U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO________
COMMISSION FILE NUMBER: 000-29869
EACCELERATION CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-2006409
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1223 NW FINN HILL ROAD, POULSBO, WASHINGTON 98370
(Address of principal executive offices)
(360) 697-9260
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 34,300,000 shares of Common Stock, as
of November 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
INDEX
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheet as of December 31, 1999 and
September 30, 2000 (unaudited). . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of income for the three
and nine months ended September 30, 1999 and 2000 (unaudited) . . . . . 4
Condensed consolidated statements of cash flows for the nine months
ended September 30, 1999 and 2000 (unaudited) . . . . . . . . . . . . . 5
Consolidated notes to condensed financial statements (unaudited) . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . 17
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . 17
Item 4. Submissions of Matters to a Vote of Security Holders. . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EACCELERATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 329,483 $ 289,504
Accounts receivable, net of allowance for doubtful
accounts of $46,750 and $75,000 . . . . . . . . . . . . . . . . . . 857,490 1,827,729
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . 108,891 50,676
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 1,295,864 2,167,909
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 102,141 134,460
Patents and trademarks, net . . . . . . . . . . . . . . . . . . . . . . 80,216 70,718
Deferred offering costs . . . . . . . . . . . . . . . . . . . . . . . . 333,546 714,147
Long-term receivable . . . . . . . . . . . . . . . . . . . . . . . . . 52,415 -
------------ ------------
$ 1,864,182 $ 3,087,234
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities . . . . . . . . . . . . . . $ 879,833 $ 1,651,460
------------ ------------
Stockholders' equity:
Common stock, par value $.0001; 100,000,000 shares authorized;
34,300,000 shares issued and outstanding at December 31, 1999
and September 30, 2000 (unaudited) . . . . . . . . . . . . . . . . . 3,430 3,430
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 350,205 543,069
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 630,714 889,275
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 984,349 1,435,774
------------ ------------
$ 1,864,182 $ 3,087,234
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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EACCELERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Internet $ 806,471 $ 1,648,522 $ 1,595,496 $ 4,470,150
License 583,115 651,000 1,430,844 1,666,453
----------- ----------- ----------- -----------
1,389,586 2,299,522 3,026,340 6,136,603
----------- ----------- ----------- -----------
Cost and expenses:
Sales and marketing 722,265 1,266,322 1,593,711 3,748,499
Software development
and products 216,021 712,586 707,739 1,396,121
General and administrative 338,429 208,015 562,170 743,800
----------- ----------- ----------- -----------
1,276,715 2,186,923 2,863,620 5,888,420
----------- ----------- ----------- -----------
Income from operations 112,871 112,599 162,720 248,183
----------- ----------- ----------- -----------
Other income 1,101 8,814 3,661 10,954
----------- ----------- ----------- -----------
Net income $ 113,972 $ 121,413 $ 166,381 $ 259,137
=========== =========== =========== ===========
Earnings per common share --
basic and diluted $ .003 $ .004 $ .005 $ .008
=========== =========== =========== ===========
Weighted average shares outstanding --
basic 34,300,000 34,300,000
=========== ===========
diluted 34,434,319 34,434,319
=========== ===========
Pro forma financial data (unaudited):
Pro forma income before tax $ 186,513 $ 364,737
=========== ===========
Pro forma net income $ 123,099 $ 240,726
=========== ===========
Pro forma earnings per common share --
basic and diluted $ .004 $ .007
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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EACCELERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 166,381 $ 259,137
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 34,511 43,515
Provision for bad debt 30,000 28,250
Value of stock options issued 55,992 114,864
Fair value of officer services 78,000 78,000
Changes in operating assets and liabilities:
Accounts receivable (277,674) (998,489)
Other current assets (5,786) 58,215
Long-term receivable - 52,415
Accounts payable and accrued liabilities 528,509 771,627
Other current liabilities (20,361) -
------------ ------------
Net cash provided by operating activities 589,572 407,534
------------ ------------
Cash flows from investing activities:
Purchases of equipment (75,906) (66,336)
------------ ------------
Net cash used in investing activities (75,906) (66,336)
------------ ------------
Cash flows from financing activities:
Deferred offering costs (46,340) (380,601)
Distribution to shareholders (339,856) (576)
------------ ------------
Net cash used in financing activities (386,196) (381,177)
------------ ------------
Net increase in cash and cash equivalents 127,470 (39,979)
Cash and cash equivalents at beginning of period 239,193 329,483
------------ ------------
Cash and cash equivalents at end of period $ 366,663 $ 289,504
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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EACCELERATION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
eAcceleration Corp. (the "Company") and its wholly-owned subsidiary have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and nine-month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form SB-2, as amended, as declared effective
by the Securities and Exchange Commission on August 14, 2000, including all
supplements thereto (the "Registration Statement").
