology in specified
geographic areas, and desire to enter into a flexible agreement providing for
such distribution, subject to future identification of the specific software or
other technology, the geographic areas of distribution, pricing, volumes and
other matters as may be determined by the parties as the necessity arises.
IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES AGREE
AS FOLLOWS:
1. DEFINITIONS.
1.01 "SOFTWARE" shall mean the software product(s) described in Exhibit
A (as defined below), and upgrades or other modifications to such specific
product (but not other products sold or otherwise distributed with or in
connection with such product), as determined in the discretion of Developer.
1.02 "SOFTWARE COPY" shall mean an object code copy of the Software,
together with a copy of any user manual or other documentation or materials
which are (or, if none, ordinarily would be) customarily supplied to End Users
by Developer with the Software, packaged for retail sale.
1.03 "END USER" shall mean, in the case of Software, any third party
which obtains a Software Copy to fulfill its own computer aided instruction or
tool needs, or, in the case of Technology, any third party which obtains the
Technology in a form suitable to fulfill its needs.
1.04 "TERRITORY" shall mean the geographic area identified in Exhibit A.
1.05 "LOCALIZATION" shall mean modification of Software or Software
Copies ("Localized Software") or Technology ("Localized Technology") to meet the
needs of non-English speaking End Users in the Territory. This may include code
changes, additions and alterations to the feature set, changes in the data,
translation, or new art or new packaging, with the intent to provide more
culturally acceptable Software or Technology to End Users speaking a principal
language in use in the Territory.
1.06 "SALE" or "SELLING" OR "PURCHASE" OR "PURCHASING" of Software,
Software Copies or Technology shall mean, with respect to the intellectual
property rights related to such Software or Technology, the grant or
acquisition, respectively, of a license to use the Software or Technology. With
respect to tangible property, such terms shall be accorded their common
meanings. In either case, such terms shall (i) include all sales, licenses,
transfers or other dispositions for value, (ii) include use by Distributor, and
(iii) be deemed a sale not later than when recorded as such on the books and
records of Distributor which are maintained for financial statement purposes.
1.07 "EXHIBIT A" shall mean each such Exhibit attached to and made a
part of this Agreement as of
<PAGE>
this Agreement's Effective Date, and each such Exhibit subsequently executed by
the parties and so made a part of this Agreement as of the Effective Date
specified in such subsequent Exhibit. Each such Exhibit A shall be construed,
together with this Agreement, as a separate and distinct agreement between the
parties, without taking into account or considering any such other Exhibit A,
such that performance or default in connection with any one such Exhibit A shall
not determine or affect performance or default as construed in connection with
any such other Exhibit A. In the event of any conflict between the terms and
conditions of any such Exhibit A and this Agreement considered without such
Exhibit A, the terms and conditions of Exhibit A shall take precedence and
control.
1.08 "AFFILIATE" shall mean any entity fifty percent (50%) or more of
the value or control of which is owned, directly or indirectly, by Distributor,
or their shareholders, or any combination of such parties, or any entity which
owns, directly or indirectly, fifty percent (50%) or more of the value or
control of such entities or their shareholders.
1.09 "TECHNOLOGY" shall mean the technology described in Exhibit A. For
purposes of this Agreement, "technology" shall be construed in its broadest
sense to include any information of actual or potential commercial use or value
relating to or arising out of the business of Developer, regardless of whether
patented, copyrighted or otherwise protected by law, and including but not
limited to computer and other programs, trade secrets, procedures, concepts,
processes, methodology, design data, computer software, specifications,
research, inventions or know-how, any of which may include or be incorporated
within or utilized in connection with either tangible or intangible property or
services, or some combination of such property and services. Such technology may
be of various forms or kinds which may, in various cases, be distributed,
licensed, provided or otherwise used. "Potential Technology" for purposes of
Section 8.09 shall be deemed to include (i) any technology which Developer is
developing or considering developing, and as to which Developer has given
Distributor notice of such development, and (ii) all performance-enhancement
computer utility software, specifically including that relating to CD-ROM drive,
hard drive and other storage media. In interpreting this Agreement in connection
with Technology (as distinguished from Software or Software Copies), a broad
interpretation shall be applied to all terms and conditions to effect the intent
of the parties that this Agreement apply to future transactions in connection
with such Technology, in accordance with any Exhibit A made a part of this
Agreement after the Effective Date.
2. APPOINTMENT AND AUTHORITY OF DISTRIBUTOR.
2.01 APPOINTMENT AS DISTRIBUTOR FOR TERRITORY. Subject to the terms and
conditions set forth in this Agreement, Developer hereby appoints Distributor as
Developer's distributor for the Software and/or the Technology in the Territory,
as specified in Exhibit A, and Distributor hereby accepts such appointment.
"Distributor," "distribution" and similar terms shall be construed as
appropriate for the circumstances in cases in which Technology is marketed,
sold, or provided in connection with services or tangible property. The parties
contemplate that Developer may appoint Distributor, and Distributor may accept
appointment as Developer's distributor, with respect to other or additional
Software and/or Technology in the Territory or other territories, which
appointment and acceptance, if any, shall be pursuant to additional Exhibit(s) A
in substantially the form attached, as executed by the parties and made a part
of this Agreement.
2.02 EXCLUSIVE DISTRIBUTOR. For so long as Distributor is performing in
compliance with this Agreement (including complying with any Minimum Performance
Requirements, as defined in Section 10.03), Developer shall not grant any other
party rights to distribute Localized Software or Localized Technology in the
Territory. Distributor acknowledges that certain of Developer's other
distributors are not prohibited from distributing in the Territory Software or
Technology which has not been localized, but Developer will not make any
Localized Software or Localized Technology available to such distributors with
respect to the Territory.
2.03 OEM SALES AND SITE LICENSES. In addition to distribution of Software
Copies provided for in Section 2.01, Distributor shall have the right to
distribute the Software to either (i) a computer hardware manufacturer or seller
desiring to bundle the Software with computer hardware (an "OEM Sale") or (ii) a
user desiring a license to use the Software on more than one (1) computer owned,
operated and used by such user in such
2
<PAGE>
user's place of business without acquiring individual Software Copies for use on
each such computer (a "Site License", as further interpreted within the ordinary
meaning of the term). Such Software shall consist of CD-ROM discs (i) which have
been acquired from Developer for, and only for, such respective use, (ii) which
are packaged in a form not suitable for normal retail distribution to End Users,
and (iii) which are sold only in the Territory and for use or resale only in the
Territory. In the case of any other OEM Sale or Site License not including an
individual CD-ROM disc, Distributor shall further have the right to negotiate
the preliminary business terms of any such sale or license, on a case-by-case
basis, for review, further negotiation, and execution of a definitive agreement
by Developer (who shall have the sole right to enter into any such agreement),
in which case Distributor shall be compensated as provided in Exhibit A.
2.04 RESPONSIBILITIES OF DISTRIBUTOR. Distributor shall, at its cost,
prepare localized versions of the Software and Software Copies or the
Technology, and shall market and distribute Software Copies and Technology in
the Territory, including marketing and distribution in the Territory for resale.
Distributor shall use its best efforts to pursue aggressive sales policies and
procedures (including marketing) to realize the maximum sales potential for the
Software or Technology, and to establish and promote Developer's business name,
trademarks, brandnames, and similar attributes, in the Territory. Distributor
shall not distribute or market the Software Copies or the Technology outside the
Territory.
2.05 INDEPENDENT CONTRACTORS. The relationship of Developer and
Distributor established by this Agreement is that of independent contractors,
and nothing contained in this Agreement shall be construed to (i) give either
party the power to direct or control the day-to-day activities of the other,
(ii) constitute the parties as partners, joint ventures, co-owners or otherwise
as participants in a joint or common undertaking. All financial obligations
associated with Distributor's business are the sole responsibility of
Distributor. All sales and other agreements between Distributor and its
customers are Distributor's exclusive responsibility and shall have no effect on
Distributor's obligations under this Agreement. Distributor shall be solely
responsible for, and shall indemnify and hold Developer free and harmless from,
any and all claims, damages or lawsuits (including Developer's attorneys' fees)
arising out of the acts of Distributor, its employees or its agents. Distributor
shall not constitute, and shall take no action which would cause it to be
treated as, a "permanent establishment" of Developer within the meaning of the
tax laws of any country.
