Registration No. 333-90867
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
-------------------
AMENDMENT NO. 1
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 Number) Identification No.
organization)
1223 NW FINN HILL ROAD, POULSBO, WASHINGTON 98730 - (360) 697-9260
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CLINT BALLARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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
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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 FEBRUARY 16, 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 as soon
as practicable 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.
Prior to this offering, there has been no public market for the shares. We
estimate that the initial public offering price will be $6.25 per share.
THE SHARES OFFERED IN THIS OFFERING INVOLVE A HIGH DEGREE OF RISK. 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>
We currently have no arrangements with underwriters or broker-dealers to
sell our shares.
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 and our Internet advertising and
marketing customers, who pay us for specified actions by our website visitors,
and between us 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
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
will refer to eAcceleration Corp. and Acceleration Software International
Corporation collectively as "eAcceleration", "we", "us" or "our".
EACCELERATION
We are a provider of online direct marketing services, advertising solutions
and proprietary software. We combine Internet-based direct marketing and
advertising services with programs that reward consumers with free software when
they use our designated homepage as their Internet browser's starting page.
These online incentive programs are intended to provide flexible,
incentive-marketing solutions for our Internet advertising and marketing
clients. Our payment structure, in which our Internet advertising and marketing
clients are only charged when our website visitors execute specific predefined
actions, provides these clients with a known cost to achieve the desired
response to their advertising campaigns. We intend to leverage our developing
homepage subscriber base and our targeting capabilities to offer our clients
customized, targeted advertising solutions designed to improve advertisement
response rates and reduce their cost of acquiring new customers.
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 other websites is not a part
of this prospectus.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Shares offered . . . . . . . . . . . Common stock, par value $.0001 per share.
Minimum . . . . . . . . . . . . 400,000 shares
Maximum . . . . . . . . . . . . 3,000,000 shares
Price per share. . . . . . . . . . . $6.25
Shares outstanding after 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.
</TABLE>
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31, Ten months ended October 31,
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
STATEMENTS OF INCOME DATA:
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 1,840,761 $1,919,149 $ 1,638,448 $3,361,536
Costs and expenses:
Software development and products 1,192,728 919,895 687,760 757,269
Sales and marketing. . . . . . . 51,459 369,336 235,595 1,633,140
General and administrative . . . 353,972 305,071 293,455 512,611
Reduction of reserves for claims. (183,554) (28,542) (28,542) -
----------- ---------- ----------- ----------
Total expenses $ 1,414,605 $1,565,760 $ 1,188,268 $2,903,020
----------- ---------- ----------- ----------
Income from operations 426,156 353,389 450,180 458,516
Other income, net . . . . . . . . . . 625,187* 43,092 42,866 3,996
----------- ---------- ----------- ----------
Net income. . . . . . . . . . . . . . $ 1,051,343* $ 396,481 $ 493,046 $ 462,512
=========== ========== =========== ==========
Basic and diluted earnings
per share . . . . . . . . . . . . $ .03 $ .01 $ .01 $ .01
=========== ========== =========== ==========
Pro forma financial data:
Pro forma net income . . . . . . $ 261,677 $ 305,258
========== ==========
Pro forma basic and diluted
earnings per share . . . . . $ .01 $ .01
========== ==========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At October 31, 1999 (unaudited)
Actual As adjusted
------ -----------
Minimum Maximum
------- -------
<S> <C> <C> <C>
Current assets. . . . . . . . . . . . . $ 855,858 $ 2,855,858 $ 19,105,858
Property and equipment. . . . . . . . . 63,208 63,208 63,208
Total assets. . . . . . . . . . . . . . 1,101,747 3,101,747 19,351,747
Current liabilities . . . . . . . . . . 539,660 539,660 539,660
Total stockholders' equity. . . . . . . $ 562,087 $ 2,562,087 $ 18,812,087
- ---------------
<FN>
* Includes $616,728 gain in connection with the settlement of a legal
dispute in 1997.
</FN>
</TABLE>
The pro forma financial data reflects income tax expenses of $134,804 and
$157,254, for the periods ended December 31, 1998 and October 31, 1999,
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 October 31, 1999 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 October 31, 1999 assumes net proceeds
of $18,250,000, net of $500,000 in offering expenses.
We plan to make a distribution of accumulated earnings to our existing
stockholders immediately prior to the first closing of this offering equal to
the amount that our total stockholders' equity exceeds $578,750 as of the date
of such distribution.
4
<PAGE>
RISK FACTORS
The shares offered in this prospectus are speculative and involve a high
degree of risk. If you purchase shares you may lose your entire investment.
Prior to making an investment decision, you should carefully consider all of the
information contained in this prospectus, including the following risk factors.
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:
- new product development;
- marketing and advertising;
- personnel;
- facilities;
- computer equipment and software; and
- working capital and general corporate purposes.
We have not definitively determined how we will allocate proceeds among these
uses, particularly in the event that more than the minimum amount is raised in
this offering. Our business strategy includes possible growth through
acquisitions 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.
See "Use of Proceeds."
OUR TWO EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMMON
STOCK AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF ALL
STOCKHOLDERS.
At the completion of this offering Clint Ballard, our president and chief
executive officer, and Diana T. Ballard, our chairman of the board, will in the
aggregate beneficially own approximately 92.0% of the outstanding shares of our
common stock in the event the maximum number of shares offered in this offering
are sold, or 98.9% of the outstanding shares of our common stock in the event
the minimum number of shares offered in this offering are sold. Accordingly,
Clint and Diana Ballard will be able to control the election of directors and
all other matters subject to stockholder votes. This concentration of ownership
may have the effect of delaying or preventing a change of control of
eAcceleration, even if this change of control would benefit shareholders.
5
<PAGE>
OUR BUSINESS STRATEGY OF ACHIEVING SIGNIFICANT GROWTH WHILE CONTINUING TO
INCREASE OUR EMPHASIS ON INTERNET ADVERTISING AND MARKETING REVENUE MAY NOT BE
SUCCESSFUL.
The Internet advertising and marketing industry is a new and rapidly
evolving market. We may not succeed in implementing our business strategy for
exploiting this market. This strategy involves attracting and maintaining the
loyalty of a larger number of visitors to our websites in order to facilitate
attracting new Internet advertising and marketing clients. If we fail to
successfully implement our business strategy, our business will suffer.
THE MAJORITY OF OUR INTERNET ADVERTISING CONTRACTS HAVE MONTH-TO-MONTH TERMS,
AND THE LOSS OF A SIGNIFICANT NUMBER OF THESE CONTRACTS IN A SHORT PERIOD OF
TIME COULD HARM OUR BUSINESS.
As of October 31, 1999, over 90% of our Internet advertising contracts could
be terminated by either party with several days notice. The loss of a
significant number of these contracts in any period could result in an immediate
and significant decline in our revenues and cause our business to suffer.
THE LOSS OF THE SERVICES OF CLINT BALLARD, OUR PRESIDENT AND CHIEF EXECUTIVE
OFFICER, OR OTHER KEY PERSONNEL WOULD LIKELY HARM OUR BUSINESS.
Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Clint Ballard, our president
and chief executive officer, Diana T. Ballard, our chairman of the board, and
other key employees, including our technical and sales personnel. The loss of
the services of any of 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.
IF WE SUCCEED IN SIGNIFICANTLY INCREASING THE NUMBER OF VISITORS TO OUR
WEBSITES, WE RISK STRAINING OUR SYSTEMS, AND WE BECOME INCREASINGLY VULNERABLE
TO SYSTEM MALFUNCTIONS.
We need to continue to develop and upgrade our technology and to minimize
technical difficulties and system downtime. Any serious or repeated problems
with the performance of our websites could lead to the dissatisfaction of our
visitors, subscribers or our Internet advertising and marketing clients. The
amount of traffic on our websites has increased over time to approximately four
million unique visitors in August 1999, and we are seeking to further increase
traffic. The systems that support our websites must be able to accommodate an
increased volume of traffic. Although we believe our systems can currently
accommodate approximately 25 million visitors monthly, our websites could
encounter a variety of systems problems, including failure of one or more of our
three Internet service providers, hardware failures 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.
6
<PAGE>
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH INTENSE COMPETITION FROM THE
RAPIDLY GROWING NUMBER OF COMPETITORS FOR INTERNET ADVERTISING AND MARKETING
CLIENTS.
We may be unable to compete successfully with current or future competitors
for Internet advertising and marketing clients. We face intense competition from
many companies, both traditional and online, to provide advertising and
marketing services for Internet advertising and marketing clients. Among the
free-offer websites, our primary competitors include FreeShop.com, CyberGold,
Inc., Winfiles.com, Download.com, Shareware.com, Volition.com and Free2Try.com.
Among the specialty lead-generation websites, our competition includes eNews,
Cataloglink and Catalogcity. Additionally, we believe that the primary
competitors for our software products that we give away online are Microsoft
Corporation, Web 3000, Bonzi Software, Symantec, Network Associates, Real
Networks, Nico Mak Computing, Inc. and Aureate Software. We expect competition
from online competitors to increase significantly because there are no
substantial barriers to entry in our industry. 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 MAY BE AT A COMPETITIVE DISADVANTAGE TO OUR COMPETITORS WHO HAVE A GREATER
MARKET SHARE OR FINANCIAL RESOURCES.
Many of our existing competitors, as well as a number of potential new
competitors, have greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than us.
These advantages may allow them to respond more quickly and effectively to new
or emerging technologies and changes in customer or client requirements. It may
also allow them to engage in more extensive research and development, undertake
farther-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential employees, strategic partners and
advertisers. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products or services to address the needs of
our prospective Internet advertising and marketing clients.
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.
7
<PAGE>
OUR PATENTS AND OTHER INTELLECTUAL PROPERTY ARE CRITICAL TO OUR SUCCESS IN BOTH
THE INTERNET ADVERTISING AND MARKETING AND SOFTWARE LICENSING MARKETS, BUT THEIR
PROTECTION IS UNCERTAIN.
We regard our patents, copyrights, service marks, trademarks, trade dress,
trade secrets, and similar intellectual property as critical to our success, and
rely on patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with employees, customers, partners and
others to protect our proprietary rights. We hold nine patents, including one
foreign patent, and have ten patent applications pending. We hold several
trademarks and service marks in the United States. We may not seek or achieve
effective trademark, service mark, copyright and trade secret protection in
every country in which the our products and services are made available online.
There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate to prevent third parties from infringing or
misappropriating our patents, copyrights, trademarks, trade dress and similar
proprietary rights without incurring significant costs.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND OTHER INTELLECTUAL PROPERTY ON
WHICH WE RELY AGAINST INFRINGEMENT CLAIMS BY THIRD PARTIES.
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.
IF THIRD PARTIES CONTINUE TO USE OR ACQUIRE DOMAIN NAMES THAT ARE SIMILAR TO OUR
DOMAIN NAMES, SUCH AS "WWW.EACCELERATION.COM," THEY COULD DECREASE THE VALUE OF
OUR TRADEMARKS AND TAKE CUSTOMERS AWAY FROM OUR WEBSITES.
We currently hold many Internet domain names including eAcceleration.com,
homepageware.com, clicksales.com, downloadsales.com, signupsales.com and
freebranding.com. A third party holds the domain name "acceleration.com" and we
do not expect to stop such third party from using it, even though visitors who
may have intended to reach our website may reach the third party's website
instead. We may be unable to prevent third parties from acquiring similar domain
names, which could reduce the value of our trademarks, potentially weaken our
brand names and take customers away from our website. Domain names generally are
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is evolving. Regulatory bodies could
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. The relationship
between regulations governing domain names and laws protecting trademarks and
similar intellectual property rights is unclear. 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.
8
<PAGE>
ONLINE PRIVACY BREACHES COULD SUBJECT US TO LIABILITY AND DETER CONSUMERS FROM
USING OUR WEBSITES.
Although we do not currently accept credit card information from any third
parties, we may do so in the future. In such event, we could be subject to
litigation and liability if third parties penetrate our network security or
otherwise misappropriate our users' personal or credit card information. This
liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims. It could also include
claims for other misuses of personal information, such as for unauthorized
marketing purposes. In addition, the Federal Trade Commission and other federal
and state agencies have been investigating various Internet companies in
connection with their use of personal information. We could be subject to
investigations and enforcement actions by these or other agencies.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Many 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.
ONLINE SECURITY BREACHES COULD DISRUPT OUR SERVICES, IN WHICH CASE OUR BUSINESS
COULD SUFFER.
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.
OUR BUSINESS WILL SUFFER IF THE ACCEPTANCE OF OUR INTERNET ADVERTISING AND
DIRECT MARKETING SERVICES DO NOT CONTINUE TO INCREASE.
The demand for Internet advertising and marketing may not develop to a level
sufficient to support our continued operations or may develop more slowly than
we expect. We expect to derive a large percentage of revenues from contracts
with clients under which we provide Internet advertising and marketing services
through our websites, homepageware.com, downloadsales.com, clicksales.com and
signupsales.com. The Internet has not existed long enough as a marketing medium
to demonstrate its effectiveness relative to traditional marketing methods.
Marketers that have historically relied on traditional marketing methods may be
reluctant or slow to adopt Internet marketing. Many marketers have limited or no
experience using the Internet as a marketing
9
<PAGE>
medium. In addition, marketers that have invested substantial resources in
traditional methods of marketing may be reluctant to reallocate these resources
to Internet marketing. Email marketing is also vulnerable to potential negative
public perception associated with unsolicited email, known as "spam." Although
we do not send unsolicited email, public perception, press reports or
governmental action related to spam could reduce the overall demand for email.