NOTE 2 - EARNINGS PER SHARE
The table set forth below reconciles the components of the basic net income per
share calculation to the diluted net income per share.
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Weighted average shares outstanding -
Basic 34,300,000 34,300,000
Effect of dilutive stock options - 134,319
---------- ----------
Weighted average shares outstanding -
Diluted 34,300,000 34,434,319
========== ==========
</TABLE>
NOTE 3 - DEFERRED OFFERING COSTS
The Company is engaged in an initial public offering (the "Offering") of its
common stock pursuant to the Registration Statement. In connection with the
Offering, the Company has incurred various costs, both direct and deferred.
The Company capitalizes its direct Offering costs. At September 30, 2000,
deferred Offering costs consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses $ 500,835
Accounting fees and expenses 102,355
Blue Sky fees and expenses 49,951
Printing and engraving 12,813
Other 48,193
----------
Total $ 714,147
==========
</TABLE>
At September 30, 2000, amounts due for direct costs incurred in connection with
the Offering were $458,638.
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EACCELERATION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SEGMENT AND OTHER INFORMATION
During the three- and nine-month periods ended September 30, 1999 and 2000,
revenues from licensing were primarily derived in Asia, and Internet advertising
revenues were derived from customers primarily located in the United States.
Revenues by geographic region are as follows for the three- and nine-month
periods ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Asia $ 583,115 $ 651,000 $ 1,430,844 $ 1,666,453
U.S. 806,471 1,648,522 1,595,496 4,470,150
----------- ----------- ----------- -----------
Total revenue $ 1,389,586 $ 2,299,522 $ 3,026,340 $ 6,136,603
=========== =========== =========== ===========
</TABLE>
During the three-month period ended September 30, 1999, revenues from one
unaffiliated customer, Pointe Control, accounted for 42% of the Company's total
revenues; this customer also accounted for 100% of the Company's licensing
revenues in that same period.
During the nine-month periods ended September 30, 1999 and 2000, revenues
from Pointe Control accounted for 47% and 10%, respectively, of the Company's
total revenues; they also accounted for 100% and 37%, respectively, of the
Company's licensing revenues in those same periods.
Additionally, during the nine-month period ended September 30, 2000, the
Company began receiving revenues under a contract with another unaffiliated
customer, Sourcenext Corporation, as discussed in Note 5 below. For the
nine-month period ended September 30, 2000, revenues from Sourcenext accounted
for 17% of total revenue and 63% of licensing revenue. During the three-month
period ended September 30, 2000, Sourcenext Corporation accounted for 28% of
total revenues and 100% of the Company's licensing revenues.
NOTE 5 - CONTRACTS
POINTE CONTROL
On May 26, 2000, the Company's distribution agreement with Pointe Control was
terminated with no further obligations. Revenues generated under the Pointe
Control agreement for the three- and nine-month periods ended September 30, 1999
were $583,115 and $1,430,844, respectively, and for the nine-month period ended
September 30, 2000, revenues under this contract amounted to $610,453. No bonus
payments were received in connection with this contract.
SOURCENEXT CORPORATION
On May 26, 2000, the Company replaced the Pointe Control agreement with a
distribution agreement with Sourcenext Corporation, the beneficiary of the
Pointe Control agreement. The Sourcenext agreement provides for 24 consecutive
monthly payments of $75,000 beginning in June 2000. Under the Sourcenext
agreement, the Company will also receive an additional $75,000 per product for a
total of 24 products that the Company delivers under the terms of the agreement,
during the same 24-month period. Additionally, the Sourcenext agreement provides
for up to five bonus payments of $400,000 each if sales of certain of the
Company's software products 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 Sourcenext agreement, a product receives
two points for being in the top ten on the industry report's best seller's list,
and one point for being ranked eleven through twenty on this list. Once a
product has accumulated 18 points, it has achieved "top product" status. None of
our products have achieved "top product" status during the nine months ended
September 30, 2000.