3. PRODUCTION OF SOFTWARE, SOFTWARE COPIES AND TECHNOLOGY.
3.01 CD-ROM DISCS AND OTHER MEDIA. In the case of Software, except as
otherwise specifically provided in Exhibit A, Developer shall, at its cost and
at a facility of its selection, reproduce the object code of Software onto
CD-ROM discs (including labeling and artwork) in a form suitable for packaging
and distribution to End Users at Developer's cost and at a facility of
Developer's selection. Localized Software will be reproduced by Developer from a
master copy of the Software (including a master of labeling and artwork) which
has been Localized and provided by Distributor at Distributor's cost. As
circumstances may require or make advantageous (as determined in the discretion
of Developer), in particular in the case of Technology, Developer may reproduce
and provide to Distributor Software or Technology in other media or form. Under
no circumstances shall Distributor replicate or otherwise duplicate Software or
Technology, on CD-ROM discs or otherwise, or obtain such replicated or
duplicated Software from any source other than Developer. Possession by
Distributor of a "Gold Disc" or other medium commonly used to replicate or
duplicate software shall not be construed as evidence that Distributor has any
right to replicate or duplicate Software.
3.02 DOCUMENTATION AND PACKAGING. Distributor shall produce all
documentation, packaging and other items customarily supplied to End Users, and
shall assemble such items, all at Distributor's cost. Such items shall be
provided to Developer not less than fifteen (15) days prior to commencement of
production for Developer's review and approval, and production shall not be
commenced until approved in writing by Developer, except that failure by
Developer to approve or disapprove within fifteen (15) days shall be deemed to
be approval.
3.03 MUTUAL ASSISTANCE. Distributor and Developer shall cooperate and
provide reasonable and timely
3
<PAGE>
assistance to one another in connection with preparation of Localized Software
or Technology.
4. END USER RESTRICTIONS.
Except as otherwise provided under applicable law:
4.01 Only a personal, non-transferable, and non-exclusive right to use
Software or Technology (on a single designated system shall be granted to each
End User.
4.02 Developer retains all rights in and title to Software and
Technology, including the media on which it is provided, and in and to all
copies, and no title to the Software or such media is transferred to either
Distributor or any End User.
4.03 The End User may not copy the Software or Technology (except in the
case of Software ,except for one (1) copy for backup purposes and only as
necessary to use the Software on such End User's designated system), and all
such copies shall contain all copyright and other proprietary notices or legends
of Developer on the Software as delivered to the End User.) No copies of the
Software documentation may be made by the End User.
4.04 Developer shall not be liable to the End User for any general,
special, direct, indirect, consequential, incidental, or other damages arising
out of the license to use the Software .
4.05 Software shall be provided to the End User subject to a
"shrink-wrap" or other appropriate license agreement, which shall be subject to
approval by Developer under Section 3.02.
5. RESTRICTIONS ON DISTRIBUTOR.
Distributor agrees (i) in the case of Software, not to reverse assemble,
decompile, or otherwise attempt to derive source code from the Software, and, if
source code is provided, to use such code solely for necessary localization
purposes, not to disclose such code to persons other than those with a need to
know for such purposes (and then only subject to a non-disclosure agreement
approved in advance by Developer), and to return or destroy all copies of such
source code immediately upon the earlier of completion of localization or the
request of Developer; (ii) in the case of Technology, not to attempt to
determine any Confidential Information (within the meaning of Section 14) from
the Technology, (iii) to comply with all export, re-export, and anti-boycott,
restrictions and regulations of the Department of Commerce or other United
States agency or authority, and not to transfer, or authorize the transfer, of
the Software or Technology to a prohibited country or otherwise in violation of
any such restrictions or regulations, and (iv) to comply with all other laws,
foreign and domestic, in connection with the Software and Technology.
6. PAYMENT.
6.01 PAYMENT AMOUNT. Distributor agrees to pay Developer the amounts set
forth in Exhibit A, plus shipping to points outside of the continental U.S., if
any. Such amounts specified shall be net of any withholding or similar tax
imposed by the taxing jurisdiction in which Distributor does business or with
respect to which or from which payments to Developer are made, and net of any
customs duty, tariff or similar charge.
6.02 TIMING OF PAYMENTS. In the case of Software or Technology, payment
to Developer for which is dependent upon delivery to Distributor of CD-ROM discs
or other media or tangible property, Payment shall be made prior to release to
Distributor of such property, except as otherwise specified in Exhibit A. In
other cases, including percentage royalties or amounts dependent upon or
affected by Distributor's gross receipts, net income, or other factors, payment
to Developer shall be made not later than thirty (30) days after the end of the
month in which such event occurs or such amounts may be reasonably determined.
All payments required to be made to Developer pursuant to this Agreement shall
be made to Developer in the State of Washington, USA, at its office or at such
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banking institution as Developer may direct from time to time, in immediately
available funds, in legal tender of the United States of America.
6.03 AUDIT RIGHTS. Distributor shall maintain accurate books and records
pertaining to the production and distribution of Software or Technology,
including packaging, documentation, artwork, and all other components of the
Software Copies or Technology in whatever form distributed, and similar rights
as to Software or Technology sold in other than the form of Software Copies.
Developer's designated auditors shall have the right, upon reasonable request
and during ordinary business hours, to examine such books and records, and the
physical inventory of Software Copies. Developer shall be entitled to exercise
such right to examine upon the end of each calendar quarter with respect to the
first year of the term of this Agreement (including each applicable Exhibit A),
and shall thereafter be entitled to exercise such right upon the end of each
calendar semi-annual period or, if more frequent, upon the end of any calendar
quarter following any such examination in which it is determined that any
underpayment of five percent (5%) or more was made by Distributor to Developer.
Further, Distributor shall require its third party suppliers, vendors and
customers (including printers, manufacturers, distributors, and resellers) to
allow Developer to examine books and records and physical inventories of such
parties pertaining to the production, distribution and sale of Software or
Technology. Such examination shall be at Developer's expense, unless the
examination reflects an underpayment of five percent (5%) or more of the amount
that should have been paid for the period audited, in which case Distributor
shall bear the expense of such audit. Interest of one and one- half percent
(1.5%) per month shall paid on payments not timely made.
6.04 TRANSACTIONS WITH AFFILIATES. All transactions by Distributor with
Affiliates shall be at fair market prices for comparable transactions between
unrelated parties, including a reasonable profit on such transactions. In any
case where payment by Distributor to Developer is a percentage royalty based
upon Distributor's receipts, or is otherwise dependent upon or affected by
Distributor's sales price or other amount received, for purposes of determining
Distributor's payment to Developer, Distributor's sales price or other amount
received from an Affiliate shall be disregarded, and instead shall be deemed to
be the amount received from the first non-Affiliate making such payment.
6.05 BUNDLED TRANSACTIONS. In any case where payment to Developer by
Distributor is a percentage royalty or is otherwise dependent upon or affected
by Distributor's gross receipts, sales price, net income or other amount
received with respect to a Bundled Transaction, for purposes of determining
Distributor's payment to Developer, such amount received shall be deemed to
include all gross receipts received in connection with such Bundled Transaction,
without regard to the allocation or characterization of the gross receipts as
relating to the Software or Technology or to other aspects of the transaction.
For purposes of this Agreement, "Bundled Transaction" shall mean any transaction
in which Distributor receives payment for Software or Technology and other
property or services in a single integrated transaction, and "gross receipts"
shall mean the total amount realized, without reduction for cost of sales,
returns or allowances, or expenses of any kind.