Those companies that have invested a significant portion of their marketing
budgets in Internet marketing may decide after a time to return to more
traditional methods if they find that Internet marketing is a less effective
method of promoting their products and services than traditional marketing
methods.
THE ABSENCE OF AN INDUSTRY STANDARD IN MEASURING OUR INTERNET MARKETING AND
ADVERTISING EFFECTIVENESS MAY ADVERSELY AFFECT US.
We do not know if accepted industry standards for measuring the
effectiveness of Internet marketing will develop. An absence of accepted
standards for measuring effectiveness could discourage companies from committing
significant resources to Internet marketing. There are a variety of pricing
models for marketing on the Internet. We cannot predict which, if any, will
emerge as the industry standard. Absence of such a standard makes it difficult
to project our future pricing and revenues.
IF THE USAGE AND STABILITY OF THE INTERNET DOES NOT CONTINUE TO INCREASE, WE MAY
BE UNABLE TO CONTINUE TO ATTRACT A SUFFICIENT NUMBER OF USERS OR INTERNET
ADVERTISING AND MARKETING CLIENTS.
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 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
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<PAGE>
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.
AS WE CONTINUE TO INCREASE OUR INTERNET ADVERTISING AND MARKETING REVENUE, IF WE
ARE UNABLE TO ADAPT TO RAPID CHANGES IN THE INTERNET ADVERTISING AND MARKETING
INDUSTRY, OUR BUSINESS WILL SUFFER.
Internet marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.
THERE IS NO ASSURANCE THAT WE WILL MAINTAIN OUR PROFITABILITY, GIVEN OUR
INCREASE IN EMPHASIS ON INTERNET ADVERTISING AND MARKETING REVENUE.
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.
BECAUSE MANY INTERNET COMPANIES ENGAGING IN PUBLIC OFFERINGS HAVE NOT BEEN
HISTORICALLY PROFITABLE, WE CANNOT ASCERTAIN THE EFFECT OF OUR HISTORICAL
PROFITABILITY ON OUR MARKET CAPITALIZATION.
Many capital market participants, including investors, underwriters, market
makers and other broker-dealers appear to place significant value on large
operating losses that are generated by Internet companies that are in the
process of capturing market share. Even though we have captured what we believe
is a significant market share in the Internet advertising and marketing industry
while maintaining our profitability, there is no assurance that the investment
community will appropriately recognize our value, and this may negatively affect
the price of our stock price.
THE SHORT LIFE CYCLES OF OUR SOFTWARE PRODUCTS MAY ADVERSELY AFFECT OUR
REVENUES.
From time to time we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing software 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
software from our websites.
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POTENTIAL GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES RELATING TO THE
INTERNET COULD HARM OUR BUSINESS.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in use of the Internet and reduce the demand for our services.
Recently, Congress enacted legislation regarding children's privacy on the
Internet. Additional laws and regulations may be proposed or adopted with
respect to the Internet, covering issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. The passage
of legislation regarding user privacy or direct marketing on the Internet may
reduce demand for our services or limit our ability to provide customer
information to marketers. Furthermore, the growth of electronic commerce may
prompt calls for more stringent consumer protection laws. For example, the
European Union recently adopted a directive addressing data privacy that may
result in limits on the collection and use of consumer information. The adoption
of consumer protection laws that apply to online marketing could create
uncertainty in Internet usage and reduce the demand for our services.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.
OUR FAILURE TO QUALIFY TO DO BUSINESS IN MANY STATES AND FOREIGN COUNTRIES WHERE
OUR ONLINE SERVICE ARE AVAILABLE COULD NEGATIVELY EFFECT OUR BUSINESS.
Our online services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Our failure to qualify in any
such jurisdictions if we were required to do so could subject us to taxes and
penalties and could restrict our ability to enforce contracts in those
jurisdictions.
WE MIGHT ONLY SELL THE MINIMUM NUMBER OF SHARES.
We can have a closing and accept subscriptions for the sale of shares to
investors if at least 400,000 shares have been sold, which is the minimum number
of shares that may be sold in this offering. In the event such minimum amount,
or any amount which is significantly less that the maximum amount of 3,000,000
shares offered in this offering are sold, we may not be able to develop 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.
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WE MAY NOT SELL AT LEAST THE MINIMUM NUMBER OF SHARES.
We may be unsuccessful in selling at least 400,000 shares in this offering,
and as a result would be unable to accept any subscriptions in the offering, or
we may decide, in our discretion, to not have a closing. Although your funds
will be returned to you from our escrow agent, with interest, you will not have
had 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.
WE ARE SELLING THE SHARES IN A DIRECT PARTICIPATION OFFERING WITHOUT THE USE OF
AN UNDERWRITER.
Our officers and directors are selling the shares in a direct participation
offering, without the resources or expertise of an underwriter. As a result,
there is no assurance that the minimum number of shares will be sold in this
offering or even if the minimum number or more shares are sold, that an
underwriter would not have helped to sell the shares more efficiently or
inexpensively.
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 $6.18 per share or 99% of the offering price per
share if the minimum number of 400,000 shares are sold in the offering and $5.75
or 92% of the public offering price if the maximum number of 3,000,000 shares
are sold in the offering.
THIS IS A DIRECT PARTICIPATION OFFERING OF OUR SHARES FOR WHICH THERE IS NO
PUBLIC MARKET, AND AS A RESULT, WE CANNOT PREDICT WHEN OR WHETHER AN ACTIVE
TRADING MARKET WILL DEVELOP.
There has not been a public market for our common stock. We are not sure
when the common stock will start trading, and this may not occur until well
after the first closing of this offering. We could decide not to facilitate the
commencement or continuation of a trading market for the common stock for an
extended period. We cannot predict the extent to which investor interest in our
common stock will lead to the development of an active trading market or how
liquid that market might become. 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.
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING IS LIKELY TO BE VOLATILE AND
MAY FALL BELOW THE INITIAL PUBLIC OFFERING PRICE, AT LEAST IN PART BECAUSE THIS
IS A DIRECT PARTICIPATION OFFERING.
The stock market has experienced significant price and volume fluctuations,
and the market prices of securities of Internet-related companies have been
particularly volatile. Our officers and directors are selling the shares in a
direct participation offering and as of the date of this prospectus, there is no
underwriter working with us who could provide aftermarket support, and no broker
dealer has committed to selling any shares. Due to this lack of aftermarket
support, the
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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.
CHANGES IN THE PRICE OUR INTERNET-RELATED SERVICES OR THOSE OF OUR COMPETITORS
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR SHARES.
The increase or decrease of the prices of our services could have a material
impact on our market share and revenue derived from our Internet advertising and
marketing business. For example, if our Internet advertising and marketing
competitors are able to charge clients prices below that what we are able to
charge our clients for comparable services, we risk losing market share to our
competitors, while if we charge our clients a lower rate for comparable
services, we risk losing revenues if our market share does not increase
sufficiently. The loss of revenue or market share could adversely affect the
market price of our shares.
SEASONAL FLUCTUATIONS IN OUR REVENUES COULD NEGATIVELY AFFECT THE VALUE OF YOUR
INVESTMENT.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of Internet advertising and marketing, which are
typically higher during the fourth calendar quarter and lower in the following
quarter. The results of operations from our Internet advertising and marketing
operations are expected to be an inverse function of these fluctuations, because
we tend to increase our advertising during periods when the advertising rates,
in general, are lower. In addition, expenditures by Internet advertisers and
marketers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns. If our revenues decline during a period of time when
the Internet advertising and marketing industry as a whole increases, the market
price of our stock could decline.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO OUR GROWING
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.
WE ARE INCREASING OUR EMPHASIS ON INTERNET ADVERTISING AND MARKETING REVENUES,
WHICH MAKES OUR FUTURE PERFORMANCE DIFFICULT TO PREDICT.
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
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from Internet advertising and marketing until 1999. As a result, our
performance since January 1999 is not comparable to prior periods.
LITIGATION AND POTENTIAL LITIGATION RELATING TO US MAY BE COSTLY OR
TIME-CONSUMING.
Our competitors and potential competitors may resort to litigation as a
means of competition, including intellectual property infringement actions. Any
litigation involving us, whether as plaintiff or defendant, regardless of the
outcome, may result in substantial costs and expenses to us and significant
diversion of effort by our management and technical personnel.
WE MAY FACE LITIGATION AND LIABILITY FOR INFORMATION DISPLAYED ON OUR WEBSITES
AND IN OUR NEWSLETTERS.
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.
WE MAY NEED TO RAISE ADDITIONAL FUNDS AFTER THE OFFERING, ESPECIALLY IF WE ONLY
SELL THE MINIMUM NUMBER OF SHARES, BUT WE MAY BE UNABLE TO DO SO.
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 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.
THERE ARE LOW BARRIERS TO ENTRY INTO THE INTERNET-BASED PRODUCTS AND SERVICES
MARKETS IN WHICH WE COMPETE.
The market for Internet-based products and services is relatively new,
intensely competitive and rapidly evolving. There are minimal barriers to entry,
and current and new competitors can launch new Internet sites at a relatively
low cost within relatively short time periods. Accordingly, we expect
competition to persist and intensify and the number of competitors to increase
significantly in the future. We cannot assure you that our websites will compete
successfully.
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IF WE DO NOT REMAIN INNOVATIVE IN THE DEVELOPMENT OF OUR SOFTWARE PRODUCTS AND
INTERNET- RELATED SERVICES, WE MAY NOT REMAIN COMPETITIVE.
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.
IF WE ARE UNABLE TO STRENGTHEN OUR BRAND NAMES SUCH AS "EACCELERATION", WE MAY
BE UNABLE TO COMPETE EFFECTIVELY AGAINST COMPETITORS WITH GREATER BRAND NAME
RECOGNITION.
We have not historically emphasized and have no current plans to
significantly attempt to strengthen our brand names. As competitive pressures in
the online direct marketing industry increase, brand name strength may become
increasingly important. If we do not strengthen our brand names, we may be
unable to maintain or increase traffic to our websites, which 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.
AS WE INCREASE OUR EMPHASIS ON INTERNET ADVERTISING AND MARKETING REVENUE, IF WE
CANNOT DEVELOP OR OBTAIN SUFFICIENT PROMOTIONAL OFFERS OUR BUSINESS MAY SUFFER.
We are increasing our emphasis on Internet advertising and marketing
products and services. 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.
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WE ARE DEPENDENT ON INTERNET ADVERTISING SPACE PROVIDED BY A VARIETY OF INTERNET
ADVERTISING SUPPLIERS, ANY LACK OF WHICH WOULD ADVERSELY AFFECT OUR BUSINESS.
We are dependent on Internet advertising space provided by Internet
advertising suppliers. For the ten months ended October 31, 1999, two
advertising vendors, Burst Media LLC and Flycast, accounted for 20% and 11%,
respectively, of our total Internet advertising purchases. Many of our suppliers
have reported significant financial losses and may not continue operations in
the long term. The unavailability of adequate Internet advertising space could
adversely affect us.
WE WILL HAVE TO MAKE SIGNIFICANT SEVERANCE PAYMENTS TO OUR SENIOR MANAGEMENT IF
WE WISH TO TERMINATE THEM UPON A CHANGE OF OUR CONTROL.
Under the terms of our employment agreements with Clint Ballard, our
president and chief executive officer, and Diana T. Ballard, our chairman of the
board, in the event either of them is terminated upon a change of control of
eAcceleration, he or she will receive three times his or her average salary over
the prior five years, less $1.00. This may inhibit our ability to enter into
arrangements with investors or acquirors which would be beneficial to the
stockholders.
THE ACCEPTANCE OF OUR NEW OR UPGRADED SOFTWARE PRODUCTS THAT WE LICENCE OR GIVE
AWAY ON OUR WEBSITES COULD BE DELAYED OR PREVENTED BY PRODUCT DEFECTS.
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.
THE ACCEPTANCE OF OUR NEW OR UPGRADED SOFTWARE PRODUCTS THAT WE LICENCE OR GIVE
AWAY ON OUR WEBSITES COULD BE LIMITED OR BECOME DIMINISHED BY INSUFFICIENT
FEATURES AND ENHANCEMENTS.
We frequently introduce new software programs and new versions of our
existing software programs. When we release such products, however, due to the
changing demands of our users, the enhancements of our users' operating systems
and compatible software, and our competitors' new products, our products'
features may be insufficient or they may require enhancements. As a result, our
products' market acceptance could be limited or diminished.
IF WE FAIL TO RECEIVE PAYMENT FROM OUR SOFTWARE LICENSING 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 Pointe Control, our Asian distributor. Under this agreement,
Pointe Control is obligated to pay us at least $150,000 per month through May
2000. Therefore, a default in payment on a significant scale could materially
adversely affect our results of operations and financial condition.
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INTERNATIONAL REGULATIONS AND LAWS COULD HAVE AN ADVERSE EFFECT ON OUR
INTERNATIONAL LICENSING AND OPERATIONS.
As a result of our significant international software licensing revenue,
material changes to the regulations and laws of other countries or of
international bodies could have a material adverse impact on us. For example,
tariffs or other trade barriers could be imposed or lifted, or there could be a
change to the tax or regulatory framework within Japan or other countries in
which we do business.
A LARGE PERCENTAGE OF OUR REVENUES ARE DERIVED FROM ONLY ONE SOFTWARE
DISTRIBUTION CUSTOMER AND ONLY A SMALL NUMBER OF INTERNET ADVERTISING AND
MARKETING CUSTOMERS.