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EACCELERATION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company records revenue using the percentage-of-completion method for each
software product deliverable. Based on the percentage-of-completion method, the
Company recorded $651,000 in revenues for the three-month period ended September
30, 2000 and $1,666,453 in revenues for the nine-month period ended September
30, 2000.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" providing the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. For companies such
as the Company with fiscal years that begin between December 16, 1999 and March
15, 2000, portions of SAB No. 101 become effective for the fourth quarter of
2000. The Company believes that adopting these portions of SAB No. 101 will not
have a material effect on the Company's financial position or overall trends in
results of operations.
NOTE 7 - INITIAL PUBLIC OFFERING
The Registration Statement for the Company's common stock became effective on
August 14, 2000. Pursuant to the Registration Statement, 3,000,000 shares of
common stock were registered for sale. The Company, through its officers and
directors, is offering a minimum of 400,000 shares and a maximum of 3,000,000 of
its shares in a direct participation offering. Until the Company has sold at
least 400,000 shares, it will not accept subscriptions for any shares.
Subscription funds are deposited in an interest-bearing escrow account. If the
Company is unable to sell the minimum number of shares in accordance with the
Registration Statement, it will return all funds, with interest, to subscribers.
The offering will remain open until all shares offered are sold or nine months
after the date of the Company's prospectus, except that the Company will have
only 180 days to sell at least the first 400,000 shares. As of November 10,
2000, the Company has not yet sold the required minimum number of shares and,
thus, it has not yet accepted subscriptions or realized any proceeds from the
Offering.
NOTE 8 - SUBSEQUENT EVENTS
In October 2000, the Company's operating subsidiary, Acceleration Software
International Corporation, applied for a $300,000 line of credit with a local
bank. The Company expects that amounts drawn on the line of credit will bear
interest at a variable rate equal to the bank's prime rate plus .25%, and will
be used for working capital, primarily to fund receivables for the software
licensing segment of the Company's business. The Company anticipates that any
amounts drawn from this line of credit will be secured by assets of the Company
and those of its subsidiary. The bank has not yet approved this line of credit,
and there is no assurance that the line of credit will be approved. See also
discussion of this line of credit in the Liquidity section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In October 2000, the Company entered into a securities purchase agreement with
one of its advertising and marketing clients, Contera Corporation, whereby in
exchange for $50,000, the Company purchased 10,000 shares of Contera's common
stock and received warrants to purchase an additional 100,000 shares of
Contera's common stock with an exercise price of $5.00 per share. The Company
also received the right to purchase, for an additional $50,000, an additional
10,000 shares of Contera's common stock, and warrants to purchase an additional
100,000 shares of Contera's common stock.
- 8 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB includes "forward-looking statements".
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which could cause the actual results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements not to occur or be realized. Such forward-looking statements
generally are based upon our best estimates of future results, performance or
achievement, based upon current conditions, and based upon the most recent
results of operations. Forward-looking statements may be identified by the use
of forward-looking terminology such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue" or similar terms, variations of those terms
or the negative of those terms. Potential risks and uncertainties include, among
other things, those factors set forth below under "Factors Affecting Future
Operating Results" and in our other filings with the Securities and Exchange
Commission.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. We undertake
no obligation to publicly update or revise any forward- looking statements,
whether as a result of new information, future events or otherwise.
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, WE REFER TO
EACCELERATION CORP. AS "WE," "US" OR "OUR".
The following discussion should be read with the historical condensed
consolidated financial statements, and accompanying notes, which are included
herein, and the consolidated financial statements included in our registration
statement on Form SB-2, as amended, as declared effective to the SEC on August
14, 2000, together with all supplements to the registration statement.
GENERAL
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 agree to 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 license localized versions of our software products for
distribution in Asia to software customers who cannot obtain our software for
free on our websites.
In 1999, our revenues were derived primarily from our software development
and licensing contracts with Pointe Control for distribution in Asia. During
1999, we diversified our revenue stream to include Internet advertising from our
websites. In 2000, our Internet advertising fees continued to increase to enable
us to be less dependent on software licensing. We intend to increase our future
revenues by concentrating on increasing our Internet revenues.
Under the terms of our former distribution agreement with Pointe Control
and current distribution agreement with Sourcenext Corporation, we granted an
unlimited license to sell the software in Japan as specified under such
agreements. This does not materially affect our operations attributed to
offering software free on our websites. This license only applies to localized,
Japanese versions of the software, and not the English versions which are
available for free on our websites. Additionally, users in Japan generally
cannot run the free English-language versions on their operating systems.