6.06 SECURITY INTEREST. Distributor hereby grants Developer a security
interest in accounts or other amounts receivable by Distributor in connection
with the sale of the Software or Technology or Software Copies. Distributor
further agrees that in event of a default in payment of amounts due Developer
which is not cured within fifteen (15) days as provided in Section 10.04,
Developer may take all reasonable action to perfect such security interest (or,
where appropriate, take comparable action under the laws of a jurisdiction other
than the U.S.). Distributor shall assist Developer in taking any such action,
including by executing documents reasonably requested by Developer to do so.
7. DEVELOPER'S WARRANTY.
7.01 WARRANTY. Developer warrants that the Software provided to
Distributor by Developer in connection with Localization by Distributor will
conform to the Software or Technology then being distributed by Developer.
Developer further warrants that upon delivery, and for sixty (60) days
thereafter, the media on which the Software or Technology is delivered will be
free of defects in material and workmanship. Should any such
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defects appear in material and workmanship appear during the warranty period,
Developer shall, as its sole obligation, replace such defective copy upon its
prompt return to Developer.
7.02 LIMITATION OF LIABILITY AND REMEDIES. EXCEPT AS SET FORTH ABOVE,
DEVELOPER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AND
SPECIFICALLY EXCLUDES ANY WARRANTY THAT ANY SERVICES, MATERIALS OR PRODUCTS
FURNISHED BY DEVELOPER ARE FIT FOR ANY PARTICULAR PURPOSE AND FURTHER
SPECIFICALLY EXCLUDES ANY IMPLIED WARRANTIES OF MERCHANTABILITY. THE STATED
WARRANTIES, COVENANTS AND REMEDIES SET FORTH IN THIS AGREEMENT ARE IN LIEU OF
ALL OTHER OBLIGATIONS OR LIABILITIES ON THE PART OF DEVELOPER FOR DAMAGES OR
OTHER RELIEF, INCLUDING, BUT NOT LIMITED TO, SPECIAL, INDIRECT OR CONSEQUENTIAL
DAMAGES THAT IN ANY WAY ARISE OUT OF OR IN CONNECTION WITH THE USE AND/OR THE
PERFORMANCE OF SUCH SERVICES, MATERIALS OR PRODUCTS FURNISHED BY DEVELOPER. IN
NO EVENT SHALL ANY LIABILITY OF DEVELOPER TO DISTRIBUTOR PURSUANT TO THIS
AGREEMENT EXCEED THE AMOUNT RECEIVED BY DEVELOPER FROM DISTRIBUTOR WITH RESPECT
TO THE TECHNOLOGY (INCLUDING SOFTWARE) GIVING RISE TO THE LIABILITY.
8. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR.
8.01 ESTIMATED DISTRIBUTION DATE. Except as otherwise provided in
Exhibit A, upon receipt of Developer's localization kit, Distributor shall,
within one (1) week, provide Developer with an estimated distribution date for
the related Software or Technology. This distribution date must be within two
(2) calendar months after receipt of the localization kit. Failure to meet such
distribution date shall be a material breach within the meaning of Section
10.04.
8.02 PROMOTION OF SOFTWARE OR TECHNOLOGY. Distributor shall, at its own
expense, vigorously promote the distribution of the Software or Technology
within the Territory. Such promotion shall include, but shall not be limited to,
advertising the Software or Technology in publications within the Territory,
participating in trade shows, establishing appropriate distribution channels and
merchandising programs, and directly soliciting orders from customers for
Software or Technology.
8.03 TECHNICAL SUPPORT. Distributor shall provide the level of technical
support for all Localized Software or Technology equivalent in all material
respects to that which Developer provides its distributors and End Users, within
the U.S.
8.04 MARKETING AND SALES MATERIALS. Distributor shall be responsible to
produce appropriate sales and marketing materials, all of which are subject to
advance approval of Developer. In the event Developer fails to approve or
disapprove of any such materials within fifteen (15) days after submission to
Developer by Distributor with a request for approval, such materials shall be
deemed approved. Developer shall cooperate and provide reasonable assistance to
Distributor in connection with preparation of such materials.
8.05 NO ASSIGNMENT. Distributor shall not assign or otherwise transfer its
rights or obligations under this Agreement.
8.06 GOVERNMENTAL APPROVALS. Distributor shall advise Developer of any
governmental permits or approvals required to consummate the transactions
contemplated by this Agreement, shall obtain such permits or approvals, and
shall provide evidence thereof to Developer.
8.07 REGISTRATION OF USERS. Distributor shall include a registration
form in Software Copies, shall use its best efforts to obtain the registration
of End Users, and shall provide all such End User Registration information to
Developer promptly (and in any event within thirty (30) days) after the end of
each calendar quarter. Distributor shall similarly use its best efforts to
identify customers of Technology and make such information available to
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Developer.
8.08 MARKET DATA. Distributor shall provide Developer with market data
relating to the Software or Technology, including (i) monthly numbers of
Software or Technology sold to other distributors, resellers, and End Users,
and, where feasible, the identity of the parties to whom sold, (ii) marketing
and merchandising programs completed and planned, (iii) names of distributors
and resellers offering the Software and Technology, and (iv) any other
information of benefit to Developer in cooperating with Distributor and
developing modifications to the Software or Technology or new products. In
particular, Distributor shall give Developer notice of all Software or
Technology "bugs" promptly upon discovery and, in the case of severe bugs,
within forty-eight (48) hours after discovery.
8.09 OTHER PRODUCTS OR SERVICES. Distributor acknowledges that in the
course of the performance of this Agreement, certain valuable confidential and
proprietary information will be furnished by Developer to Distributor and
because of the unique nature of such information, it is necessary to provide for
non-competition obligations in order to protect such information. In light of
the above, during the term of this Agreement and, at the discretion of Developer
exercisable by notice to Distributor not later than the non-renewal or other
termination of this Agreement, for a period of six (6) months after such
non-renewal or other termination, Distributor shall not, without the express
written approval of Developer, commence marketing, distribution, sale or other
providing of any technology (as such term is described in Section 1.09,
including computer software) or other product or service which may tend to be
directly or indirectly competitive or similar in purpose or use with, or
otherwise related to, the Software or Technology or Potential Technology (as
defined in Section 1.09), as determined in Developer's discretion. The parties
acknowledge that breach of this Section would cause irreparable damage to
Developer, for which Developer would not have an adequate remedy for damages,
such that, in the event of any such breach, in addition to other remedies,
Developer may apply to a court to specifically enforce the provisions of this
Section.
9. ADDITIONAL OBLIGATIONS OF DEVELOPER.
9.01 NEW DEVELOPMENTS. Developer shall provide Distributor reasonable
notice of new developments in connection with the Software or Technology.
9.02 MARKETING ASSISTANCE. Developer shall provide Distributor with market
data which is obtained by Developer and relates to the Software or Technology,
and which may benefit Distributor in distributing the Software or Technology.
10. TERM, RENEWAL AND TERMINATION.
10.01 TERM. The Effective Date of this Agreement is as set forth above,
and the Effective Date of each subsequent Exhibit A is as set forth in such
Exhibit. The term of this Agreement shall be one (1) year, commencing with its
Effective Date, and the term with respect to each subsequent Exhibit A shall be
one (1) year, commencing with its respective Effective Date, in either case
unless renewed or terminated earlier under the provisions of this Section 10.
10.02 AUTOMATIC RENEWAL AND EXTENDED TERM. In any case in which Exhibit
A includes Minimum Peformance Requirements (as defined in Section 10.03) and
Developer has not granted to any third party rights to distribute Localized
Software or Localized Technology under its option to do so under Section 10.03,
the term of this Agreement shall be automatically renewed for an additional
period of one (1) year upon the end of each one (1) year term. This Agreement
shall not so automatically renew where no Minimum Performance Requirements are
so included in Exhibit A. Further, Exhibit A may specifically provide for a term
of more than one (1) year, including a perpetual term (an "Extended Term"), in
connection with, among other terms and conditions, for an advance or other
lump-sum royalty or other payment. Such Extended Term shall be provided only by
specific language to that effect, and shall not otherwise be implied or
construed from the terms of this Agreement or any Exhibit A. In the case of any
Extended Term, Exhibit A shall be deemed to include annual Minimum Performance
Requirements for
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the duration of such Extended Term, and such deemed Requirements shall be deemed
to be met on an annual basis for the duration of such Extended Term.