In 1998, two software distribution customers, Pointe Control and Syncronys
Soft Corp., accounted for 85% and 14% of our revenues, respectively. For the ten
months ended October 31, 1999, Pointe Control has been our only software
distribution customer, and it accounted for 40% of our revenues. During such
period, one Internet advertising and marketing client, MediaRing, Inc.,
accounted for 14% of our revenues. Although the term of our distribution
agreement with Pointe Control expires in October 2000, the agreement only
guarantees payments to us through May 2000. There is no agreement to extend the
term or otherwise amend the agreement as of the date of this prospectus. The
loss of Point Control as a software distribution customer or any of our major
Internet advertising or marketing clients such as MediaRing, 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 DEPEND ON A DISTRIBUTOR AND ITS SALES REPRESENTATIVES FOR OUR SOFTWARE
LICENSING REVENUE, WHICH MAY ADVERSELY AFFECT OUR SALES AND CASH FLOWS.
Pointe Control, our software distribution customer, accounted for 40% of our
revenues for the ten months ended October 31, 1999. As a distributor, Pointe
Control is in a strong position to negotiate favorable terms of sale, including
price discounts and product return policies. Pointe Control and its sales
representatives may also give higher priority to products other than ours, thus
reducing their efforts to sell our products. We may not be able to increase or
sustain the current amount of our retail shelf space, and as a result, our
operating results could be adversely affected.
BECAUSE OUR REVENUES ARE GENERATED FROM COMPUTER AND SOFTWARE-RELATED MARKETS,
PRODUCTS AND SERVICES, THE POTENTIAL YEAR 2000 COMPUTER PROBLEMS COULD
NEGATIVELY AFFECT OUR BUSINESS.
Many older computer systems and software products currently in use were
coded to accept only two digit entries in the date code field. These date code
fields needed to accept four digit entries to distinguish twenty-first century
dates from twentieth century dates. As a result, prior to January 1, 2000,
computer systems and/or software used by many companies needed to be upgraded to
comply with such Year 2000 requirements. Significant uncertainty existed in the
software and various Internet-related industries concerning the potential
effects associated with
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such compliance. We utilize third-party equipment and we license software
from third parties that may not be Year 2000 compliant. Failure of the our
software or internal computer systems or of third-party equipment or software
which we utilize to be Year 2000 compliant could have resulted in a material
adverse affect on our business, financial condition and results of operations.
Although we have had no material effects of any Year 2000 problems, and to our
knowledge none of the third parties in which we rely have experienced any
material problems, as of the date of this prospectus, we do not know for certain
if there will be any material problems in the future. Furthermore, the spending
patterns of business customers or potential business customers may be affected
by Year 2000 issues as companies may have expended significant resources to
correct or update their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available in the near future for our
Internet advertising and marketing clients to retain our services, which could
have a material adverse effect on our business, financial conditions and results
of operations.
IF WE EXPAND THROUGH ACQUISITION, WE MAY HAVE DIFFICULTY ASSIMILATING OUR
PERSONNEL WITH THAT OF AN ACQUIRED COMPANY.
As part of our business strategy, we may make acquisitions of, or
significant investments in, complementary companies, products or technologies.
Any such future acquisitions would be accompanied by the 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.
IF WE EXPAND THROUGH ACQUISITION, WE MAY HAVE DIFFICULTY ASSIMILATING OUR
OPERATIONS WITH THAT OF THE ACQUIRED COMPANY.
Any future acquisitions could 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.
OUR INVESTORS WILL BE MINORITY STOCKHOLDERS AND OUR DIRECTORS' LIMITED LIABILITY
COULD PREVENT STOCKHOLDERS FROM HOLDING DIRECTORS RESPONSIBLE FOR A LACK OF
CARE.
Our certificate of incorporation provides that our directors, but not our
officers. will not be held liable to us or our stockholders for monetary damages
upon breach of a director's fiduciary duty, except to the extent otherwise
required by law. Accordingly, our directors may not be held liable for a breach
of their fiduciary duty of care.
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WE CARRY GENERAL LIABILITY, PRODUCT LIABILITY AND COMMERCIAL INSURANCE THAT MAY
BE INADEQUATE TO PROTECT US AGAINST ALL CLAIMS.
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.
THE NEED TO DISTRIBUTE LOCALIZED PRODUCTS INTERNATIONALLY COULD HAVE AN ADVERSE
IMPACT ON OUR INTERNATIONAL OPERATIONS.
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 guaranty
that the localization of our software, which is currently effectuated by Pointe
Control for Japanese users, will be acceptable to such users.
WE LACKED DISINTERESTED INDEPENDENT DIRECTORS TO APPROVE OR RATIFY OUR PAST
MATERIAL TRANSACTIONS, AND AS A RESULT YOU HAVE NO INDEPENDENT ASSURANCE THAT
SUCH TRANSACTIONS ARE FAIR.
As of the date of this prospectus, we have not yet elected independent
directors. As a result, no independent director has approved or disapproved any
of our related-party transactions, including our employment agreements with
Clint Ballard and Diana T. Ballard, our granting of stock options to Shane H.
Traveller, our former chief financial officer and our subsequent severance,
settlement and general release agreement with Mr. Traveller upon his
resignation.
WE HAVE NEVER PAID ANY CASH DIVIDENDS ON OUR COMMON STOCK OTHER THAN
S-CORPORATION DISTRIBUTIONS.
We have never paid any cash dividends on the common stock other than
S-corporation distributions and we do not anticipate paying any dividends in the
foreseeable future.
ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES UPON THE EXERCISE OF STOCK
OPTIONS WILL DILUTE OUR STOCKHOLDERS.
As of the date of this prospectus, we have an aggregate of 34,300,000
shares of common stock outstanding. In addition, as of the date of this
prospectus, we have 5,000,000 shares of common stock issuable upon the exercise
of stock options granted or available for grant under our 1999 stock option plan
and 27,500 shares of common stock issuable upon exercise of other stock options
previously granted. All of such shares may be issued without any action or
approval by our stockholders. The issuance of these shares would dilute the
percentage ownership of our common stock held by our stockholders.
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ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES IN CONNECTION WITH
INVESTMENTS OR ACQUISITIONS WILL DILUTE OUR STOCKHOLDERS.
Although there are no material present plans, agreements, commitments or
undertakings with respect to the issuance of additional shares of common stock
or securities convertible into any such shares other than in connection with the
exercise of outstanding stock options, we may decide to issue securities to
third parties in the future in connection with possible investments or
acquisitions by us, or otherwise. Any such shares issued would further dilute
the percentage ownership of our common stock held by our stockholders.
THE POSSIBLE SALE OF SHARES HELD BY INSIDERS COULD REDUCE THE VALUE OF SHARES
YOU PURCHASE IN THIS OFFERING.
Clint Ballard, our president and chief executive officer, and Diana T.
Ballard, our chairman of the board, currently 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 under a lock-in agreement with us. Under
the lock-in agreement, beginning on the day the offering is completed, and
ending no more than two years from the day the offering is completed, they are
prohibited from transferring or pledging 34,191,059 of their shares of our
common stock. The lock-in agreement will terminate sooner if the shares become
"covered securities" as defined by the National Securities Markets Improvement
Act of 1996, including being listed on the Nasdaq National Market, prior to the
completion of the two-year term. Additionally, all of their shares are
restricted, which means that they may only be sold in compliance with a number
of conditions, including those set forth in Rule 144 under the Securities Act of
1933. In general, under Rule 144, commencing 90 days after the date of this
prospectus, Clint and Diana Ballard would be 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 common stock 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. If a large number of shares are sold by Clint Ballard or
Diana T. Ballard, it may reduce the market price of the shares and value of your
shares.
THIS IS A DIRECT PARTICIPATION OFFERING, AND OUR OFFICERS AND DIRECTORS HAVE
DETERMINED THE OFFERING PRICE ARBITRARILY.
This is a direct participation offering and no investment banker or
appraiser has been consulted concerning this offering or the fairness of the
offering price of the shares. Our officers and directors have arbitrarily
determined the offering price and other terms relative to the shares offered.
The offering price may not bear any relationship to assets, earnings, book value
or any other objective criteria of value.
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OUR PRINCIPAL PLACE OF BUSINESS IS LOCATED IN A RURAL LOCATION WHERE THERE IS AN
INCREASED LIKELIHOOD OF UTILITY OUTAGES.
Our principal place of business is located in Poulsbo, Washington, 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 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.
OUR SHARES MAY NEVER BECOME LISTED ON NASDAQ.
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. 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.
EVEN IF OUR SHARES BECOME LISTED ON NASDAQ, THEY MAY BECOME DELISTED IN THE
FUTURE.
Nasdaq 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.
OUR SHARES COULD BE 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;
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<PAGE>
- - 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.
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 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. 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 principal market
makers for the shares. Under these circumstances, the market bid and asked
prices for the shares may be significantly influenced by decisions of the market
makers to buy or sell the shares for their own account, which may be critical
for the establishment and maintenance of a liquid public market in the shares.
Market makers are not required to maintain a continuous two-sided market and are
free to withdraw firm quotations at any time. Additionally, in order to become
listed on the Nasdaq SmallCap Market or Nasdaq National Market, we need to have
at least three registered and active market makers. We currently have no market
makers. No assurance can be given that any market making activities of any
market makers, if commenced, will be continued.
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<PAGE>
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" section 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 $18,250,000 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 21.9%
Marketing and advertising 550,000 27.5% 5,000,000 27.4%
Facilities 325,000 16.3% 3,000,000 16.4%
Personnel 275,000 13.8% 3,000,000 16.4%
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% 2,650,000 14.5%
---------- -----------
$2,000,000 $18,250,000
</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 twelve new software products and seven new
websites under development, and we estimate our development costs for these
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.
"Facilities" costs consist of the following:
- leasehold improvements;
- furniture;
- equipment; and
- the development of additional facilities to house our operations.
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<PAGE>
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;
- financing account receivables;
- existing employee salaries;
- existing employee benefits, and
- professional and consulting fees.
The amounts set forth above are estimates. The actual amount expended to
finance any category of expenses may be increased or decreased by our board of
directors, in its discretion, if a reapportionment or redirection of funds is
deemed to be in our best interests. The level and timing of expenditures
necessary for each of the intended uses described above will depend upon
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<PAGE>
numerous factors, including the progress of our product development activities,
the timing and amount of revenues resulting from our operation and changes in
competitive or technological conditions in our industry. As we discuss 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 if 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 currents
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. We have no specific plans, arrangements,
understandings or commitments with respect to any acquisition at the present
time, and it is uncertain as to when or if any 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.
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 set forth above, we may invest all or a portion
of such proceeds in marketable securities, short-term, interest-bearing
securities, U.S. Government securities, money market investments, 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 October 31, 1999, 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, net of offering costs of $500,000, and after the
application of the net proceeds of such sale.
<TABLE>
<CAPTION>
October 31, 1999 (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. . . . . . . . . . . . 34,582 2,034,542 18,284,282
Retained earnings . . . . . . . . . . . . . . . . 524,075 524,075 524,075
-------- ---------- -----------
Total stockholders' equity . . . . . . . . . . . $562,087 $2,562,087 $18,812,087
======== ========== ===========
</TABLE>
We plan to make a distribution of accumulated earnings to our existing
stockholders immediately prior to the first closing of this offering equal to
the amount that our total stockholders' equity exceeds $578,750 as of the date
of such distribution. To the extent our total stockholders' equity is below
$578,750, our existing stockholders have agreed to contribute such deficiency.
At October 31, 1999, our existing stockholders would have had to contribute
$16,663 to us.
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<PAGE>
DILUTION
Our net tangible book value at October 31, 1999 is $379,406 or $.01 per
share of common stock. Net tangible book value per share represents the amount
of total tangible assets less liabilities, divided by 34,300,000, the pro forma
number of shares of common stock outstanding at October 31, 1999. 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 October 31, 1999 would be $2,379,406, or $.07 per
share in the event that the minimum number of shares offered in this offering
are sold, or $18,629,406, or $.50 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 $.06 per share to the existing
stockholders in the event the minimum number of shares are sold or $.49 per
share to the existing stockholders in the event the maximum number of shares are
sold, and an immediate dilution of $6.18 per share to new investors in the event
that the minimum number of shares offered in this offering are sold or $5.75 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. . . . . . . . . .01 .01
Increase per share attributable to new investors . . . . . . . . . .06 .49
----- -----
As adjusted net tangible book value per share after offering. . . . . .07 .50
----- -----
Dilution per share to new investors . . . . . . . . . . . . . . . $6.18 $5.75
===== =====
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. . . . . . . . . . . . . . . . $38,012 $2,500,000 $2,538,012
Percentage of consideration paid. . . . . . . . . . . . 1.0% 99.0% 100%
Average consideration per share of common
stock . . . . . . . . . . . . . . . . . . . . . . . . - $6.25 $.07
</TABLE>
<TABLE>
<CAPTION>
Current Public
Maximum Stockholders Investors Total
------- ------------ --------- -----
<S> <C> <C> <C>
Number of shares of common stock purchased. . . . . . . 34,300,000 3,000,000 37,300,000
Percentage of outstanding common stock after
offering. . . . . . . . . . . . . . . . . . . . . . . 92.0% 8.0% 100%
Gross consideration paid. . . . . . . . . . . . . . . . $38,012 $18,750,000 $18,788,012
Percentage of consideration paid. . . . . . . . . . . . 0.1% 99.9% 100%
Average consideration per share of common
stock . . . . . . . . . . . . . . . . . . . . . . . . - $6.25 $.50
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction 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, we began offering our software, as well as licensed third party
products, to users for free through a suite of websites in exchange for users'
adoption of our homepage as their Internet browser's starting page. In 1999,
this diversified our revenue stream to include Internet advertising from our
websites. We intend to increase our future revenues by concentrating on
increasing our Internet revenues.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
Revenues
Our revenues increased by $78,388 or 4% from $1,840,761 in 1997 to
$1,919,149 in 1998, primarily as a result of increased revenues from software
licensing, particularly a $489,588 or 43% increase in Asian software licensing
revenues under our long-term contract with Pointe Control, which more than
offset a decline of $411,200 or 59% in domestic software licensing revenues.