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<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUES
Our revenues increased $909,936 or 65% from $1,389,586 during the 1999
third quarter, to $2,299,522 during the 2000 third quarter, primarily due to an
increase of $842,051 or 104% in our Internet advertising and marketing revenues
to $1,648,522 in the 2000 third quarter from $806,471 in the 1999 third quarter.
This increase is due to our efforts to expand our customer base by marketing a
wide variety of advertising options available on the Internet.
Revenues from software licensing increased $67,885 or 12% from $583,115
during the 1999 third quarter, to $651,000 during the 2000 third quarter.
Software license revenues were derived from a license agreement with Pointe
Control in Asia during the 1999 third quarter. During the 2000 third quarter,
software license revenues were derived from a contract with Sourcenext
Corporation, as discussed below. Both contracts were accounted for using the
percentage-of-completion method.
During the 2000 third quarter, we recognized software license revenues in
Asia from a distribution agreement that we entered into with Sourcenext
Corporation as of May 26, 2000, that replaced our distribution agreement with
Pointe Control. Sourcenext is a Japanese company that was the beneficiary of our
previous distribution agreement with Pointe Control. The agreement with
Sourcenext provides for the production and license of 24 specified new software
products and 24 consecutive monthly payments of $75,000. Additionally, we are
entitled to receive $75,000 for each of the 24 products that we deliver under
the terms of this agreement during this 24-month period.
During 1999, we commenced Internet revenue sharing programs with several
other companies, under which we were to receive a portion of such other
companies' sales originating from our websites ranging from 3% to 50%. No
significant revenue sharing programs have been commenced in the current year.
Our revenues derived from revenue sharing programs during the 1999 third quarter
and 2000 third quarter have been inconsequential.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased by $544,057 or 75% from $722,265
during the 1999 third quarter to $1,266,322 during the 2000 third quarter
primarily due to an increase in Internet advertising expenses in order to
generate traffic to our websites, which in turn generated increased Internet
advertising and marketing revenues. Internet advertising expenses incurred in
the 1999 third quarter were $620,492, and such expenses increased by $725,255 or
117% to $1,345,747 in the 2000 third quarter. We do not have any material
commitments to purchase banner space or other advertising space from any of our
vendors. We typically enter into short- to intermediate-term purchase agreements
with our suppliers, and such agreements are cancelable by either party at short
notice.
SOFTWARE DEVELOPMENT AND PRODUCT EXPENSES
Software development and product costs increased $496,565 or 230% from
$216,021 during the 1999 third quarter to $712,586 in the 2000 third quarter,
primarily due to our expansion during the 2000 third quarter, including an
increase in employees as compared to this prior year period. We expect our
Internet development activities to continue to increase significantly as we
increase our emphasis on generating Internet advertising and marketing revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $130,414 or 39% from $338,429
during the 1999 third quarter to $208,015 in the 2000 third quarter, due
primarily to the existence of extraordinary expenses in the 1999 third quarter
that did not exist in the 2000 third quarter, such as those incurred in
connection with a two-year audit, increased use of outside software consultants,
as well as a change in the allocation of our business segments in
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<PAGE>
2000. We anticipate that legal and professional fees, salaries and wages,
and general office expenses, will increase significantly to provide for
infrastructure necessary to administer a growing company.
FUTURE RESULTS
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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUES
Our revenues increased $3,110,263 or 103% from $3,026,340 during the first
three quarters of 1999, to $6,136,603 during the first three quarters of 2000,
primarily due to an increase of $2,874,654 or 180% in our Internet advertising
and marketing revenues to $4,470,150 in the first three quarters of 2000 from
$1,595,496 in the first three quarters of 1999. This increase is due to our
efforts to expand our customer base by marketing a wide variety of advertising
options available on the Internet.
Revenues from software licensing also increased $235,609 or 16% from
$1,430,844 during the first three quarters of 1999, to $1,666,453 during the
first three quarters of 2000. Software license revenues were derived from a
license agreement with Pointe Control in Asia during the first three quarters of
1999 and part of the first three quarters of 2000. During the 2000 third quarter
and the first three quarters of 2000, we also recognized software license
revenues in Asia from our agreement with Sourcenext Corporation. Revenues under
both contracts were recognized using the percentage-of-completion method. Our
revenues derived from revenue sharing programs during the first three quarters
of 1999 and 2000 have been inconsequential.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased by $2,154,788 or 135% from
$1,593,711 during the first three quarters of 1999 to $3,748,499 during the
first three quarters of 2000 primarily due to an increase in Internet
advertising expenses in order to generate traffic to our websites, which in turn
generated increased Internet advertising and marketing revenues. Internet
advertising expenses incurred in the first three quarters of 1999 were
$1,346,175, and such expenses increased by $2,101,142 or 156% to $3,447,317 in
the first three quarters of 2000. We do not have any material commitments to
purchase banner space or other advertising space from any of our vendors. We
typically enter into short- to intermediate-term purchase agreements with our
suppliers, and such agreements are cancelable by either party at short notice.