10.03 CONVERSION TO NON-EXCLUSIVE DISTRIBUTORSHIP. In the event
Distributor fails to meet Minimum Peformance Requirements for any period in
which such Requirements are provided for in Exhibit A, Developer shall have the
ption to grant to any third party rights to distribute Localized Software or
Localized Technology in the Territory notwithstanding the provisions of Section
2.02. Such option may be exercised by giving notice to Distributor of
Developer's desire to grant such rights at any time within eleven (11) months
after the end of any period in which Distributor fails to meet such
Requirements. The fact that after such failure Developer meets such Requirements
shall not affect Developer's option or grant of rights. Such rights may be
granted for the remainder of the term of this Agreement or such longer period as
Developer shall desire. Failure by Distributor to meet any of such Minimum
Performance Requirements shall not, however, constitute a breach of this
Agreement. "Minimum Performance Requirements" for purposes of this Agreement
shall mean any such requirements specifically described as such on Exhibit A.
10.04 RETENTION, RETURN AND TRANSFER OF MATERIALS AND INTELLECTUAL
PROPERTY RIGHTS. All Software or Technology, trademarks, trade names, packaging
trade dress, patents, other intellectual property rights, (including all
derivative works and enhancements) samples, literature and sales aides of every
kind shall remain the property of Developer, regardless of whether provided by
Developer to Distributor or whether created, developed, modified or otherwise
obtained by Distributor. Immediately upon termination of this Agreement,
Distributor shall ship or transfer to Developer, as Developer may direct, all
such items in its possession (or ownership, if any), at Developer's expense.
Distributor shall further execute any and all such documents as Developer may
request in order to convey and transfer title to any such property to Developer.
Distributor shall not make or retain any copies of any confidential items or
information which may have been entrusted to it. Effective upon the termination
of this Agreement, Distributor shall cease to use all trademarks, service marks,
tradenames, packaging trade dress, or other intellectual property rights used in
connection with Software or Technology by either Distributor or Developer.
10.05 BREACH AND TERMINATION. Prior to terminating this Agreement,
requesting arbitration, filing suit or taking similar action upon a breach of
this Agreement by either party, the non-breaching party shall give the breaching
party notice of the basis for asserting such breach. If the breaching party
fails to cure such breach within thirty (30) days, and the breach is a material
breach, the non-breaching party may terminate this Agreement. If the breach is
the non-payment of amounts due under this Agreement, the breach shall be deemed
to be a material breach, and the breaching party shall have fifteen (15) days to
cure such breach.
10.06 WAIVER OF LIABILITY ON TERMINATION. Should this Agreement or any
portion thereof expire, be terminated or not be renewed at any time for any
reason, neither party will be liable to the other because of such expiration,
termination or non-renewal for reimbursement of costs or expenses or for damages
on account of the loss of prospective profits, anticipated sales, goodwill or on
account of expenditures, inventory, investments, leases or commitment in
connection with the business of Developer or Distributor, or for any other
reason whatsoever flowing from such termination or expiration. Termination shall
not, however, relieve either party of any obligation incurred before termination
or of liability for breach of any of the provisions of this Agreement.
Distributor hereby specifically waives, to the maximum extent permitted by law,
any claims for compensation damages arising out of the termination or expiration
of this Agreement in accordance with its terms.
11. PROPERTY RIGHTS.
11.01 OWNERSHIP. Distributor agrees that Developer owns all right, title
and interest in the Software or Technology now or hereafter subject to this
Agreement, and in all patents, trademarks, trade names, inventions, copyrights,
know-how, trade secrets, and any other proprietary information relating to the
design, operation or maintenance of the Software or Technology, and all
marketing, sales or other promotional materials, trade dress, and artwork
utilized in connection with the Software or Technology. Distributor shall not
record or file or otherwise attempt to establish ownership of such items in
Distributor's name. The use by Distributor of any of these property
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rights is authorized only for the purposes set forth in this Agreement, and upon
termination of this Agreement for any reason such authorization shall cease
except to the extent necessary for Distributor to provide maintenance to its
existing customers for the Software or Technology. Software source code shall be
disclosed by Developer to Distributor only in Developer's sole discretion. The
parties agree that their mutual intention is that after any termination of this
Agreement (or after Distributor's rights under this Agreement become
non-exclusive), Developer shall have all legal rights, and shall be allowed, to
continue manufacture, distribution and sale of the Software or Technology in the
form and manner which the Software or Technology were so manufactured,
distributed and sold during the term of this Agreement.
11.02 TRADEMARKS. Distributor shall distribute Software or Technology
using only trademarks, tradenames and servicemarks expressly authorized in
writing by Developer ("Trademarks"). Distributor shall assist Developer in
selecting local Trademarks, the sole owner of which shall be Developer.
Distributor admits the validity of, and agrees not to challenge, any Trademarks
and agrees that all rights that may be acquired by use of Trademarks shall inure
to the sole benefit of Developer. Where Developer, in its sole discretion, deems
it appropriate, Distributor shall be recorded as a registered user of
Trademarks, and will cooperate with Developer to be so recorded. Distributor
shall not use the Trademarks or any part thereof as part of its name, and shall
not use any similar name, trademarks, service mark or other designation similar
to the Trademarks. Distributor agrees not to register any trademarks similar to
the Trademarks, and to assign any such registrations to Developer. If any
application for registration which is or has been filed by Distributor relates,
as determined in the sole discretion of Developer, to a mark which is similar,
deceptive or misleading with respect to any of the Trademarks, Distributor shall
reimburse Developer for all cost and expenses of any opposition or related
proceedings, including attorneys fees, brought by Developer or its authorized
representative to challenge, oppose or cancel such application or registration.
In the event Distributor learns of any actual or threatened infringement of a
Trademark or any passing- off, or any third party alleges that any Trademark is
liable to cause deception or confusion to the public, Distributor shall
immediately notify Developer, and Distributor shall provide reasonable
assistance to Developer if Developer determines to commence or defend
proceedings. Any such proceeding, and any recovery in such proceeding, shall be
equally divided between Developer and Distributor. Nothing in this Agreement
shall be construed to require Developer to defend or enforce the Trademarks.
Distributor shall comply with all applicable laws and regulations pertaining to
the proper use and designation of the Trademarks in the Territory, and shall
notify Developer promptly (and in any event within thirty (30) days) of any law
or regulation which is inconsistent with any provision of this Agreement. Upon
request, Distributor agrees to assist Developer in the filing and recording of
Developer's trade names, copyrights, patents and trademarks in Territory.
12. INDEMNIFICATION OF DEVELOPER. Distributor will defend, indemnify and hold
Developer harmless from and against any and all actions, damages, liabilities,
costs, and expenses (including but not limited to attorney's fees) incurred by
Developer as a result of (i) any false or misleading statement made by
Distributor to any customer or potential customer; (ii) any breach by
Distributor of any terms or conditions set forth in this Agreement, or of any
representations or warranties made by Distributor under this Agreement, (iii)
any action taken by Distributor in the performance of this Agreement which is
not authorized by Developer, or (iv) infringement or violation with respect to
the Territory of any patents, copyrights, trade secrets, or other proprietary or
intellectual property rights by any product owned by Developer which is
localized or distributed by Distributor.
13. INDEMNIFICATION OF DISTRIBUTOR. Developer warrants that as of the Effective
Date of any Exhibit A attached to this Agreement, the Software or Technology
specified in such Exhibit A does not infringe upon any copyrights or trade
secrets of any third party. Developer agrees, at its own expense, to defend and
indemnify Distributor, if necessary, against any actions, liabilities, costs,
damages, claims, losses and expenses (including but not limited to attorney's
fees) arising out of Developer's breach of this warranty.
14. CONFIDENTIALITY. Distributor acknowledges that it may acquire information
which is proprietary or confidential to Developer, including technology within
the meaning of Section 1.09, or financial, product, sales or marketing
information (collectively, and in whatever form, "Confidential Information").