Domestic revenues declined upon the discontinuation of sales of pre-packaged
software to distributors and retail chains, as we found that profit margins were
not sufficient to retain these customers. We derived no material advertising
revenues from our websites in 1998.
Revenues from pre-packaged software licenses are recognized when shipped.
Incidental costs are accrued at the time of sale. We do not provide technical
support for software products sold in Asia; however, we do provide technical
support to users in the United States. Software developed under fixed price
contracts are recorded on a percentage of completion basis. No revenues were
deferred as of December 31, 1998 because no prepayments made under the terms of
our agreements with software distributors. Gross margins and operating income
may be affected in particular periods by the timing of product introductions.
Gross margins have been, and may continue to be, adversely affected by product
demand and changes in technology. We intend to reduce our percentage of revenues
represented by licensing revenues by increasing our Internet revenues.
Software development and product costs
Software development and product costs decreased 23% from $1,192,728 in
1997 to $919,895 in 1998, as $181,553 of software product costs such as CD-ROM
disks, packaging and freight incurred in 1997 were eliminated in 1998, as we
ceased selling packaged software. We intend to continue our software development
activities for the foreseeable future, as well as development of our websites.
Because of the inherent uncertainties associated with our software development
projects, there can be no assurance that our research and development efforts
will
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<PAGE>
result in successful product introductions, increased revenues or profitability.
Sales and marketing expenses
Sales and marketing costs increased by $317,877 or 618% from $51,459 in
1997 to $369,336 in 1998, primarily as a result of the incurrence of $367,796 of
Internet advertising costs for our software products; no amounts were incurred
in 1997 for Internet advertising. Total advertising expenses incurred in 1997
totaled $28,556 for retail software sales. We also expended $22,183 for
marketing brochures in 1997; no material amounts were paid in 1998 for offline
marketing materials.
We establish advertising expenditure levels based on expected net revenues.
If advertising revenues do not occur when expected, expenditure levels could be
disproportionately high compared to recognized revenues for the reported period,
and our operating results could be adversely affected. We periodically review
and adjust our variable expenditure levels based on actual revenue volumes. In
the future, our net revenues and operating results could be adversely affected
by these and other factors.
General and administrative expenses
General and administrative expenses decreased $48,901 or 14% from $353,972
in 1997 to $305,071 in 1998, primarily due to a decline in legal fees from
$108,564 in 1997 to $55,384 in 1998. Administrative salaries also declined by
$33,873 or 19% from $176,403 in 1997 to $142,530 in 1998, due to reduced
requirements for administrative functions. These reductions were offset by a
$78,385 increase in communications-related expenses. We believe that legal and
professional fees, salaries and wages and general office expenses will increase
significantly to provide for infrastructure necessary to administer a growing
public company.
Other income and expenses
Other income and expenses in 1997 include settlement gains of $616,728, net
of legal fees of $308,272, from settlement of a dispute related to the sale of
source code in 1992. In 1997, we also recorded a settlement gain of $183,554 in
connection with claims which arose in 1995 related to cooperative advertising
and marketing with some of our distributors.
TEN MONTHS ENDED OCTOBER 31, 1998 COMPARED TO TEN MONTHS ENDED OCTOBER 31, 1999.
Revenues
Our revenues increased $1,723,088 or 105% from $1,638,448 during the ten
months ended October 31, 1998 to $3,361,536 during the comparable period in
1999, primarily due to the development in 1999 of our Internet advertising and
marketing revenues of $1,955,232, which more than offset a decline of $232,144
or 14% in our revenues from software licensing. Domestic revenues from software
licensing were not significant during the ten-month periods ended October 31,
1998 and October 31, 1999. We had one license agreement that resulted in the
recognition of
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<PAGE>
$1,050,000 of revenues during the ten months ended October 31, 1998.
Revenues derived in Asia during the ten-month periods ended October 31, 1998 and
1999 were generated from Pointe Control.
During the ten months ended October 31, 1998, our revenues were primarily
derived from the Pointe Control contract in Asia. During 1999, we diversified
our revenue stream to include Internet advertising and marketing. We believe the
our future products and services revenues will be principally Internet-based.
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.
At October 31, 1999, we deferred revenues totaling $168,750 because we
received such amount from Pointe Control as a prepayment relating to development
of software under the terms of the distribution agreement. Such revenues are
recorded on the percentage of completion method. No revenues were deferred at
December 31, 1998 since no prepayments were made under the terms of the
distribution agreement as of such date.
Under the terms of our distribution agreement with Pointe Control, Pointe
Control is granted an unlimited license to sell the software listed in the
agreement in Japan. This does not materially affect our operations attributed to
offering software free on our websites. Pointe Control's 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. Our
agreement with Pointe Control, which currently calls for payments to us of
$150,000 per month until May 2000, expires in October 2000. We have no assurance
that this agreement will be extended or renewed.
During the ten months ended October 31, 1999, we commenced Internet revenue
sharing programs with five 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 the
ten months ended October 31, 1999 have been inconsequential.
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<PAGE>
Software development and product expenses
Software development and product costs increased $69,509 or 10% from
$687,760 during the ten months ended October 31, 1998 to $757,269 in the
comparable period in 1999, due to our expansion during the 1999 ten-month
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 $1,397,545 or 593% from
$235,595 during the ten months ended October 31, 1998 to $1,633,140 during the
comparable period in 1999. Internet advertising expenses were incurred in 1999
to promote our software products and increase traffic to our websites. Total
advertising expenses incurred in the 1998 period totaled $28,542 for retail
software sales. Total Internet advertising expenses incurred in the 1998 period
were $234,055, and increased by $1,199,485 or 512% to $1,433,540 in the 1999
period. These expenses were incurred in order to support increased advertising
revenues.
General and administrative expenses
General and administrative expenses increased $219,156 or 75% from $293,455
during the ten months ended October 31, 1998 to $512,611 in the comparable
period of 1999, largely due to increases in Internet communications-related
expenses and salaries and wages. We believe that legal and professional fees,
salaries and wages, and general office expenses, will increase significantly to
provide for infrastructure necessary to administer a growing public company.
On July 1, 1999, we granted stock options to employees and non-employees
which currently have an exercise price of $0.88 per share in the case of options
granted to non-employees and $1.04 per share in the case of options granted to
employees. The board of directors determined the fair value of our common stock
based on a number of factors, including primarily the market valuations of
comparable competitors and multiples of our trailing and projected revenues. 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
no less than 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 fair value at the time of
grant. 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 the ten months ended October 31, 1999. Options issued to non-employees are
valued based on a commonly used valuation model that considers volatility, among
other factors. Accordingly, we recorded approximately $21,000 of compensation
expense during the ten months ended October 31, 1999. We will record future
compensation expense of approximately $312,000 related to these
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<PAGE>
stock options. We also granted stock options in late July through
mid-September 1999, at prices ranging from $1.50 to $3.00 per share, which we
believe were not less than 85% of fair value at the time of grant in the case of
non-qualified stock options and not less than fair value at the time of grant in
the case of incentive stock options. Additionally, we granted stock options on
October 31, 1999 to a then employee, which have an exercise price of $4.50 per
share, which we believe is equal to the fair value at the time of grant. We
believe that the further rapid development of our Internet business since the
dates of such grants provides a reasonable basis for the increase in our
estimated value of our common stock since such dates.
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.
LIQUIDITY AND CAPITAL RESOURCES.
During the periods reported, we generated sufficient cash flows from
operations to support our business. During the ten months ended October 31, 1998
and 1999, we generated cash flows from operations of $138,948 and $366,964,
respectively. Increases in accounts receivable required the use of additional
operating cash flows in 1998 and 1999.
At October 31, 1999, we had cash and cash equivalents of $188,850 and
working capital of $316,198. We intend to continue to utilize our resources in
2000 for software and website development, marketing and advertising, to finance
the higher level of accounts receivable necessary to support our anticipated
increase in revenues and for capital expenditures, including the purchase of
computer equipment and software. However, our working capital requirements may
change depending upon numerous factors, including, without limitation, the need
to expand our website traffic through free software downloads and Internet
advertising. We believe that our existing cash and cash equivalents and cash
generated from operations, if any, should be sufficient to meet our currently
anticipated liquidity and capital expenditure requirements for at least the next
12 months. There can be no assurance, however, that we will be successful in
attaining our revenue goals, nor that attaining such goals will have the desired
effect on our cash resources. We have no long-term debt; however, we believe
that credit facilities may be available to us. There can be no assurances that
we will be able to obtain additional financing, if at all, or that such
financing will be on terms acceptable to us.
Foreign currency transactions
Our revenues from Asia are denominated in U.S. dollars. Accordingly, we do
not incur transaction gains and losses related to foreign currencies.
Income taxes
During the periods presented, we were not subject to federal and state
income taxes since we elected to be taxed as an S-Corporation. Accordingly, we
report income on our stockholders'
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<PAGE>
personal income tax return. Immediately prior to the initial closing of
this offering, we will begin to be a taxed as a separate legal entity. The
minimum regular federal income tax rate is currently 34%. At present, the State
of Washington does not impose income taxes on corporations but does impose a
business and occupation tax on corporations conducting business in the State of
Washington. The consolidated statements of operations for the year ended
December 31, 1998 and the ten months ended October 31, 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 of accumulated earnings to our
existing stockholders equal to the amount that our total stockholders' equity
exceeds $578,750 as of the date of such distribution. Any such distribution will
be funded from our working capital.
Consulting agreement
As of July 1999, we entered into a consulting agreement relating to
services consisting of financial public relations and advice regarding corporate
structuring and marketing. The terms of the contract include, among others,
payments of up to an aggregate of $187,500 and a grant of options, at an
exercise price of $3.00 per share, to the consultant to purchase 34,300 shares
of our common stock. As of the date of this prospectus, we have granted the
options and have paid $37,500 to the consultant. We will be required to pay an
additional $50,000 of the $187,500 upon our having at least $3,000,000 in cash
in the bank and the remaining $100,000 upon our having at least $18,000,000 in
the bank. The consulting agreement expires on July 11, 2000.
YEAR 2000 COMPLIANCE ISSUES.
Many currently installed computer systems and software products were coded
to accept only two-digit entries in the date code field. These date code fields
needed to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, computer systems and software used by
many companies needed to be upgraded to comply with such Year 2000 requirements.
We conducted a review of issues related to our Year 2000 compliance. This review
was intended to determine the effect of the turn of the century on the
operability of our products and websites, internal and external information
technology systems, non-information technology systems we utilize to conduct our
business and other internal and external processes which may impact our
operations. In connection with this evaluation, we also reviewed our vendors and
suppliers for Year 2000 compliance and effected changes where necessary.
This review process was conducted in three phases. The first phase
encompassed a review of all of our products and websites, internal and external
systems/processes and vendors and suppliers for year 2000 compliance. The second
phase corrected all items identified as non- compliant and essential to our
operations. The third phase was a second review to ensure year 2000 compliance
and interoperability of all systems/processes.
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We completed all phases of our review of the Year 2000 requirements. We
expended a total of approximately $5,000 in our year 2000 compliance review and
implementation efforts and do not anticipate additional expenditures.
We produce computer application software and operate several websites. We
determined that all products that we developed and our websites are Year 2000
compliant. We believe that we have no liability concerning any of our products
with respect to Year 2000 requirements.
As of the date of this prospectus, which is after January 1, 2000, none of
our products, processes or systems, have been found to be non-Year 2000
compliant. If any of our products, processes or systems are found to be non-year
2000 compliant in the future, we do not believe that this would have any
significant impact on us. We believe that our having 19 servers at three
separate geographic locations minimizes any risk that our Internet business will
fail to operate due to any year 2000-related problems . Although we developed a
contingency plan to address any failure of our products, vendors and other third
parties or information technology systems to be Year 2000 compliant, we have not
needed, nor do we believe that we will need to implement it.
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 incentive programs are intended to provide flexible,
incentive-marketing solutions for our Internet advertising and marketing
clients. Our payment structure, in which our Internet advertising and marketing
clients are only charged when our website visitors execute specific predefined
actions, provides these clients with a known cost to achieve the desired
response to their advertising campaigns. We intend to leverage our developing
homepage subscriber base and our targeting capabilities to offer our clients
customized, targeted advertising solutions designed to improve advertisement
response rates and reduce their cost of acquiring new customers.
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 programing
services in the Silicon Valley region of California. We became a leading
provider of SCSI software services and developed a library of SCSI software
solutions that we sold to the Microelectronics Products Division of NCR
Corporation in 1992. After relocating to Kitsap County, Washington, in the Puget
Sound area, in 1992, we developed d-Time, a software product that accelerated
the performance of CD-ROM drives, which by 1995 became a top 100 software title
in the U.S., according to PC Data Online, and a top 20 software title in Japan.
As the need for CD-ROM performance acceleration declined in light of the rapid
increase in CD-ROM drive speed, we developed Superfassst, a hard drive
performance acceleration product. 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 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 yet
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.
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
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purchase of a product or service. The Direct Marketing Association
estimates total direct marketing expenditures in the United States at $162.7
billion. By the year 2003, it expects that this figure will exceed $221 billion.
Traditional direct marketing.