SOFTWARE DEVELOPMENT AND PRODUCT EXPENSES
Software development and product costs increased $688,382 or 97% from
$707,739 during the first three quarters of 1999 to $1,396,121 in the first
three quarters of 2000, due to our expansion during the first three quarters of
2000, including an increase in employees as compared to the prior year period.
We expect our Internet development activities to continue to increase
significantly as we increase our emphasis on generating Internet advertising and
marketing revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $181,630 or 32% from $562,170
during the first three quarters of 1999 to $743,800 in the first three quarters
of 2000, largely due to increases in Internet communications-related expenses
and salaries and wages. We anticipate that legal and professional fees, salaries
and wages, and general office expenses will increase significantly to provide
for infrastructure necessary to administer a growing company.
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<PAGE>
We record compensation expense for options granted to employees if the
exercise price is less than the fair market value of the underlying common
stock. Because options issued to employees were granted at the estimated fair
market value, no compensation expense relating to these options was charged to
operations in the first three quarters of 1999 or 2000. Options issued to
non-employees are valued based on the "Black-Scholes" valuation model that
considers volatility, among other factors. Accordingly, we recorded $55,992 and
$114,864 of compensation expense during the first three quarters of 1999 and
2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES.
During the periods reported, we generated sufficient cash flows from
operations to support our business. During the first three quarters of 1999 and
2000, we generated cash flows from operations of $589,572 and $407,534,
respectively. The increase in net income was partially offset by increases in
accounts receivable which required the use of additional operating cash flows in
1999 and 2000.
At September 30, 2000, we had cash and cash equivalents of $289,504 and
working capital of $516,449. 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 continued increase in revenues; and for capital
expenditures, including the purchase of computer equipment and software.
However, our working capital requirements may change depending upon numerous
factors, including, among others, the need to expand our website traffic through
increased amounts of 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. In October 2000, our operating subsidiary, Acceleration
Software International Corporation, applied for a $300,000 line of credit with a
local bank. We expect that amounts drawn on the line of credit will bear
interest at a variable rate equal to the bank's prime rate plus .25% (which
would currently be 9.75%), and that it will be used for working capital,
primarily to fund receivables for the software licensing segment of our
business. We anticipate that any amounts drawn from this line of credit will be
secured by our assets and those of our subsidiary. The bank has not yet approved
this line of credit, and there is no assurance that the line of credit will be
approved.
We are engaged in an initial public offering of our common stock and there
can be no assurance that we will be able to sell the minimum number of shares
offered in the offering, in which case we will be unable to accept any funds
from the offering. Further, even if we complete this offering, we may be
required to raise additional funds after the 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 we will be able to raise funds in our initial public
offering or that any additional financing will be available when needed or that
if available, such financing will include terms favorable to us or our
stockholders. If we are unable to complete our initial public offering and if
alternative financing is not available when required or is not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
Under our distribution agreement with Sourcenext, in addition to 24
consecutive monthly payments of $75,000, we will receive during such 24-month
period $75,000 for each of the 24 products that we deliver under the terms of
the agreement. As of September 30, 2000, we delivered three products under this
agreement, and based on our historical success in producing new software
products under the Pointe Control agreement, we believe that it is likely that
we will continue to produce and deliver the products as required by the
Sourcenext agreement. We cannot make any assurances that we will be successful,
however, and in the event we do not produce new products in a timely manner, we
will not receive, or continue to receive, the conditional $75,000 payments per
product. Failure to receive a significant amount of the payments from Sourcenext
would have a materially adverse effect on our financial position, operations and
cash flows.