Distributor agrees to hold such Confidential Information in strict confidence
and not to copy, reproduce, sell, assign, license, market, transfer
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or otherwise disclose such information to third parties or to use such
information for any purposes without the express written consent of Developer,
and to advise Distributor's employees, agents, and representatives of their
obligation to keep such information confidential. Distributor shall use
reasonable efforts to identify and prevent any unauthorized use or disclosure of
Confidential Information, and shall advise Developer in the event Distributor
learns or has reason to believe that any person has violated or intends to
violate the terms of this Agreement, and will cooperate in seeking injunctive
relief against such person. Distributor shall have the right to disclose
Confidential Information to its employees, agents and third party consultants
who have a need to know such information in the course of localization,
marketing or distribution of the Software or Technology, provided that each such
person signs a nondisclosure agreement with respect to such information to
protect its confidentially.
15. ARBITRATION, JURISDICTION AND VENUE. Except as provided below, any dispute
or claim between the parties shall be finally settled by binding arbitration in
Seattle, Washington under the Rules of the American Arbitration Association by a
single arbitrator who is knowledgeable about the development, distribution, and
licensing of computer software or technology, as appropriate. In resolving all
such disputes, the arbitrator shall apply the law of the State of Washington as
more fully set forth in Section 16. Developer may, however, at its option, seek
a temporary restraining order, preliminary injunction, permanent injunction and
any other form of equitable relief from any court having jurisdiction over the
subject matter and personal jurisdiction over Distributor. Distributor hereby
consents to and submits to the jurisdiction of federal and state courts located
in the State of Washington. Should any such action be commenced in the State of
Washington, Distributor agrees not to assert, and hereby waives, any defenses
based on improper venue, inconvenience of the forum, lack of personal
jurisdiction or sufficiency of service of process or the like. Distributor
hereby appoints the Secretary of State of the State of Washington as
Distributor's agent for service of process.
16. CHOICE OF LAW. This Agreement shall be governed by and construed under
the laws of the State of Washington without regard to conflict of laws
principles or the U.N. Convention on Contracts for the International Sale of
Goods.
17. LEGAL EXPENSE. The prevailing party in any legal action or arbitration
brought by one party against the other arising out of this Agreement shall be
entitled, in addition to any other rights and remedies it may have, to
reimbursement for its expenses, including court costs and reasonable attorney's
fees.
18. ENTIRE AGREEMENT: AMENDMENT. This Agreement constitutes the entire
agreement of the parties relating to its subject matter and supersedes any prior
agreements, written or oral. This Agreement may be revised or amended only in a
writing executed by the parties.
19. NOTICES.
Any notices or other communications given in connection with this
Agreement will be validly given if in writing, and will be effective upon
personal delivery or upon delivery if sent by recognized carrier or by facsimile
transmission, with confirmation of the time and date of delivery, to the
following or such other person as the party may respectively designate in the
manner set forth in this Section:
If to Developer: Acceleration Software International Corporation
1223 N.W. Finn Hill Road
Poulsbo, WA 98370, United States
FAX 360-598-2450
If to Distributor: Pointe Control, Inc.
P.O.Box 1462
North Bend, WA 98405, United States
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IN WITNESS WHEREOF, the parties have entered into this Agreement effective as of
the date provided above.
"Developer" "Distributor"
Acceleration Software Int. Corp. Point Control, Inc.
a Washington corporation a Washington corporation
by /s/ Clint T. Ballard by /s/ Robert Miracle
----------------------------- --------------------------------
Clint T. Ballard, its C.E.O. Robert Miracle, its Managing Director
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Exhibit "A" to
Distribution Agreement dated November 9, 1996
Effective Date. February 1, 1998 for this Exhibit A, which supercedes the
International Distributor Agreement entered into on November 2, 1995 and further
amended on February 16, 1996 and the Exhibit A dated August 12, 1997 for
"virtual CD-ROM" between Acceleration Software International Corporation and
Pointe Control.
Territory. Japan.
Software or Technology. The Software shall consist of Developer's software
programs commonly known as "Phantom CD 2.0" for Windows 95. Phantom CD 2.0 may
be sold in Retail Sales, OEM Sales, and Site Licenses (within the meaning of
Section 2.02 and this Exhibit A).
Payment. CD-ROM Discs for Retail Sales. Payment to Developer shall be in the
amount of Twenty Dollars (US$20) for each CD-ROM disc containing Phantom CD 2.0,
which is purchased from Developer for resale to an End User in a transaction not
in connection with an OEM Sale or a Site License (within the meaning of Section
2.03) ("Retail Sale")
CD-ROM Discs for OEM Sales and Site Licenses. Payment to Developer in connection
with both OEM Sales and Site Licenses (within the meaning of Section 2.03) shall
be sixty percent (60%) of the gross receipts.
Minimum Performance Requirements. Net of product returns/exchanges, Distributor
shall purchase Ten Thousand (10,000) copies every three months commencing
February 1, 1998, during the term of this Agreement for distribution in Retail
Sales in accordance with this Exhibit A. The initial order shall be for Ten
Thousand (10,000) copies.
Incorporation into Distribution Agreement. This Exhibit A is hereby made a part
of the Distribution Agreement dated November 9, 1996, between Acceleration
Software and Pointe Control, Inc., including but not limited to Sections 15 and
16 providing that disputes shall be settled by binding arbitration in, and
according to the laws of, the State of Washington, U.S.A., and the parties
executing below hereby agree to be bound by the terms and conditions of such
Agreement.
"Developer" "Distributor"
Acceleration Software Int. Corp., Pointe Control, Inc.
a Washington corporation a Washington corporation
by /s/ Clint L. Ballard by /s/ Robert Miracle
------------------------------ -----------------------------
Clint L. Ballard, its C.E.O. Robert Miracle, its Managing Director
<PAGE>
Exhibit "A" to
Distribution Agreement Dated November 9, 1996
Effective Date. August 14, 1998 for this Exhibit A.
Territory. Japan.
Software or Technology. The Software shall consist of Developer's programs
called SuperFassst! '98.
Payment. Payment to Developer shall be US $750,000 (seven hundred fifty
thousand dollars) according to the following schedule:
1. Final Acceptance of production master $375,000
2. September 1st, 1998 $ 75,000
3. October 1st, 1998 $ 75,000
4. November 1st, 1998 $ 75,000
5. December 1st, 1998 $ 75,000
6. January 1st, 1998 $ 75,000
Total: $750,000
Upon receipt by Developer of the Total according to the schedule above, an
Unlimited License for the Software will be granted. Upon receipt of payment 1,
for $375,000 above, all subsequent payments are an irrevocable obligation of
Pointe Control and Source. In the event of a delay of any payment by 3 days, all
unpaid amounts become due immediately with interest of 0.05% per day compounded
daily to accrue immediately. Both parties agree that at the sole discretion of
the Developer, other remedies can be chosen which may include but not be limited
to, immediate termination, conversion to non-exclusive, recalculation of amounts
due based on units manufactured, etc.
Incorporation into Distribution Agreement. This Exhibit A is hereby made a part
of the Distribution Agreement dated November 9, 1996, between Acceleration
Software and Pointe Control, Inc., including but not limited to Sections 15 and
16 providing that disputes shall be settled by binding arbitration in, and
according to the laws of, the State of Washington, U.S.A., and the parties
executing below hereby agree to be bound by the terms and conditions of such
Agreement.
"Developer" "Distributor"
Acceleration Software Int. Corp., Pointe Control, Inc.
a Washington corporation a Washington corporation
by /s/ Clint L. Ballard by /s/ Robert Miracle
----------------------------- -------------------------------------
Clint L. Ballard, its C.E.O. Robert Miracle, its Managing Director
<PAGE>
Exhibit "A" to
Distribution Agreement Dated November 9, 1996
Effective Date. January 20th, 1999 for this Exhibit A.
Territory. Japan.