Traditional direct marketing media include direct mail, telemarketing and
newspaper, magazine, radio and television advertisements. Although traditional
direct marketing is effective and widely used, it presents a number of
challenges for marketers and consumers alike. Traditional direct marketers
generally lack specific and timely information on a particular consumer's
immediate interests. As a result, marketers spend considerable resources on
communications most consumers don't want or need. Given the costs associated
with traditional direct marketing, which include telecommunications, postage,
printing, assembly, labor and facilities, we believe the often low
response rates make the process inefficient.
Online direct marketing.
Online direct marketing media include banner advertisements, targeted email
solicitations and website sponsorships. We believe online direct marketing is
more attractive than traditional direct marketing because it requires lower
production costs and provides easier and faster customer response features. In
addition, online direct marketing allows marketers to easily:
- develop one-to-one relationships with consumers;
- collect data and feedback on marketing campaigns; and
- customize marketing campaigns to broad audiences or specific groups.
Even with these advantages, direct marketers face challenges in realizing
the full potential of the Internet as a marketing medium. With millions of
websites, only a fraction of which have significant audiences, it is difficult
for marketers to decide where to spend their marketing dollars. Even leading
brand name marketers who build their own websites must find ways to attract a
sizeable audience of visitors. In addition, technological hurdles may impede
conventional direct marketers from successfully extending their activities to
the Internet. In order to participate in most online marketing efforts,
marketers must build and maintain websites as well as incorporate order-taking
capabilities and develop systems to integrate online ordering with their
traditional databases.
We believe marketers desire a solution that benefits from the effectiveness
of direct marketing while overcoming the challenges presented by both
traditional and online marketing methods.
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
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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 $1.7 million over the six-month period ended October 31, 1999, we
believe that we have achieved a market share of approximately one tenth of one
percent of aggregate 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. See "Risk factors".
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.
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Increase traffic and transactions
Our strategy of rapidly increasing consumer traffic to our website is
focused on both new and repeat visitors. New visits are expected to be driven
primarily by our online advertising programs, enhanced software offerings, and
word-of-mouth referrals.
Expand offers
The number and quality of offers on our site are critical to our ability to
attract visitors and increase revenues from our marketer client base. We believe
we have a significant competitive advantage in attracting additional marketer
clients due to the large number of consumers visiting our websites and our
popular software offerings, including Internet-related software. We expect to
implement content expansion through a combination of internal sales efforts,
partnerships and
acquisitions.
Continue to develop and use technology to enhance website capabilities and
visits
We have designed and implemented proprietary systems that enable us to
ensure that users of our free software also use our homepage as their Internet
browser's starting page. We regularly update our websites to encourage consumers
to frequently revisit. As part of our effort to promote repeat visits, we
continue to develop features that will make our visitors' homepage experience
faster, easier and more personalized. We have spent approximately $1,000,000 and
$900,000 on research and development during 1997 and 1998, respectively.
Acquisitions
We intend to explore possible acquisitions of 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 are not currently involved in any
discussions or negotiations relating to any material acquisition.
SALES AND MARKETING
Our primary sales strategy is to sell our services directly to advertisers,
direct marketers, advertising agencies and other advertising-supported software
companies. We currently sell our services directly to clients in the United
States utilizing 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.
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Advertising and marketing client benefits:
- Cost-per-action payment structure. We provide a cost-per-action
incentive marketing solution, in which our clients are only charged
when pre-defined actions specified by our clients are generated,
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, and
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:
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.
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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.
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.
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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.
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 300,000 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 revenues from our newsletters, including the IPO GroundFloor
Newsletter.
Potential ownership of a broker-dealer
Since the filing of the registration statement of which this prospectus
forms a part, we have received numerous inquiries about this offering and
methods of conducting direct participation public offerings. We are
preliminarily considering forming or acquiring 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.
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 46% of our Internet advertising and marketing revenues in the ten months
ending October 31, 1999. In 1997, two software customers, Pointe Control, a
Japanese distributer, and Syncronys Softcorp, a domestic distributer, accounted
for 62% and 30%, respectively, of our
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revenue. In 1998, these customers accounted for 85% and 14%, respectively,
of our revenue. Currently, all of our foreign software revenues are derived from
our agreement with Pointe Control, relating to the distribution by Point Control
of some of our software products in Japan. Under this distribution agreement,
which is designed to be a flexible agreement that allows the parties to adapt to
the evolving software market, Pointe Control is the distributor of those
software products developed by us and "localized" into Japanese versions by
Point Control listed in the most recent amendment to the agreement. 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.
Currently, the agreement provides for monthly payments by Pointe Control of
$150,000 until May 2000, plus potential additional bonus payments of $400,000
for several of our software products if any of such products' sales reach "top
product" status based on sales totals as determined by industry reports listed
in the agreement. The maximum possible bonus is $2,000,000.
In the ten months ended October 31, 1999, Pointe Control accounted for 40%
of our total revenue and MediaRing, Inc., an Internet advertising and marketing
client, accounted for 14% of our total revenue and 24% of our Internet
advertising and marketing revenue. We believe that MediaRing accounted for a
significantly lower percentage of our revenue in the remainder of 1999 and will
continue to do so throughout 2000. If one or more of our other large customers
cease operations or otherwise abruptly cease or reduce their business with us,
our results of operations, cash flows and financial condition could be adversely
affected.
SUPPLIERS
We are dependent on products and services provided by a variety of Internet
suppliers. For the ten months ended October 31, 1999, two advertising vendors,
Burst Media LLC and Flycast, accounted for 20% and 11%, respectively, of our
total Internet media purchases. Many of these suppliers have reported
significant financial losses and may not continue operations in the long term.
Accordingly, we have established redundant relationships with our suppliers in
order to mitigate our risk. The unavailability of adequate supplies could
adversely affect us.
TECHNOLOGY AND INFRASTRUCTURE
We have developed an expandable, secure and reliable technology
infrastructure to support our online direct marketing programs. One of the
principal elements of our proprietary technology is our ability to ensure that
our free software customers use our homepage as their Internet browser's
starting page.
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Expandability
Our technology is designed to support up to approximately 25 million
visitors per month. To date we have demonstrated that our architecture is
capable of rapid expansion as our total amount of domestic and international
visitors-per-month have increased from approximately 800,000 in February 1999 to
over four million in August 1999 based on information supplied by PC Data
Online. Comparable information is not yet available for the months following
August 1999.
Security
We incorporate a variety of encryption techniques meant to protect the
privacy of consumer information. We also employ a variety of automated fraud
detection procedures to identify patterns of abuse and potential fraudulent use
of the system. Our fraud detection systems can automatically disable accounts in
which fraud is suspected. The data center where our system is located provides
security management 24 hours per day, seven days per week.
Reliability
Our software system architecture uses industry standard technologies to
maximize reliability. We use Secure Socket Layer for secure transactions, Oracle
databases, the UNIX operating system and the Apache web server within our
infrastructure. All of these platforms have demonstrated a high degree of
reliability. We back up our Oracle databases and other information to long-term
tape storage on a regular basis.
Our network servers are housed separately at three separate geographic
locations. We believe that each data center provides redundant network
connections, redundant connections to power grids, diesel generators for
emergency power, air conditioning and engineering support 24 hours per day,
seven days per week. Our infrastructure is built to maximize reliability through
the use of multiple central processor units and redundant power supplies,
networking and input/output controllers.
COMPETITION
We believe that competition in our website and software businesses are
based on factors that include the following:
- brand recognition;
- ease and speed of use; and
- quality and reliability.
Website competition
We face intense competition from both traditional and online advertising
and direct marketing companies. We also face competition from established
online portals and community websites that
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engage in direct marketing. We compete directly and indirectly for marketers and
consumers with companies in various categories, including:
Other free-offer websites There are a number of sites, both large and
small, that give consumers access to free software and other offers, including
Freeshop.com, Winfiles.com, Download.com, shareware.com, Volition.com, and
Free2Try.com.
Specialty lead-generation websites. Various websites focus on generating
leads for a specific segment of the direct marketing industry, such as the
catalog, magazine or coupon segments. While these websites typically provide a
depth of offerings within their specific sector, they may not offer promotions
across a broad spectrum of product categories. These sites include eNews,
Cataloglink and Catalogcity. In some instances, we may include their offerings
on our websites.
Other websites. We also compete with a number of "community" sites that
offer content, services or information about a particular topic, as well as
other advertising networks. In addition, we compete with sites featuring loyalty
programs that reward consumers for taking specific actions such as Cybergold,
Inc. and MyPoints.com
The number of websites competing for consumer attention and marketers'
dollars has proliferated, and we expect that competition will continue to
intensify. We also compete with traditional media such as television, radio and
print for a share of marketers' total marketing budgets.
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.
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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.
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
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comply with current and proposed legislation. However, if we are required to
change our business practices as a result of new legislation, our business could
suffer.
We do not know how our business may be affected by the application to the
Internet of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. Most of these laws were adopted before
the advent of the Internet and do not contemplate or address the unique issues
of the Internet and related technologies. Changes in laws intended to address
such issues could create uncertainty in the Internet marketplace. That
uncertainty could reduce demand for our service or increase the cost of doing
business as a result of litigation costs or increased service delivery costs.
In addition, because our services are available on the Internet in multiple
states and foreign countries, these states and countries may claim that we are
required to qualify to do business in their jurisdictions. Our failure to
qualify in any jurisdictions where we are required to do so could subject us to
taxes and penalties. It could also restrict our ability to enforce contracts in
those jurisdictions. The application of laws or regulations from jurisdictions
whose laws do not currently apply to our business could have a material adverse
effect on our business, results of operations and financial condition. We are
currently not aware of any violations by us of any laws or regulations of any
states or other countries or of any material failure to qualify in any states or
countries.
The European Union has adopted a privacy directive that went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited with respect to the transactions in which they may engage with
business entities domiciled outside the EU, unless the non-EU entities are
domiciled in jurisdictions with privacy laws comparable to the EU privacy
directive. The United States presently does not have laws that satisfy the EU
privacy directive. Discussions between representatives of the EU and the United
States are ongoing and may lead to a number of safe harbor provisions which, if
adhered to, would allow business entities in the EU and the United States to
continue doing business without limitation. If these negotiations are not
successful and the EU begins enforcing the privacy directive, there could be an
adverse impact on international Internet business. If we do business directly in
the EU in the future, we will be required to comply with the EU privacy
directive.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers,
independent contractors, partners and others to protect our intellectual
property rights. We own nine patents, including one foreign patent, on our
software products and have ten 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.
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We have registered a number of domain names, including eAcceleration.com,
homepageware.com, clicksales.com, downloadsales.com, signupsales.com and
freebranding.com. Domain names generally are regulated by Internet regulatory
bodies. The regulation of domain names in the United States and in foreign
countries is evolving. Regulatory bodies could establish additional top-level
domains, appoint additional domain name registrars or modify the requirements
for holding domain names. The relationship between regulations governing domain
names and laws protecting trademarks and similar intellectual property rights is
unclear. Therefore, we could be unable to prevent third parties from acquiring
domain names that infringe on or otherwise decrease the value of our trademarks
and other proprietary rights. We have no knowledge of any companies in other
countries using domain names that infringe on our trademarks.
We may be required to obtain licenses from others to refine, develop,
market and deliver new services. We may be unable to obtain any such
license on commercially reasonable terms, if at all, or guarantee that
rights granted by any licenses will be valid and enforceable.
EMPLOYEES
As of January 4, 2000, we had a total of 39 employees, all of which work
for us full time. Five employees work in sales and marketing, 28 in technology
and development, and six in operations and administration. None of our employees
are represented by unions, and we consider relations with our employees to be
good.
FACILITIES
We currently occupy approximately 4,500 square feet in a leased facility in
Poulsbo, Washington, with a monthly rental cost of approximately $2,100 per
month. 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 beginning 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 three percent annually. 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following persons are our current executive officers, directors
and director nominees:
<TABLE>
<CAPTION>
<S> <C> <C>
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
Michael J. Clementz 56 director nominee
Edward P. Swain, Jr. 64 director nominee
</TABLE>
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.
Michael J. Clementz was nominated in November 1999 to serve as director of
eAcceleration and has served as consultant to us since September 1999. Mr.
Clementz has been chairman and chief executive officer of North Sound Bank,
which was formerly, the Bank of Poulsbo, since 1999, president and chief
executive officer of such company since prior to 1994 and president and chief
executive officer of Liberty Bay Financial Corporation since prior to 1994. Mr.
Clementz was a bank examiner with the Washington State Division of Banking from
1966 to 1979. Mr. Clementz serves on the board of directors of North Sound Bank
and Liberty Bay Financial
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Corporation. He is a past president and director of the Washington Bankers
Association and has served the American Bankers Association as a committee
member of the Government Relations Council and Community Bankers Council. He is
a former advisory director of the Conference of State Bank Supervisors,
Washington D. C. He was appointed by the Supreme Court for the State of
Washington, to serve as a lay person on the Washington State Lawyers
Disciplinary Board.
Edward P. Swain, Jr. was nominated in November 1999 to serve as director of
eAcceleration and has served as consultant to us since September 1999.
Mr. Swain has served as president of PT Holdings Corporation since December
1997. From January 1992 through December 1997, Mr. Swain served as president,
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., the holding company
for a proposed Internet bank, whose national charter has been applied for, since
December 1998. He is also a member of the board of trustees of the Museum of
Flight in Seattle, Washington. Mr. Swain received a B.A. from Williams College
in 1957 and a LLb from Harvard Law School in 1964.