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<PAGE>
CUSTOMER CONCENTRATION
During the first three quarters of 1999, MediaRing, Inc., an Internet
advertising and marketing client, accounted for 15% our total revenue and 28% of
our Internet advertising and marketing revenue. MediaRing did not account for
any of our revenue in 2000 because it began to be more economically beneficial
for us to enter into agreements with other advertisers instead. During the first
three quarters of 2000, another customer, ProSTEP, accounted for 14% of our
total revenue and 19% of our Internet advertising revenue. If one or more of our
large customers ceases operations or otherwise abruptly ceases or reduces their
business with us, our results of operations, cash flows and liquidity could be
adversely affected.
SUPPLIER CONCENTRATION
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have agreements with us that are cancelable by either
party at short notice. For the first three quarters of 1999, three advertising
vendors, BURST!Media, Flycast and Adauction.com accounted for 24%, 17% and 14%,
respectively, of our total Internet media purchases. For the first three
quarters of 2000, one advertising vendor, Adsmart, accounted for 19% of our
total Internet media purchases; no other vendor accounted for over 10% of our
media purchases. 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 flows and liquidity.
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 our initial public offering, we will begin to be
taxed as a separate legal entity under C- corporation status. The estimated
federal income tax rate for our company is approximately 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.
In connection with the Sourcenext Corporation agreement, we are subject to
a 10% withholding tax in Japan on software licenses sold in that country.
Payments are received net of the withheld tax from Sourcenext, our Japanese
customer. Currently, under our S-corporation status, these payments are not
considered deductible expenses, and flow through to our stockholders' personal
returns, as we are not subject to income tax. We are currently reporting these
amounts as "general and administrative" expenses.
After we become a C-corporation, all future tax payments will then become
tax credits on our federal tax return. The withholding tax will produce a
deferred tax asset and may be offset against future taxable income. For the 2000
third quarter and first three quarters of 2000, the income tax expense on a pro
forma basis would be approximately $63,000 and $124,000, respectively.
The condensed consolidated statements of income for the three- and
nine-month periods ended September 30, 2000, that are included in this quarterly
report on Form 10-QSB, also show pro forma income before tax, net income, and
basic and diluted 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 prior to the first closing of our initial public offering, we
will make distributions to our existing stockholders equal to the amount that
our total stockholders' equity exceeds $578,750 on the date of such
distribution.
FACTORS AFFECTING FUTURE OPERATING RESULTS
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.
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<PAGE>
As of September 30, 2000, over 90% of our Internet advertising contracts
could be terminated by either party with several days notice. The loss of a
significant number of these contracts in any period could result in an immediate
and significant decline in our revenues and cause our business to suffer.
A SIGNIFICANT PERCENTAGE OF OUR INTERNET ADVERTISING AND MARKETING REVENUES
ARE DERIVED FROM ONLY A SMALL NUMBER OF INTERNET ADVERTISING AND MARKETING
CUSTOMERS, AND THE INABILITY TO CONTINUE OUR RELATIONSHIP WITH ANY OF THEM COULD
ADVERSELY AFFECT US.
During the first three quarters of 1999, one Internet advertising and
marketing client, MediaRing, Inc., accounted for 15% of our total revenues. By
late 1999 and continuing into 2000, we substantially reduced our volumes with
MediaRing, Inc. During the first three quarters of 2000, MediaRing did not
account for any of our revenues. During such period, another company, ProSTEP,
accounted for 14% 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
AGREEMENTS WITH US THAT ARE CANCELABLE BY EITHER PARTY AT SHORT NOTICE. MANY OF
THESE SUPPLIERS HAVE REPORTED SIGNIFICANT FINANCIAL LOSSES, AND MAY NOT CONTINUE
OPERATIONS. THE LOSS OF A SIGNIFICANT NUMBER OF THESE SUPPLIERS COULD ADVERSELY
AFFECT US.
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have agreements with us that are cancelable by either
party at short notice. For the first three quarters of 1999, three advertising
vendors, BURST!Media, Flycast, and Adauction.com accounted for 24%, 17%, and
14%, respectively, of our total Internet media purchases. For the first three
quarters of 2000, one advertising vendor, Adsmart, accounted for 19% of our
total Internet media purchases; no other vendor accounted for over 10% of our
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.
WE MIGHT ONLY SELL THE MINIMUM NUMBER OF SHARES IN OUR INITIAL PUBLIC OFFERING,
IN WHICH CASE THE GROWTH OF OUR BUSINESS WOULD BE GREATLY LIMITED, OR LESS THAN
THE MINIMUM NUMBER OF SHARES, IN WHICH CASE WE WOULD BE UNABLE TO ACCEPT ANY
SUBSCRIPTIONS.