Software or Technology. The Software shall consist of Developer's products
called:
1. SuperFassst! iMacintosh
2. d-Time MP3
3. d-Time iMacintosh
4. Phantom NT
5. Phantom iMacintosh
6. - 10. Five more Windows '95/'98 products TBD during the year.
Payment. Payment to Developer shall be a guaranteed US $2,400,000 (two
million four hundred thousand dollars) plus an additional US $400,000 (four
hundred thousand dollars) bonus for each of the products 6. to 10. that achieves
a "TOP PRODUCT" (as defined below) status according to the following schedule:
1. February 7th, 1999 $150,000
2. March 7th, 1999 $150,000
3. April 7th, 1999 $300,000
4. May 7th, 1999 $150,000
5. June 7th, 1999 $150,000
6. July 7th, 1999 $300,000
7. August 7th, 1999 $200,000
8. September 7th, 1999 $200,000
9. October 7th, 1999 $200,000
10. November 7th, 1999 $200,000
11. December 7th, 1999 $200,000
12. January 7th, 2000 $200,000
Sub-Total: $2,400,000
"http://www.com-path.ne.jp" has a weekly "System and Utilities" best sellers
list for software products in Japan. Each week that a product is in the Top 10
of this list shall earn two points and each week that it is #11 to #20 on this
list shall earn one point toward being a TOP PRODUCT. A product shall be deemed
to be a TOP PRODUCT after it accumulates 18 such points and the bonus shall be
paid within 30 days after the 18th point is earned. A product can earn such
points only during the 28 weeks following its initial appearance on the list.
Only products 6. through 10. are eligible for a TOP PRODUCT bonus, for a maximum
possible bonus of two million dollars. In the event that a product is released
that is categorized outside of the "System and Utilities" category, the
appropriate category's best sellers list shall be used.
Upon receipt by Developer of all of the above payments according to the schedule
above, an Unlimited License for the Software will be granted. Upon receipt of
payment 1. for $150,000, all subsequent payments are an irrevocable obligation
of Pointe Control and Source. In the event of a delay of any payment by 3 days,
all unpaid amounts become due immediately with interest of 0.05% per day
compounded daily to accrue immediately. Both parties agree that at the sole
discretion of the Developer, other remedies can be
<PAGE>
chosen which may include but not be limited to, immediate termination,
conversion to non-exclusive, recalculation of amounts due based on units
manufactured, etc.
In the event that the 10 SKU's cannot be delivered by January 1st, 2000,
Acceleration Software will continue to work to complete them without additional
payments. In the event that the 10 SKU's are delivered ahead of schedule, a new
agreement will be entered into to cover SKU's beyond the 10 from this agreement.
In such a scenario, there would be overlapping payment streams from this
agreement and the new agreement.
Incorporation into Distribution Agreement. This Exhibit A is hereby made a part
of the Distribution Agreement dated November 9, 1996, between Acceleration
Software and Pointe Control, Inc., including but not limited to Sections 15 and
16 providing that disputes shall be settled by binding arbitration in, and
according to the laws of, the State of Washington, U.S.A., and the parties
executing below hereby agree to be bound by the terms and conditions of such
Agreement.
"Developer" "Distributor"
Acceleration Software Int. Corp., Pointe Control, Inc.
a Washington corporation a Washington corporation
by /s/ Clint L. Ballard by /s/ Robert Miracle
------------------------------ -----------------------------------
Clint L. Ballard, its C.E.O. Robert Miracle, its Managing Director
<PAGE>
AMENDMENT TO EXHIBIT "A" EFFECTIVE JANUARY 20, 1999 TO DISTRIBUTION AGREEMENT
DATED NOVEMBER 9, 1996
EFFECTIVE DATE. October 14th, 1999 for this Exhibit A.
TERRITORY. Japan
SOFTWARE OR TECHNOLOGY. The Software shall consist of Developer's products
called:
1. d-Time '98 (done)
2. MP3 App for '98 (done)
3. d-Time iMacintosh (done)
4. MP3 App for iMacintosh (done)
5. Compilation product comprising existing versions of: (done)
d-Time '98, SuperFassst! '98, Webcelerator '98, Phantom '98
6. TBD
7. TBD
8. TBD
9. TBD
10.TBD
PAYMENT. Payment to Developer shall be a guaranteed additional US
$1,050,000 (one million fifty thousand dollars) plus an additional US $400,000
(four hundred thousand dollars) bonus for each of the products 4. through 10.
that achieves a "TOP PRODUCT" (as defined below) status according to the
following schedule:
1. November 7th, 1999 $ 150,000
2. December 7th, 1999 $ 150,000
3. January 7th, 2000 $ 150,000
4. February 7th, 2000 $ 150,000
5. March 7th, 2000 $ 150,000
6. April 7th, 2000 $ 150,000
7. May 7th, 2000 $ 150,000
Sub-Total: $1,050,000
"http://www.com-path.ne.jp" has a weekly "System and Utilities" best sellers
list for software products in Japan. Each week that a product is in the Top 10
of this list, or comparable list, shall earn two points and each week that it is
#11 to #20 on this list shall earn one point toward being a TOP PRODUCT. A
product shall be deemed to be a "TOP PRODUCT" after it accumulates 18 such
points and the bonus shall be paid within 30 days after the 18th point is
earned. A product can earn such points only during the 28 weeks following its
initial appearance on the list. Products 4. to 10. are eligible for a TOP
PRODUCT bonus, with a maximum possible bonus of two million dollars. In the
event that a product is released that is categorized outside of the "System and
Utilities" category, the appropriate category's best sellers list shall be used.
Upon receipt by Developer of all of the above payments according to the schedule
above, an Unlimited License of the Software will be granted. All payments are an
irrevocable obligation of Pointe Control and Source. In the event of a delay of
any payment by 3 days, all unpaid amounts become due immediately with interest
of 0.05% per day compounded daily to accrue immediately. Both parties agree that
at the sole discretion of the Developer, other remedies can be chosen, which may
include but not be limited to, immediate termination, conversion to non-
exclusive, recalculation of amounts due based on units manufactured, etc.
In the event that the 10 SKU's cannot be delivered by May 7th, 2000,
Acceleration Software will continue to work to complete them without any more
payments than the above. In the event that the 10 SKU's are delivered ahead of
<PAGE>
schedule, a new agreement will be entered into to cover SKU's beyond the 10 from
this agreement. In such a scenario, there would be overlapping payment streams
from this agreement and the new agreement.
ALTERNATIVE SOURCE OF PAYMENT. Both parties agree to let Huge Incorporated have
the option to make the monthly and bonus payments instead of Pointe Control and
each such payment shall remove Pointe Control's obligation for that specific
payment. In the event that Developer receives all remaining payments from Huge
Incorporated, all parties agree that Huge Incorporated shall be the one granted
the Unlimited License for all of the Software.
INCORPORATION INTO DISTRIBUTION AGREEMENT. This Exhibit A is hereby made a part
of the Distribution Agreement dated November 9, 1996, between Acceleration
Software and Pointe Control, including but not limited to Sections 15 and 16
providing that disputes shall be settled by binding arbitration in, and
according to the laws of, the State of Washington, U.S.A., and the parties
executing below hereby agree to be bound by the terms and conditions of such
Agreement.
"Developer" "Distributor"
Acceleration Software Int. Corp. Pointe Control
a Washington corporation a Washington corporation
by /s/ Clint Ballard by /s/ Robert Miracle
-------------------------- ------------------------------------
Clint Ballard, its C.E.O. Robert Miracle, its Managing Director
Exhibit 10.20
eAcceleration Corp.
Acceleration Software International Corporation
1223 NW Finn Hill Road
Poulsbo, Washington 98370
May 1, 2000
Millennium Capital Quest
222 Munson Road
Wolcott, Connecticut 06716
Re: Consulting Agreement Dated July 12, 1999 between Acceleration
Software International Corporation and you (the "Consulting
Agreement")
Gentlemen:
This letter confirms the following:
1. The Consulting Agreement is hereby terminated in its entirety. In this
connection, you agree that you will not receive any further
compensation from the undersigned (the "Company") pursuant to the
Consulting Agreement, and you acknowledge that you have not received
any compensation from the Company relating to any particular offering
of securities.