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. Directors
receive no cash compensation for their services to us as directors, but are
reimbursed for expenses actually incurred in connection with attending meetings
of the board of directors. Members of the board of directors are eligible to
participate in our 1999 stock option plan.
The audit committee currently consists of Clint Ballard and Diana T.
Ballard. We anticipate that Michael J. Clementz and Edward P. Swain, Jr. will
serve as the audit committee immediately upon being elected to our board of
directors. The audit committee recommends engagement of our independent
certified public accountants, and is primarily responsible for reviewing and
approving the scope of the audit and other services performed by our independent
certified public accountants and for reviewing and evaluating our accounting
principles and practices, systems of internal controls, quality of financial
reporting and accounting and financial staff, as well as any reports or
recommendations issued by the independent accountants.
The compensation committee currently consists of Clint Ballard and
Diana T. Ballard. We anticipate that Michael J. Clementz and Edward P. Swain,
Jr. will serve as the compensation committee immediately upon being elected to
our board of directors. The compensation committee generally reviews and
approves our executive compensation and currently administers our 1999 stock
option plan.
We currently have no nominating committee.
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.
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<PAGE>
<TABLE>
<CAPTION>
Annual compensation
---------------------------------------------------------
Name and Other annual
principal position Year Salary Bonus compensation
- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Clint Ballard 1999 $104,000 $194,929 -
President and chief 1998 104,000 198,325 -
executive officer 1997 208,000 175,000 -
Diana T. Ballard 1999 $194,929 -
Chairman of the board, 1998 - 198,325 -
secretary and treasurer 1997 - 175,000 -
</TABLE>
Clint Ballard's salaries listed in the annual compensation table reflects
the combined salaries of Clint and Diana Ballard for the periods presented.
Bonuses listed on the table represent S-corporation distributions. In 1997,
Clint Ballard and Diana T. Ballard each materially participated in our
day-to-day operations and are each deemed to have earned salaries of $104,000.
In 1998 and 1999, Ms. Ballard did not provide material participation in our
day-to-day operations. Accordingly, Mr. Ballard earned a salary of $104,000 in
each of 1998 and 1999 and Ms. Ballard is deemed to have earned no salary in 1998
and 1999.
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 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;
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<PAGE>
- 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 first closing of this offering and $15,000 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 at an exercise price of $4.50 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 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. We have options to purchase an
aggregate of 829,300 shares of common stock outstanding under the 1999 plan,
including options to purchase 50,000 shares of common stock granted to each of
Michael J. Clementz and Edward P. Swain, Jr., each of which such options are
exercisable at $3.00 per share in equal annual
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<PAGE>
installments over five years. 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 are exercisable at $0.88 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 and provide
for indemnification of directors and other persons. We are unaware of any
pending or threatened litigation against us or our directors that would result
in any liability for which such director would seek indemnification or similar
protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase our ability to attract and retain
qualified persons to serve as directors. We believe that the substantial
increase in the number of lawsuits being threatened or filed against
corporations and their directors has resulted in a growing reluctance on the
part of capable persons to serve as members of boards of directors of companies,
particularly of companies which are or intend to become public companies.
Prior to the initial closing of this offering, we expect that our officers
and directors will be covered by officers' and directors' liability insurance.
We expect that the policy coverage will be $2,000,000, 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.
In the opinion of the SEC, indemnification for liabilities arising under
the Securities Act of 1933, such as those contained in our indemnification
agreements, is contrary to public policy and, therefore, is unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of October 31, 1999, and as adjusted to reflect the sale of the shares of
common stock offered by this prospectus, of:
- each person known by us to beneficially own 5% or more of the shares
of outstanding common stock;
- each of our executive officers and directors; and
- all of our executive officers and directors as a group.
Except as otherwise indicated, all shares are beneficially owned, and investment
and voting power is held by, the persons named as owners.
<TABLE>
<CAPTION>
Amount and nature of Percentage ownership 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 0 - - -
c/o eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
All officers and directors 34,300,000 100% 98.9% 92.0%
as a group (3 persons)
</TABLE>
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.
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<PAGE>
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 exercisable at an exercise price of $3.00 per share in equal installments
over a five year period to two consultants and director nominees, Michael J.
Clementz and Edward P. Swain, Jr.
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 will receive his remaining salary for February
2000 plus moving expenses, and will receive $26,000 upon the first closing of
this offering and $15,000 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 at an exercise price of $4.50 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 currently have no independent directors. Prior to the first closing
under the offering, Michael J. Clementz and Edward P. Swain, Jr., consultants
and director nominees, will be elected as directors by our shareholders. At such
time, their consulting agreements with us will be terminated, and we believe
that at such time, Mr. Swain and Mr. Clementz will be considered "independent".
Thereafter, we will at all times maintain at least two independent directors. We
may elect additional independent directors at any time in the future, but have
no plans to do so at this time.
Since our inception, we lacked sufficient disinterested, independent
directors to ratify past material transactions at the time the transactions were
initiated. Upon Mr. Swain and Mr. Clementz becoming independent directors, all
future material related-party transactions and loans, and any forgiveness of
loans, will be approved by a majority of the 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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<PAGE>
PLAN OF DISTRIBUTION
ARBITRARY DETERMINATION OF OFFERING PRICE
We have determined the initial offering price of the shares arbitrarily.
Among the factors we considered were the 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 in through registered or licensed brokers or dealers in
any states where required.
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 as soon as
practicable 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
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<PAGE>
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 this offering is oversubscribed, we may consider whether
or not you are willing to accept delivery of our prospectus and future filings
with the SEC electronically and whether you expect to hold the shares purchased
in this offering long term in determining whether and to what extent we will
accept your subscription. 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,
- how long he or she intends to hold the shares, 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, you will receive paper copies of any or all
documents from us.
Prior to effectiveness, no one may purchase any shares in this offering.
Following the effectiveness of this offering, in order to purchase shares in
this offering, an investor must complete, date, sign 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 alternatively, 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. The
address and wire transfer instructions for our escrow agent is indicated in the
subscription agreement. Following the effectiveness of this offering,
subscription agreements will be available in the following ways:
- By printing it from the website where we have posted our final
prospectus;
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<PAGE>
- Unless an investor has specifically requested electronic delivery
of the final prospectus, we will include the subscription
agreement together with a paper copy of the final prospectus that we
send to such investor; and
- An investor 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.
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 National Association of Securities Dealers, Inc. 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 the
registration statement of which this prospectus is a part to disclose the name
of such selling broker-dealer and the agreed underwriting and compensation
terms.
We 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:
- 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
60
<PAGE>
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.
LOCK-IN AGREEMENT
Clint Ballard and Diana T. Ballard have entered into a lock-in agreement
with us under which 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
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- the date the shares become listed on the Nasdaq National Market, The
American Stock Exchange or the New York Stock Exchange.
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.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $.0001 per share, and 2,000,000 shares of Serial Preferred
Stock, par value $.0001 per share.
COMMON STOCK
General. We have 100,000,000 authorized shares of common stock, par value
$.0001 per share, 34,300,000 of which are issued and outstanding prior to this
offering. All shares of common stock currently outstanding are validly issued,
fully paid and non-assessable, and are all owned beneficially and of record by
two stockholders, Clint Ballard and Diana T. Ballard. All shares which are the
subject of this prospectus, when issued and paid for 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 eAccleration after satisfaction of all liabilities.
Shares eligible for future sale. Upon completion of this offering, we will
have 34,700,000 shares of common stock outstanding if the minimum number of
shares offered 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 tradeable
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
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<PAGE>
defined as 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 per cent 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. 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 adversely
affect prevailing market prices following the offering.
PREFERRED STOCK
The board of directors is authorized by the our certificate of
incorporation to issue up to an additional 2,000,000 shares of one or more
series of serial preferred stock, par value $.0001 per share. No shares of such
serial preferred stock have been authorized for issuance by our board of
directors, and we have no present plans to issue any such shares. In the event
that the board of directors issues shares of serial preferred stock, it may
exercise its discretion in establishing the terms of such serial preferred
stock; 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 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.
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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.
TRANSFER AGENT
The transfer agent for the common stock will be American Stock Transfer &
Trust Co., 40 Wall Street, New York, New York 10005.
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EXPERTS
Our financial statements as of December 31, 1998 and for each of the years
in the two-year period ended December 31, 1998, appearing in this prospectus and
registration statement have been audited by McKennon, Wilson & Morgan, LLP,
independent auditors, as set forth in their report 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 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.
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.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated financial statements:
Consolidated balance sheets - December 31, 1998 and
October 31, 1999 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated statements of income for each of the years in the two-year
period ended December 31, 1998 and the ten months ended
October 31, 1998 and 1999 (unaudited). . . . . . . . . . . . . . . . . . . F-4
Consolidated statements of stockholders' equity (deficit) for each of the
years in the two-year period ended December 31, 1998 and the ten months
ended October 31, 1999 (unaudited) . . . . . . . . . . . . . . . . . . . . F-5
Consolidated statements of cash flows for each of the years in the two-year
period ended December 31, 1998 and the ten months ended
October 31, 1998 and 1999 (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, 1998, and the related consolidated statements of
income, stockholders' equity (deficit) and cash flows for each of the years in
the two-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eAcceleration Corp.,
as of December 31, 1998, and the results of their operations and their cash
flows for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ McKennon, Wilson & Morgan LLP
Irvine, California
September 10, 1999, except for the matters discussed in Notes 1, 6 and 8, as to
which the date is December 17, 1999
F-2
<PAGE>
eACCELERATION CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, 1998 October 31, 1999
----------------- ----------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 239,193 $ 188,850
Accounts receivable, net of allowance for doubtful
accounts of $0 and $30,000, respectively 241,667 550,766
Other current assets - 116,242
---------- ---------
Total current assets 480,860 855,858
Property and equipment, net 64,776 63,208
Deferred offering costs - 122,542
Patents and trademarks, net 64,281 60,139
---------- ---------
$ 609,917 $1,101,747
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 49,435 $ 341,866
Accrued liabilities 71,817 29,044
Deferred revenue - 168,750
Other current liabilities 20,361 -
---------- ----------
Total current liabilities 141,613 539,660
---------- ----------
Commitments and contingencies (Note 5)
<S> <C> <C>
Stockholders' equity:
Common stock, par value $.0001; 100,000,000
shares authorized; 35,000,000 shares
issued, and 34,300,000 shares outstanding at
December 31, 1998; 34,300,000 shares issued
and outstanding at October 31, 1999 (unaudited) 3,430 3,430
Additional paid-in capital 113,454 34,582
Retained earnings 466,420 524,075
Treasury stock, at cost; 700,000 shares in 1998 (115,000) -
---------- ----------
Total stockholders' equity 468,304 562,087
---------- ----------
$ 609,917 $1,101,747
========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements
F-3
<PAGE>
EACCELERATION CORP.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, Ten Months Ended October 31,
----------------------- ----------------------------
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
Revenues:
<S> <C> <C> <C> <C>
License revenues $1,840,761 $1,919,149 $1,638,448 $ 1,406,304
Internet revenues - - - 1,955,232
---------- ---------- ---------- -----------
1,840,761 1,919,149 1,638,448 3,361,536
---------- ---------- ---------- -----------
Cost and expenses:
Software development and products 1,192,728 919,895 687,760 757,269
Sales and marketing 51,459 369,336 235,595 1,633,140
General and administrative 353,972 305,071 293,455 512,611
Reduction in reserves for claims (183,554) (28,542) (28,542) -
---------- ---------- ---------- -----------
1,414,605 1,565,760 1,188,268 2,903,020
---------- ---------- ---------- -----------
Income from operations 426,156 353,389 450,180 458,516
---------- ---------- ---------- -----------
Other income (expense):
Interest income 10,866 49,499 48,554 4,461
Interest expense (18,896) (6,557) (5,838) (465)
Settlement gains 616,728 - - -
Other 16,489 150 150 -
---------- ---------- ---------- ------------
625,187 43,092 42,866 3,996
---------- ---------- ---------- -----------
Net income $1,051,343 $ 396,481 $ 493,046 $ 462,512
========== ========== ========== ===========
Basic and diluted earnings per
common share $ 0.03 $ 0.01 $ 0.01 $ 0.01
========== ========== ========== ===========
Pro forma financial data (unaudited):
Pro forma net income $ 261,677 $ 305,258
========== ===========
Pro forma basic and dilutive
earnings per common share $ 0.01 $ 0.01
========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements, including
"Note 2 Income Taxes" and " Pro Forma Financial Data."