We can have a closing and accept subscriptions for the sale of shares to
investors if at least 400,000 shares have been sold, which is the minimum number
of shares that may be sold in our initial public 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 the 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 the
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, we will be unable to accept any
subscriptions in the offering. We could also decide, in our discretion, to not
have a closing.
IF AND WHEN WE COMPLETE OUR INITIAL PUBLIC OFFERING, OUR TWO EXISTING
STOCKHOLDERS WILL IN THE AGGREGATE BENEFICIALLY OWN 92% OF THE OUTSTANDING
SHARES OF OUR COMMON STOCK IN THE EVENT THE MAXIMUM NUMBER OF SHARES OFFERED IN
OUR INITIAL PUBLIC OFFERING ARE SOLD, OR 99% OF THE OUTSTANDING SHARES OF OUR
COMMON STOCK IN THE EVENT THE MINIMUM NUMBER OF SHARES OFFERED IN OUR INITIAL
PUBLIC OFFERING ARE SOLD AND WILL CONTINUE TO BE ABLE TO EXERCISE CONTROL OF OUR
COMMON STOCK AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF ALL
STOCKHOLDERS.
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<PAGE>
If and when we complete our initial public offering, Clint Ballard, our
president and chief executive officer, and Diana T. Ballard, our chairman of the
board, will in the aggregate beneficially own 92% of the outstanding shares of
our common stock in the event the maximum number of shares offered in the
offering are sold, or 99% of the outstanding shares of our common stock in the
event the minimum number of shares offered in the offering are sold.
Accordingly, Clint and Diana Ballard will be able to control the election of
directors and all other matters subject to stockholder votes. This concentration
of ownership may have the effect of delaying or preventing a change of control
of eAcceleration, even if this change of control would benefit shareholders.
IF OUR CUSTOMERS REQUEST PRODUCTS AND SERVICES DIRECTLY FROM OUR MARKETER
CLIENTS INSTEAD OF REQUESTING THE PRODUCT OR SERVICE FROM US, OUR BUSINESS COULD
SUFFER.
Our Internet advertiser and marketer clients may offer similar free
products or services on their own websites that we offer on our websites. Our
customers may choose to request products or services directly from our Internet
advertiser and marketer clients instead of requesting the product or service
from us, which would result in lower revenues to us and cause our business to
suffer.
OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND
MAY CONTINUE TO DO SO IN THE FUTURE AS WE CONTINUE TO INCREASE OUR DEPENDENCE ON
INTERNET ADVERTISING AND MARKETING REVENUE AND AS A RESULT, THE MARKET PRICE OF
OUR COMMON STOCK MAY DECLINE.
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 DO NOT HOLD COLLATERAL TO SECURE PAYMENT FROM OUR ONLY SOFTWARE LICENSING
CUSTOMER FROM WHOM WE DERIVE A SIGNIFICANT PERCENTAGE OF OUR TOTAL REVENUE, AND
IF WE FAIL TO RECEIVE PAYMENT FROM THIS CUSTOMER, OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
We do not hold collateral to secure payment on our software licensing
agreement with Sourcenext Corporation, our Asian distributor. Under this
agreement, Sourcenext is obligated to pay us up to $3.6 million through May
2002. Therefore, a default in payment on a significant scale could materially
adversely affect our results of operations and financial condition.
IF WE ARE UNABLE TO CONTINUE TO DELIVER AND DESIGN SOFTWARE PRODUCTS TO OUR
SOFTWARE DISTRIBUTION CUSTOMER AS REQUIRED BY OUR AGREEMENT WITH THIS CUSTOMER,
OUR REVENUES WILL BE SIGNIFICANTLY DECREASED.
Under our distribution agreement with Sourcenext, our software distribution
customer, in addition to other payments, Sourcenext is obligated to pay us
$75,000 per product delivered, for up to 24 products within two years. If we are
unable to design, complete and deliver such products, we could fail to receive a
significant amount of our software distribution revenue.
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<PAGE>
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS, IF ANY, FROM OUR
INITIAL PUBLIC OFFERING, AND WE MIGHT USE THEM INEFFECTIVELY.
We will have broad discretion over how we use the net offering proceeds, if
any, from our initial public offering, and we could spend the proceeds in ways
with which you might not agree. Our business strategy includes possible growth
through acquisitions or significant investments, and we may use a substantial
portion of the offering proceeds to buy or invest in businesses we have not yet
identified. We cannot assure you that we will use these proceeds effectively.