2. You hereby acknowledge that no amounts have been or will be incurred
or paid pursuant to paragraph 6 of the Consulting Agreement, including
for any marketing or advertising.
3. You acknowledge that you have not provided to the Company any services
relating to the following:
(a) coordinating communications between the Company and investment
banks or equity investor groups;
(b) attracting investor venture capital or joint venture partners;
(c) structuring or promoting the Company's initial public offering
or any other offering of securities by the Company;
(d) finding for the Company suitable broker-dealers and/or market
makers to sell and/or trade any of the Company's stock, whether
in the U.S. or in the
<PAGE>
European markets; or
(e) finding or arranging investments by any investor in the
Company's initial public offering.
4. Neither you, nor any of your affiliates, including, but not limited to
DigitalIPO.com, will provide any of the services described in
paragraph 3 hereof to us in connection with our initial public
offering.
5. The five-year options to purchase 34,300 shares of eAcceleration
Corp.'s common stock at an exercise price equal to $4.78 per share
granted to you pursuant to section 5A(v) of the Consulting Agreement
shall be represented by the option certificate attached hereto as
exhibit A.
If the foregoing accurately sets forth our understanding, please sign where
indicated below.
Very truly yours,
EACCELERATION CORP.
ACCELERATION SOFTWARE
INTERNATIONAL CORPORATION
By: /s/ Clint Ballard
------------------------------
Clint Ballard
President
Accepted and agreed as of the date first above written:
MILLENNIUM CAPITAL QUEST
By: /s/ Gregg Nolan
------------------------------
Name: Gregg Nolan
Title: C.F.O.
<PAGE>
Exhibit A
THE OPTIONS EVIDENCED HEREBY AND THE SHARES OF COMMON STOCK ISSUABLE PURSUANT
HERETO HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THE OPTIONS AND ANY SHARES OF COMMON STOCK ISSUABLE PURSUANT THERETO HAVE BEEN
AND WILL BE ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO DISTRIBUTION
OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR THE OPTIONS AND/OR
SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THE
OPTIONS AND SUCH SHARES TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT AND SUCH STATE SECURITIES LAWS.
Void after 5:00 p.m. New York City time, on April 30, 2010.
Option to Purchase 34,300 Shares of Common Stock.
OPTION TO PURCHASE COMMON STOCK
of
eAcceleration Corp.
This is to certify that, FOR VALUE RECEIVED, MILLENIUM CAPITAL QUEST, or
permitted assigns ("Holder"), is entitled to purchase, subject to the provisions
of this option certificate, from eAcceleration Corp., a Delaware corporation
(the "Company"), 34,300 fully paid, validly issued and nonassessable shares of
the common stock, $.0001 par value (the "Common Stock"), of the Company at an
exercise price of $4.78 per share (the "Exercise Price"), at any time or from
time to time during the period commencing on the date hereof and terminating on
April 30, 2010 (the "Termination Date"), but not later than 5:00 p.m. New York
City Time, on the Termination Date (subject to the provisions of this option
certificate). The number of shares of Common Stock to be received upon the
exercise of this option certificate and the price to be paid for each share of
Common Stock may be adjusted from time to time as hereinafter set forth. The
rights granted by this option certificate to purchase shares of Common Stock are
hereinafter sometimes referred to as the "Options;" the shares of Common Stock
deliverable upon exercise of the Options, as adjusted from time to time, are
hereinafter sometimes referred to as "Option Shares;" and the exercise price of
a share of Common Stock in effect at any time, as adjusted from time to time, is
hereinafter sometimes referred to as the "Exercise Price." The Options have been
granted outside of the Company's 1999 Stock
1
<PAGE>
Incentive Compensation Plan (the "1999 Plan"); provided, however, that, except
as specifically provided in this option certificate, the Options shall be
governed and interpreted in accordance with the provisions of the 1999 Plan.
1. Duration.
Subject to the earlier termination as provided herein or under the
1999 Plan, the Option shall expire at the close of business on April 30, 2010
(the "Termination Date").
2. Written Notice of Exercise.
The Options may be exercised only by delivering to the President or
Secretary of the Company, at the Company's principal executive offices, of a
written notice of exercise substantially in the form described in paragraph 8
hereof.
3. Anti-Dilution Provisions.
(a) If there is any stock dividend, stock split, or combination of
shares of Common Stock, the number and amount of Option Shares then subject to
the Options shall be proportionately and appropriately adjusted as determined by
the Committee, whose determination shall be final, conclusive and binding upon
Holder and the Company.
(b) If there is any other change in the Common Stock, including a
recapitalization, reorganization, sale or exchange of assets, exchange of
shares, offering of subscription rights, or a merger or consolidation in which
the Company is the surviving corporation, an adjustment, if any, shall be made
in the Option Shares then subject to the Options as the Board of Directors or
Committee may deem equitable, and whose determination shall be final, conclusive
and binding upon Holder and the Company. Failure of the Board of Directors or
the Committee to provide for an adjustment pursuant to this subparagraph prior
to the effective date of any Company action referred to in this Paragraph 3(b)
shall be conclusive evidence that no adjustment is required in consequence of
such action.
(c) If the Company is merged into or consolidated with any other
corporation and the Company is not the surviving corporation, or if it sells all
or substantially all of its assets to any other corporation, then either (i) the
Company shall cause provisions to be made for the continuance of the Options
after such event, or for the substitution for the Options of an option covering
the number and class of securities which Holder would have been entitled to
receive in such merger or consolidation by virtue of such sale if Holder had
been the holder of record of a number of shares of Common Stock equal to the
number of Option Shares covered by the unexercised portion of the Options, or
(ii) the Company shall give to Holder written notice of its election not to
cause such provision to be made and the Options shall become exercisable in full
(or, at the election of Holder in part) at any time during a period of twenty
days, to be designated by the Company, ending not more than ten days prior to
the effective date of the merger,
2
<PAGE>
consolidation or sale, in which case the Options shall not be exercisable to any
extent after the expiration of such twenty-day period. In no event, however,
shall the Options be exercisable after the Termination Date.
4. Investment Representation and Legend of Certificates.
Holder acknowledges and agrees that, for any period in which a
registration statement, with respect to the Options and/or Option Shares under
the Securities Act of 1933, as amended (the "Securities Act"), is not effective,
Holder shall hold the Options and will purchase and/or own the Option Shares for
investment and not for resale or distribution. The Company shall have the right
to place upon the face and/or reverse side of any stock certificate or
certificates evidencing the Option Shares such legend as the Committee may
prescribe for the purpose of preventing disposition of such Option Shares in
violation of the Securities Act.
5. Non-Transferability.
The Options shall not be transferable by Holder other than by will
or by the laws of descent or distribution, and are exercisable during the
lifetime of Holder only by Holder. The terms of this option certificate shall be
binding upon the executors, administrators, heirs, successors and assigns of
Holder.
6. Certain Rights Not Conferred by Option.
Holder shall not, by virtue of holding Options, be entitled to any
rights of a stockholder in the Company.
7. Expenses.
The Company shall pay all original issue and transfer taxes with
respect to the issuance of Option Shares pursuant hereto and all other fees and
expenses necessarily incurred by the Company in connection therewith.
8. Exercise of Options.
(a) The Options shall become exercisable cumulatively to the extent
of the total number of Option Shares on each of the following dates:
Date Number of Option Shares
- ---- -----------------------
Immediately. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,860
May 1, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,860
May 1, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,860
May 1, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,860
4
<PAGE>
May 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,860
(b) The Options shall be exercisable, in whole or part and from time
to time, by written notice of such exercise, delivered to the President or
Secretary of the Company, at the Company's principal office by personal
delivery, against written receipt therefor, or by pre-paid, certified or
registered mail, return receipt requested. Such notice shall specify the number
of Option Shares for which Options are being exercised (which number, if less
than all of the Option Shares then subject to exercise, shall be 50 or an
integral multiple thereof) and shall be accompanied by payment of the full
exercise price for the Option Shares for which Options are being exercised.