F-4
<PAGE>
EACCELERATION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Earnings Treasury Stockholders
Shares Amount Capital (Accumulated Deficit) Stock Equity (Deficit)
------ ------ ------- --------------------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 35,000,000 $ 3,430 $ 113,454 $ (234,754) $ - $ (117,870)
Distributions to stockholders - - - (396,650) - (396,650)
Repurchase of common stock 700,000 - - - (115,000) (115,000)
Net income - - - 1,051,343 - 1,051,343
----------- ------- --------- ---------- --------- ----------
Balances, December 31, 1997 34,300,000 3,430 113,454 419,939 (115,000) 421,823*
Distributions to stockholders - - - (350,000) - (350,000)
Net income - - - 396,481 - 396,481
---------- ------- --------- ---------- --------- ----------
Balances, December 31, 1998 34,300,000 3,430 113,454 466,420 (115,000) 468,304
Value of stock options issued
below fair value (unaudited) - - 21,128 - - 21,128
Distributions to stockholders
(unaudited) - - - (389,857) - (389,857)
Cancellation of treasury stock - - (100,000) (15,000) 115,000 -
(unaudited)
Net income (unaudited) - - - 462,512 - 462,512
Balances, October 31, 1999
(unaudited) 34,300,000 $ 3,430 $ 34,582 $ 524,075 $ - $ 562,087
========== ======= ========= ========== ========= ==========
</TABLE>
See accompanying notes to these consolidated financial statements
F-5
<PAGE>
EACCELERATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, October 31,
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income $ 1,051,343 $ 396,481 $ 493,046 $ 462,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 62,625 54,073 29,852 27,328
Increase in allowance for doubtful accounts - - - 30,000
Provision for write down of inventory 149,730 13,053 - -
Provision for write down of fixed assets 24,340 - - -
Value of stock options issued below fair value - - - 21,128
Settlement gain (616,728) - - -
Changes in operating assets and liabilities:
Accounts receivable 1,584 (241,667) (225,000) (339,099)
Deferred offering costs - - - (122,542)
Other current assets 2,748 (11,012) 7 (116,242)
Accounts payable (399,541) (7,507) (10,275) 292,430
Accrued liabilities 77,214 (8,691) (85,830) (42,773)
Deferred revenue (250,000) - - 168,750
Other current liabilities 106,075 (91,546) (62,852) (14,528)
----------- --------- --------- ---------
Net cash provided by operating activities 209,390 103,184 138,948 366,964
----------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment (28,021) (32,306) (42,876) (21,618)
Patent and trademark expenditures (33,114) (35,927) - -
Settlement gain 616,728 - - -
----------- --------- --------- ---------
Net cash provided by (used in) investing activities 555,593 (68,233) (42,876) (21,618)
----------- --------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations (12,815) (15,514) (19,882) (5,833)
Distributions to stockholders (396,650) (350,000) (260,000) (389,856)
Repurchase of common stock (115,000) - - -
----------- --------- --------- ---------
Net cash used in financing activities (524,465) (365,514) (279,882) (395,689)
----------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 240,518 (330,563) (183,810) (50,343)
Cash and cash equivalents at beginning of period 329,238 569,756 569,756 239,193
----------- --------- --------- ---------
Cash and cash equivalents at end of period $ 569,756 $ 239,193 $ 385,946 $ 188,850
=========== ========= ========= =========
Supplemental disclosure of cash flow information-
Cash paid during the period for-
Interest $ 18,896 $ 6,557 $ 5,838 $ 465
=========== ========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
F-6
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND HISTORY
Organization and Nature of Operations
eAcceleration Corp., a Delaware corporation, (the "Company"), was incorporated
on November 1, 1999. At such time, the Company acquired 100% of the issued and
outstanding common stock of Acceleration Software International Corporation, a
Washington corporation ("ASIC"). ASIC was formed in June 1995 as Ballard Synergy
Corporation and immediately merged with Ballard Synergy Corporation, a Nevada
corporation ("Ballard"), and changed its name in 1996. Ballard was originally
incorporated in the state of Nevada in 1987. In connection with the Company's
acquisition of ASIC, the Company issued one share for every two shares of ASIC
that was issued and outstanding at such time. This acquisition of ASIC by
eAcceleration was accounted for at historical bases similar to a pooling of
interest since the companies were under common control.
Beginning in late 1998, the Company has provided an integrated suite of websites
which allow Internet users to receive free products in exchange for using the
Company's home page as their startpage. The Company sells online advertising
space to online media buyers and merchants who can be assured they will reach a
relatively captive and targeted set of Internet users. The Company is thus able
to sell to such customers no-risk advertising based on quantifiable actions by
Internet users on a per click, per download or per signup 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."
Revenues from pre-packaged software products are recorded when the software is
delivered. Revenues from license agreements that allow unlimited duplication are
recorded when the product master is delivered. Maintenance and support of
software is not significant and is accrued at the time revenue is recognized.
Revenue from software developed for customers which require significant
production, modification or customization of software is recognized in a manner
which approximates SOP 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts." Specifically, the Company uses the
percentage of completion method based on labor costs incurred. 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 in the accompanying balance sheet of October 31,
1999.
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-through, signups, or downloads. Revenues from
contracts based on impressions, click-throughs, signups and downloads are
recognized in the period in which visitors execute these pre-defined actions.
The rates for impressions range from $4.00 to $5.00 per thousand actions and the
rates for click-throughs range up to $400.00 per thousand actions. Signups are
billed at the rate of $22.50 each and downloads are billed at the rate of up to
$5.00 each.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
F-8
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the double
declining method over the estimated useful lives of the related assets, ranging
from five to seven years. Maintenance and repairs are charged to expense as
incurred. Significant renewals and betterments are capitalized. At the time of
retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," states
that all costs incurred in connection with the development of software
subsequent to technological feasibility should be capitalized until such time
that the software is available to customers. The Company believes its current
process for developing software is essentially completed concurrent with the
establishment of technological feasibility and, as such, no costs have been
capitalized to date.
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 3% annually. The Company has
the option of terminating the lease at the end of the second year.
Deferred Offering Costs
Direct costs incurred in connection with the Company's initial public offering
(the "Offering") are capitalized. In the event the Offering is unsuccessful, the
Company will charge these costs to operations.
Patents and Trademarks
Patents and trademarks are recorded at cost and are amortized using the
straight-line method over the estimated useful lives of the related assets
ranging from three (3) to five (5) years.
F-9
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets under the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. At present, the Company reviews for impairment annually.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair value of the financial
instruments could be different than that recorded on a historical basis in the
accompanying balance sheets. The Company's financial instruments consist of
accounts receivable and accounts payable. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of December 31,
1998.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" ("EPS"). SFAS No. 128 requires dual presentation
of basic EPS and diluted EPS on the face of all income statements issued after
December 15, 1997, for all entities with complex capital structures. Basic EPS
is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options, warrants and
other convertible securities. The table set forth below reconciles the
components of the basic net income per share calculation to the diluted net
income per share.
<TABLE>
<CAPTION>
December 31, October 31,
-------------------------- -----------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 35,000,000 34,300,000 34,300,000 34,300,000
Effect of dilutive stock options - - - 199,485
---------- ---------- ---------- ----------
Weighted average shares outstanding - Dilutive 35,000,000 34,300,000 34,300,000 34,499,485
</TABLE>
There were 224,300 options to purchase common stock ranging from $2.50 to $4.50
per share which were considered anti-dilutive during the ten months ended
October 31, 1999 (unaudited).
F-10
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Pro Forma Financial Data
Included in the accompanying statements of income is pro forma financial data
(unaudited) reflecting pro forma net income and earnings per share assuming the
Company was taxed as a C-Corporation from the beginning of the most recent
annual statement of income and the most recent interim period. The Company's
estimated federal tax rate would be approximately 34%. There are no material
state income taxes incurred by the Company; however, the Company pays a business
tax based on certain revenues, which are not classified as income taxes. Pro
forma income tax expense for the year ended December 31, 1998 and the ten months
ended October 31, 1999 is $134,804 and $157,254, respectively.
The Company entered into two employment agreements on November 1, 1999 (see Note
8). 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, 1998 and the ten months
ended October 31, 1999 would have been $22,856 and $24,515, respectively.
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.
F-11
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Licensing revenues from Asia for the years ended December 31, 1997 and 1998 were
$1,145,000 and $1,636,000, respectively.
During the years ended December 31, 1997 and 1998, revenues from two
unaffiliated customers accounted for 62% and 30%, respectively, and 85% and 14%,
respectively, of total revenues. At December 31, 1998, accounts receivables of
$241,661 were due from one of these unaffiliated customers. In 1997 and 1998,
revenues from these customers were primarily generated based on product
shipments, less allowances for returns up to 15% of sales. During the ten months
ended October 31, 1999, revenues from one of these unaffiliated customers
accounted for approximately 40% of total revenues and all of its software
licensing revenues. Revenues from this customer were primarily generated under
an unlimited license contract whereby the Company received a fixed payment per
month. On October 14, 1999, the Company amended the agreement with this
customer, which currently requires monthly payments from this customer of
$150,000 from November 1999 to May 2000. At present, this contract 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 industry reports listed in the agreement.
The maximum possible bonus is $2,000,000.
During the ten months ended October 31, 1999, another unaffiliated company
accounted for 14% of total revenues.
During the ten months ended October 31, 1999, the Company commenced Internet
revenue sharing programs with 5 other companies, under which the Company is to
receive a portion of such other companies' sales originating from our websites
ranging from 3 to 50%. The Company's revenues derived from revenue sharing
programs during the ten months ended October 31, 1999 have been inconsequential.
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 October 31, 1999, and for the ten
months ended October 31, 1998 and 1999, is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of October 31, 1999, and the results of their operations and their
cash flows for the
F-12
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ten months ended October 31, 1998 and 1999.
Stock Compensation
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS No. 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS No. 123 had been applied. The Company has
elected to account for its stock-based compensation to employees under APB 25.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income, as well as
certain non-shareholder items that are reported directly within a separate
component of stockholders' equity and bypass net income. The Company has adopted
the provisions of this statement in 1998, with no impact on the accompanying
consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The provisions of this statement require
disclosures of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
stockholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating
decision-maker in the determination of resource allocation and assessing
performance, and for which discrete financial information is available. The
Company has adopted the provisions of this statement in 1998 with no impact on
the accompanying consolidated financial statements. The impact of such
provisions during the period ended October 31, 1999 will be reported at December
31, 1999.
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, 1998, and
October 31, 1999 (unaudited):
<TABLE>
<CAPTION>
December 31, October 31, 1999
1998 (unaudited)
------------ ----------------
<S> <C> <C>
Equipment $ 224,320 $ 245,938
Furniture and fixtures 15,886 15,886
Vehicles 39,987 39,987
---------- ---------
Less accumulated depreciation (215,417) (238,603)
---------- ---------
$ 64,776 $ 63,208
=========== =========
</TABLE>
During the years ended December 31, 1997 and 1998, and the ten months ended
October 31, 1998 and 1999 (unaudited), depreciation expense totaled $61,422,
$49,103, $28,754, and $23,186, respectively.
F-14
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 PATENTS AND TRADEMARKS
Patents and trademarks consist of the following as of December 31, 1998, and
October 31, 1999 (unaudited):
<TABLE>
<CAPTION>
December 31, October 31, 1999
1998 (unaudited)
------------ ----------------
<S> <C> <C>
Patents $ 81,481 $ 81,481
Trademarks 4,560 4,560
---------- ---------
Less accumulated amortization ( 21,760) ( 25,902)
---------- ---------
$ 64,281 $ 60,139
========== =========
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company currently leases a building that holds substantially all of the
Company's operations. The lease was extended in February 1999 for an additional
five years. As a result of this extension the lease expires in the year 2005.
The Company's future annual minimum lease payments at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1999 $ 22,491
2000 22,941
2001 22,491
2002 22,491
2003 22,491
Thereafter 24,365
---------
$ 136,820
=========
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1998, and for the
ten month periods ended October 31, 1998 and 1999 (unaudited), amounted to
$51,565, $20,628, $16,193, and $21,415, respectively.
See Note 8 for a discussion of subsequent events.
F-15
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Litigation
In 1997, the Company reached an out-of-court settlement of a dispute with a
former licensee and purchaser of one of the Company's products. Under the terms
of the settlement, the Company received $616,728, net of attorneys' fees and
costs amounting to $308,272. The income from this settlement has been included
as other income in the 1997 statement of income.
In 1997, the Company settled a dispute with a former distributor of the
Company's product in relation to advertising expenses owed to the distributor.
Under the settlement agreement, the Company was obligated to pay $160,000, plus
5% interest on the unpaid portion, in monthly installments for two years
beginning May 1997. The unpaid portion as of December 31, 1998 was $14,528,
which has been included in other current liabilities.
A small number of claims have been made against the Company for credits and
unpaid advertising and marketing fees from various former distributors of the
Company's products. The Company estimated the credits to be approximately
$183,554. Accordingly, the Company recorded a provision of approximately
$183,554 to operations in fiscal 1995. In 1997, the Company determined that
these claims no longer had merit and, accordingly, recorded a reduction in its
reserves which are included in the accompanying statement of income.
The Company is subject to a limited number of claims and actions which arise in
the ordinary course of business. The litigation process is inherently uncertain,
and it is possible that the resolution of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters that may have material impact on the Company's financial position,
results of operations or cash flows.
As of July 12, 1999, the Company entered into a consulting agreement relating to
services consisting of financial public relations and advise regarding corporate
structuring and marketing. The terms of the contract include, among others,
payments of up to an aggregate of $187,500 and a grant of options, at an
exercise price of $3.00, to the consultant in an amount equal to 0.1% of the
outstanding common stock of the Company. The Agreement expires on July 11, 2000.
NOTE 6 - STOCKHOLDERS' EQUITY
Common Stock Purchase Options
In 1995, the Board of Directors of ASIC adopted the 1995 Stock Option Plan (the
"1995 Plan") pursuant to which officers, directors and employees of the Company
were eligible to receive options to purchase common stock of the Company.
Options to purchase 27,500 shares were granted at $0.70 per
F-16
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
share, vesting over four years. As of December 31, 1998, the Company had
27,500 options outstanding and exercisable. The Company did not grant nor have
any exercises of stock options during the fiscal years ended December 31, 1997
and 1998. The weighted average remaining contractual life of options outstanding
as of December 31, 1998, was 6.71 years.
On June 1, 1999, the Board of Directors of ASIC adopted the 1999 Stock Option
Plan (the "1999 Plan"). Under the 1999 Plan, the Company may issue 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 vesting period of such options.