IF WE ESTABLISH A BROKER-DEALER SUBSIDIARY, WE WILL BE SUBJECT TO SUBSTANTIALLY
INCREASED POTENTIAL REGULATORY AND ECONOMIC LIABILITY.
Our proposed broker-dealer subsidiary may be restricted by the NASD, other
regulatory bodies and its clearing firm with respect to its ability to
participate in underwritings, and we have no present intention to underwrite any
securities offerings. If we decide to start underwriting offerings, we would
face numerous challenges and restrictions. The broker-dealer subsidiary may
incur losses if it is unable to resell any securities it is committed to
purchase or if it is forced to liquidate its commitments at less than the agreed
purchase price. In addition, we would be subject to substantial potential
liability for material misstatements or omissions in prospectuses and other
communications with respect to any underwritten offerings. We do not expect that
any potential liabilities relating to our proposed broker- dealer subsidiary's
role as an underwriter would be covered by insurance.
IF WE ESTABLISH A BROKER-DEALER SUBSIDIARY, WE WILL BECOME SUBJECT TO CAPITAL
MAINTENANCE REQUIREMENTS WHICH COULD HINDER OUR ABILITY TO CARRY OUT OUR
BUSINESS EFFICIENTLY.
If we create a broker-dealer subsidiary, we will be subject to, among other
requirements, the financial capital minimums requirements of Rule 15c3-1 under
the Exchange Act, which is known as the "net capital rule". The net capital rule
is designed to monitor the general financial integrity and liquidity of a
broker-dealer by imposing strict requirements on the amount of indebtedness
which a broker-dealer may incur relative to its equity capital. In computing net
capital, various adjustments are made to net worth which exclude assets which
are not readily convertible into cash, and take a conservative perspective of
other assets such as a broker-dealer's position in securities. The requirements
provide that the broker-dealer shall maintain a minimum level of net capital and
a minimum ratio of net capital to aggregate indebtedness. The particular levels
vary in application depending upon the nature of the activity undertaken by the
broker-dealer and the length of time it has been in business.
The net capital rule would impose restrictions on our proposed
broker-dealer subsidiary's operations and it could, in turn, impose restrictions
on our operations. Compliance with the net capital rule may limit our operations
and those of our proposed broker-dealer subsidiary, which require the intensive
use of capital, such as underwriting commitments and principal trading
activities, and will limit our ability to pay dividends. We will also have to
enter into a membership agreement with the NASD that may similarly limit our
activities.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Our registration statement (Registration No. 333-90867) under the Securities Act
of 1933, in connection with our initial public offering, became effective on
August 14, 2000. A total of up to 3,000,000 shares of common stock were
registered for sale and, through our officers and directors, we are offering a
minimum of 400,000 and a maximum of 3,000,000 of our shares in a direct
participation offering. 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. If we are unable to sell the
minimum number of shares, we will return all funds, with interest, to
subscribers. 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. As of November 10, 2000, we have
not yet sold the required minimum number of shares and, thus, we have not yet
accepted subscriptions or realized any proceeds from this offering. As of
September 30, 2000, we have incurred expenses of $714,147 in connection with the
offering.
If we sell the required minimum of 400,000 shares in the offering, we intend to
accept subscriptions and the proceeds from the escrow account will be available
to us. We intend to use the net proceeds of the offering (total offering
proceeds net of aggregate offering expenses, which expenses will not exceed 20%
of the total offering proceeds) for new product development, marketing and
advertising, improvements and upgrades to our existing facilities and equipment
and development of additional facilities to house our operations, personnel,
computer equipment and working capital and general corporate purposes, including
costs associated with future acquisitions and various other costs necessary for
our ongoing operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Set forth below are all exhibits to this Quarterly Report on Form
10-QSB.
Number Description
------ -----------
10.1 Securities Purchase Agreement, between eAcceleration Corp. and
Contera Corporation, dated October 12, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three-month period ended
September 30, 2000.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EACCELERATION CORP.
Dated: November 14, 2000 By: /s/ Clint Ballard
--------------------------------------------
Clint Ballard
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2000 By: /s/ E. Edward Ahrens
--------------------------------------------
E. Edward Ahrens
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE>
EACCELERATION CORP.
INDEX TO EXHIBITS
Number Description
------ -----------
10.1 Securities Purchase Agreement, between eAcceleration Corp. and Contera
Corporation, dated October 12, 2000.
27 Financial Data Schedule.
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