(c) The form of payment of the Exercise Price for Option Shares
purchased pursuant to Options shall consist of (i) cash; (ii) check (subject to
collection); (iii) in the discretion of the Board of Directors of the Company or
the Committee administering the 1999 Plan, by (A) delivery to the Company of a
promissory note, (B) surrender to the Company of other shares of Common Stock
owned by Holder which are then registered under the Securities Act or otherwise
publicly saleable under Rule 144 or other applicable exemption under the
Securities Act and have a fair market value on the date of surrender equal to
the aggregate Exercise Price of the Option Shares as to which Options shall be
exercised, (C) assignment to the Company of the net proceeds (to the extent
necessary to pay such Exercise Price) to be received from a registered broker
upon the sale of the Option Shares or assignment of the net proceeds (to the
extent necessary to pay such Exercise Price) of a loan from such broker in such
amount or (D) such other consideration and method of payment for the issuance of
stock to the extent permitted under Delaware law and satisfying the requirements
of Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as
amended; or (iv) any combination of such methods of payment.
(d) Any promissory note (the "Note") delivered pursuant to clause
(iii)(A) of paragraph 8(c) shall be in the form prescribed by the Board of
Directors of the Company or the Committee administering the 1999 Plan and shall
be in the principal sum of such total Exercise Price, bear interest at the
applicable federal rate (as such term is defined in the Code) in effect as of
the date of the Note and be duly executed by Holder.
(e) No Shares shall be delivered upon exercise of Options until all
laws, rules and regulations which the Board of Directors of the Company or the
Committee administering the 1999 Plan may deem applicable have been complied
with. If a registration statement under the Securities Act is not then in effect
with respect to the shares issuable upon such exercise, the Company may require
as a condition precedent that Holder, upon exercising the Options, deliver to
the Company a written representation and undertaking, satisfactory in form and
substance to the Committee, that, among other things, Holder is acquiring the
shares for Holder's own account for investment and not with a view to the
distribution thereof.
(f) Holder shall not be considered a record holder of the Option
Shares so purchased
4
<PAGE>
for any purpose until the date on which Holder is actually recorded as the
holder of such Option Shares in the records of the Company.
(g) In the event of Holder's death, disability or termination of
employment, the exercisability of Options shall be governed by the provisions of
the 1999 Plan, unless such provisions are waived by the Committee, in the
Committee's sole discretion.
Dated: As of May 1, 2000 EACCELERATION CORP.
By: /s/ Clint Ballard
---------------------------------
Name: Clint Ballard
Title: President
Holder acknowledges receipt of a copy of the 1999 Plan and certain
information related thereto and represents that Holder is familiar with the
terms and provisions thereof, and hereby accepts the Option subject to all of
the terms and provisions thereof. Holder has reviewed the 1999 Plan and this
option agreement in their entirety, has had an opportunity to obtain the advice
of counsel prior to executing this option agreement and fully understands all of
the terms and provisions of the Options and this option agreement. Holder hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Committee upon any questions rising under the 1999 Plan.
Holder further agrees to notify the Company upon any change in the residence
address indicated below.
Accepted and agreed as of the date first set forth above:
MILLENNIUM CAPITAL QUEST
By: /s/ Gregg R. Nolan
-----------------------------
Name: Gregg R. Nolan
Title: C.F.O.
Address: 222 Munson Road
Wilcott, CT 06716
Sample Tombstone Banner Insertion Order
Email: FAX:
Date: Avails Checked [x] This I/O [ ] IS
[X] IS NOT accompanied by Agency I/O
Campaign Information
[ ] New Advertiser/Agency [x] Existing Advertiser/Agency
Agency Name: Client Name: eAcceleration Corp.
Job I/O# 5031 Campaign reference Name:
Street Address: 1223 NW Finn Hill Road Campaign Flight Date: to
City/State/Zip: Poulsbo, WA 98370 Impressions: 778000000
Contact: Clint Ballard Gross CPM: $ Net CPM: $
Contact Email: [email protected] Total Campaign Value (Gross): $
Phone: 360-697-9260 Fax: 360-598-2450 Total Campaign Value (Net):
$
Do NOT Bill to Agency [ ](Enter Billing Instruction in Special Instructions
Section)
Campaign Type
Buy Type [ ] Open Inventory* [x] Guaranteed Inventory *Open Inventory campaigns
are automatically pre-empted by Guaranteed Inventory campaigns and do not
guarantee any specific web site delivery or impression volume. ** Advertiser
agrees to pay for any impression delivered.
Network: Description:
1. [ ] RON* (Run Of Network, Guaranteed or Open Inventory Available)
*Please note that the sites included in the RON buy and the
Guaranteed of Open inventory status may vary based upon the CPM
price and are subject to management approval.
2. [ ] TRON* (Targeted Run of Network, ie: area code/browser/os, Guaranteed or
Open Inventory Available)
Online Demographics: [ ] ALL (Default)
[ ] Domain [ ] Countries [ ] Browser [ ] Internet Service Provider
[ ] SIC [ ] Area Code [ ] OpSystem [ ] Time of Day/Days of Week
Creative Banner Details
Creative Contact: Clint Ballard Email: [email protected] Phone #:
360-697-9260
Creative URL Link: Will be provided Creative Art Text:
Creative Pck-up Site: [ ] Creative in email to follow
[x] GIF [ ] HTML*, ** [ ] ReDirect [ ] Interstital*
[ ] Full Page [ ] Other*
*Site Requires Javescript Tag. ** HTML must not include any Cgf's.*,
** Requires 3-5 business days for testing.
Banners Specs - max 12K/Button Specs - max 4K (Max 4 loops) Send Creatives to:
[email protected]
Reporting Details
Reporting Contact: Clint Ballard Email: [email protected] Phone #:
360-697-9260
Agency Reporting Template [ ] Yes* [x] No Reporting Schedule: Weekly [ ]
Monthly [ ]
*Please forward reporting template to Reporting Special Instructions:
in digital format.
Special Instructions
24 hour creative change notice. 3 day cancel notice. Run with a 3 cap Frequency.
Stream-line the impressions so that 2 million impressions served per day.
Advertiser has the option to increase or decrease impression depending on the
current impression level. To run on windows 95, 98 and NT environments only.
Filter out all other operating systems.
Signature
AUTHORIZED AGENCY REPRESENTIVE
- ------------------------- ---------------------------- --------------
Authorized Signature Print Name Date
<PAGE>
[Banner Network] agrees not to modify the appearance of any of eAcceleration
Corp.'s banners relating to Insertion Order # in any way. [Banner Network] will
transmit each such banner file as submitted to it by eAcceleration to all sites
in accordance with the terms of the Insertion Order without any modification,
and the appearance of such banners will not be changed.
Signature of
Representation of [Banner Network]
- --------------------- --------------------- -------------
Authorized Signature Print Name Date
Consent of Independent Accountants
We hereby consent to the use in this Amendment No. 3 to Registration Statement
No. 333-90867, on form SB-2 and the Prospectus contained therein of our report
dated March 16, 2000, except for Notes 7 and 11, for which the date is May 1,
2000, relating to the consolidated financial statements of eAcceleration Corp.
which appears in such Prospectus. We also consent to the reference to us under
the heading experts, in such Prospectus.
/s/ McKennon, Wilson & Morgan LLP
Irvine, California
May 19, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE TEN MONTH
PERIOD ENDED OCTOBER 31, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 337,300
<SECURITIES> 0
<RECEIVABLES> 931,252
<ALLOWANCES> (50,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,332,114
<PP&E> 383,020
<DEPRECIATION> (264,519)
<TOTAL-ASSETS> 2,016,482
<CURRENT-LIABILITIES> 842,740
<BONDS> 0
0
0
<COMMON> 3,430
<OTHER-SE> 1,170,312
<TOTAL-LIABILITY-AND-EQUITY> 2,016,482
<SALES> 1,931,118
<TOTAL-REVENUES> 1,931,118
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (775)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347
<INCOME-PRETAX> 100,065
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,065
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