Incentive stock options may only be issued to employees and generally vest
evenly over 10 years from the date of grant and may not, in any case, vest
beyond ten years from the date of grant. Non-qualified stock options vest over a
period of five years from the date of the grant. Forfeitures are returned to the
plan and become available for grant. 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 October 31, 1999 (unaudited), the Company granted employees
options, net of cancellations, to purchase an aggregate of 617,500 shares of
common stock that currently have exercise prices ranging from $1.04 to $3.00 per
share. The Company also granted non-employees options to purchase 299,300 shares
of common stock that currently have exercise prices ranging from $0.88 to $4.50
per share.
The Board of Directors established a fair value as of July 1, 1999 of $1.04 per
share of common stock. Options to employees and non-employees to purchase
567,500 of these shares, net of cancellations, granted in July 1999 are
currently exercisable at $0.88 (85% of estimated fair value) in the case of
non-employees and $1.04 (estimated fair value) in the case of employees. Options
to purchase shares granted in August and September 1999 were granted with an
exercise price of $3.00 per share, which is above the Board's determination of
fair value of the Company's common stock of $2.50 per share at such time.
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 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 our common stock at an exercise price of $4.50 per share, which shall
become fully vested and exercisable upon the shares of our common stock becoming
publicly traded.
F-17
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options issued to Employees were granted at the estimated fair value, and as
such, no compensation was charged to operations in 1999. Options issued to
non-employees are valued based on a commonly- used valuation model using that
considers volatility, among other factors. Aggregate compensation to be charged
to future operations as of October 31, 1999 is $312,222. Compensation charges
during the ten months ended October 31, 1999 was $20,128.
NOTE 7 - RELATED PARTY TRANSACTIONS
In fiscal 1997, the Company repurchased all shares of the Company's common stock
issued to a former director for $115,000 originally issued at $100,000. On
August 31, 1999, the Board of Directors of ASIC approved the cancellation of
such shares and, accordingly, the Company charged retained earnings in the
amount of $15,000 for the difference between the original issuance price and the
repurchase price.
NOTE 8 - SUBSEQUENT EVENTS
On October 14, 1999, the Company amended an existing software distribution
agreement whereby it agreed to deliver an unlimited license for an additional
one-year term to its sole Asian distributor. In connection therewith, the
Company received $150,000 in November and December 1999, and will receive a
monthly payment of $150,000 from January through May 2000. 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 industry reports listed in the agreement. The
maximum possible bonus is $2,000,000. The Company was required to deliver five
(5) additional new releases through May 2000. The Company is not required to
provide customer support for its distributor's customers. Although the customer
is granted an unlimited license to sell the software listed in the agreement,
this does not materially affect the Company's operations attributed to offering
software free on its websites. The distributor's license only applies to
localized, Japanese versions, and not the English versions which are provided
free on the Company's websites. Additionally, users in Japan cannot generally
download or run the English-language versions on their operating systems.
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 fiscal year. Such agreements
become effective on the date of the first closing of the initial public
offering, and no bonuses will be paid based on 1999 income.
On November 2, 1999, the Board of Directors of the Company authorized the
Company's management to file a registration statement for an initial public
offering of the Company's common stock.
F-18
<PAGE>
EACCELERATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Company entered into an additional lease agreement for an
approximately 10,000 square foot facility with a four year term beginning
February 2000. 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 three percent annually based on the prior years' monthly
payments. The Company has the option to terminate the lease at the end of the
second year
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 first
closing of this offering and $15,000 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 $4.50 per share 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.
See Notes 1 and 6 for additional subsequent events.
F-19
<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 . . . . . . . . . . . . . . . . . . . . . . . 24
Use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Management's discussion and analysis. . . . . . . . . . . . . . . . . . . 30
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Principal stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 56
Related party transactions. . . . . . . . . . . . . . . . . . . . . . . . 57
Plan of distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Description of capital stock . . . . . . . . . . . . . . . . . . . . . . 63
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Where you can find more information . . . . . . . . . . . . . . . . . . . 66
Index to financial statements . . . . . . . . . . . . . . . . . . . . . . F-1
----------------------
================================================================================
================================================================================
[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.
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. . . . . . . . . . . . . . 75,000*
Legal Fees and Expenses . . . . . . . . . . . . . . . . 220,000*
Advertising . . . . . . . . . . . . . . . . . . . . . . 100,000*
Printing and Engraving. . . . . . . . . . . . . . . . . 35,000*
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 4,787*
----------
Total. . . . . . . . . . . . . . . . . . . . . . $ 500,000
==========
- ----------
<FN>
*Estimated
</FN>
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
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.*
10.8 Software License and Distribution Agreement between the Registrant
and Syncronys Softcorp.* 10.9 Lease Agreement, as amended, between
Registrant and Finn Hill Partnership.* 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.
10.12 Severance, Settlement and General Release Agreement between the
Registrant and Shane H. Traveller.
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.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.
99.1 Consent of Edward P. Swain, Jr.
99.2 Consent of Michael J. Clementz.
- -------------
* Previously filed.
II-2
<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-3
<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. 1
to this Registration Statement to be signed on its behalf by the undersigned, in
the City of Poulsbo, State of Washington on the 15th day of February 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. 1 to this Registration Statement was signed by the following
persons in the capacities indicated on February 15, 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 and
- ----------------------------- Treasurer
Diana T. Ballard
/s/ E. Edward Ahrens Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
E. Edward Ahrens
II-4
<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.*
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.
10.12 Severance, Settlement and General Release Agreement between Registrant
and Shane H. Traveller.
10.13 Form of Lock-in Agreement among the Registrant, Clint Ballard and Diana
Ballard.
10.14 Stockholders Agreement among the Registrant, Clint Ballard and Diana T.
Ballard.
23.1 Consent of McKennon, Wilson & Morgan, LLP.
27.1 Financial Data Schedule.
99.1 Consent of Edward P. Swain, Jr.
99.2 Consent of Michael J. Clementz.
- -------------
* Previously filed.
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of November, 1999 by and between
eAcceleration Corp., a Delaware corporation (the "Company") and Clint Ballard,
an individual with an address at P.O. Box 3546, Silverdale, Washington 98383
(hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, this Agreement is intended to supersede and replace all prior
agreements, understandings and arrangements between or among the Company and the
Employee relating to the employment of the Employee.
NOW, THEREFORE, it is agreed as follows:
1. Retention of Services. The Company hereby retains the services of
Employee, and Employee agrees to furnish such services, upon the terms and
conditions hereinafter set forth.
2. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, and further subject to certain provisions hereof which
survive the term hereof, the term of this Agreement shall be comprised of a five
(5) year period of employment commencing on the date of the first closing of the
proposed public offering of shares of common stock pursuant to a registration
statement on form SB-2 filed with the Securities and Exchange Commission in
November 1999, and shall be extended thereafter for additional one-year periods
unless or until the Company or the Employee provides sixty (60) days' notice to
the other party of the termination of this Agreement.
3. Duties and Extent of Services During Period of Employment.
(a) During the term of employment, Employee shall be employed by the
Company as President and Chief Executive Officer or in such other equivalent
positions with the Company and its affiliates, as may be determined by the Board
of Directors of the Company, and shall also serve as a director of the Company.
In such capacity, Employee agrees that he shall devote Employee's full time
business efforts to serving the Company and its affiliates under the direction
of the Board of Directors of the Company, shall perform all duties incident to
Employee's position on behalf of the Company to the best of Employee's ability
and shall perform such other duties as may from time to time be assigned to him
by the Board of Directors of the Company.
(b) The Company and Employee agree that Employee shall perform
Employee's basic responsibilities and duties hereunder at the office of the
Company in Kitsap County, Washington, or at Employee's home office consistent
with past practice; subject, however, to the travel requirements of Employee's
position, including that Employee may be required to perform services on a
temporary basis at the offices of the Company and its affiliates outside Kitsap
County, Washington and travel to visit certain customers of the Company, in
connection with the Company acquiring the rights or license to market and sell
certain products or otherwise in connection with the business and investor
relations of the Company.
4. Remuneration. During the period of employment, Employee shall be
entitled to receive the following compensation for Employee's services:
(a) The Company shall pay to Employee a salary at the rate of $104,000
per annum, payable in equal bi-weekly installments, or in such other manner as
shall be consistent with the Company's payroll practices.
(b) In addition to the salary provided in clause (a) above, not later
than one hundred ten (110) days after the end of each fiscal year of the
Company, the Company shall pay to Employee, as incentive
<PAGE>
compensation, an amount equal to two and one-half percent (2.5%) of the
Company's Pre-Tax Income (as defined below) for such immediately preceding
fiscal year. For purposes of this Agreement, "Pre-Tax Income" shall mean an
amount equal to the net income of the Company before taxes, depreciation,
amortization, and extraordinary items, in each case computed in accordance with
United States generally accepted accounting principles, consistently applied.
The Company agrees to furnish to Employee a copy of the Company's financial
statements not later than one hundred and five (105) days after the end of each
fiscal year of the Company during the term of this Agreement. In the event that
this Agreement is terminated other than pursuant to Section 9(a), the Employee
shall be entitled to receive the amount which would be payable under this clause
(b) for each fiscal quarter of any fiscal year in which Employee was employed by
the Company at the date of such termination.
5. Employee Benefits; Expenses.
(a) During the term of this Agreement, the Company shall provide to
the Employee the right to participate in the Company's then existing medical and
dental insurance and other employee benefit plans and policies on the same terms
as are then generally available to the Company's executive and managerial
employees.
(b) Employee shall be entitled to paid vacation each year during the
term of this Agreement at the rate of four (4) weeks per annum. Vacation shall
be taken each year and, if not taken, shall be carried over for one (1) year
and, if not taken during such carry-over period, shall be forfeited.
(c) The Corporation shall reimburse Employee, in accordance with the
practice followed from time to time for other executive and managerial officers
of the Company, for all reasonable and necessary business and traveling
expenses, and other disbursements incurred by Employee for or on behalf of the
Corporation in the performance of Employee's duties hereunder, upon presentation
by Employee to the Company of an appropriate accounting or documentation of
such.
6. Disability. If Employee, during the period of employment, becomes
unable for any 120 days in any twelve-month period due to ill health or other
physical or mental incapacity, to perform Employee's services hereunder, the
Company may thereafter, upon at least 100 days' written notice to Employee,
place him on disability status. After such action by the Company, Employee shall
no longer be entitled to receive any compensation hereunder until the Employee
returns to full-time status.
7. Confidential Information.
(a) In the course of Employee's employment by the Company, Employee
will have access to and possession of valuable and important confidential or
proprietary data or information of the Company and its operations. Employee will
not during Employee's employment by the Company or at any time for a period of
five (5) years thereafter divulge or communicate to any person nor shall
Employee direct any employee, representative or agent of the Company or its
affiliates to divulge or communicate to any person or entity (other than to a
person or entity bound by confidentiality obligations similar to those contained
herein and other than as necessary in performing Employee's duties hereunder) or
use to the detriment of the Company or for the benefit of any other person or
entity, including without limitation any competitor, supplier, licensor,
licensee or customer of the Company , any of such confidential or proprietary
data or information or make or remove any copies thereof, whether or not marked
or otherwise identified as "confidential" or "secret." Employee shall take all
reasonable precautions in handling the confidential or proprietary data or
information within the Company to a strict need-to-know basis and shall comply
with any and all security systems and measures adopted from time to time by the
Company to protect the confidentiality of confidential or proprietary data or
information.
(b) The term "confidential or proprietary data or information" as used
in this Agreement shall mean information not generally available to the public,
including, without limitation, all database information, personnel information,
financial information, customer lists, account lists or other account
information, names,
2
<PAGE>
telephone numbers or addresses, supplier lists, trade secrets, patented or
proprietary information, forms, information regarding products, operations,
systems, methods, financing, services, know how, computer and any other
processed or collated data, computer programs, pricing, marketing, media and
advertising data.
(c) Employee will at all times promptly disclose to the Company in
such form and manner as the Company may reasonably require, any inventions,
improvements or procedural or methodological innovations, including without
limitation relating to programs, methods, forms, systems, services, designs,
marketing ideas, products or processes (whether or not capable of being
trademarked, copyrighted or patented) conceived or developed or created by
Employee during or in connection with Employee's employment hereunder and which
relate to the business of the Company ("Intellectual Property"). Employee agrees
that all such Intellectual Property shall be the sole property of the Company.
Employee further agrees that Employee will execute such instruments and perform
such acts as may reasonably be requested by the Company to transfer to and
perfect in the Company all legally protectable rights in such Intellectual
Property.
(d) In accordance with RCW 49.44.140, any assignment of inventions
required by this Agreement does not apply to an invention for which no
equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on the Employee's own time, unless (a) the
invention relates (i) directly to the business of the Company or (ii) to the
Company's actual or demonstrably anticipated research or development or (b) the
invention results from any work performed by the Employee for the Company.
(e) As a matter of record Employee attaches hereto as Exhibit A a
complete list of all inventions (including patent applications and patents)
relevant to the subject matter of Employee's engagement pursuant to this
Agreement which have been made, conceived, developed or first reduced to
practice by Employee, alone or jointly with others, prior to Employee's
engagement with Company pursuant to this Agreement that Employee desires to
remove from the operation of this Agreement, and Employee covenants that such
list is complete. If no such list is attached to this Agreement, Employee
represents that it has no such inventions at the time of signing this Agreement.
(f) All written materials, books, records and documents made by
Employee or coming into Employee's possession during Employee's employment by
the Company concerning any products, processes or equipment manufactured, used,
developed, investigated, purchased, sold or considered by the Company or
otherwise concerning the business or affairs of the Company, including without
limitation any files, customer records such as names, telephone numbers and
addresses, lists, firm records, brochures and literature, shall be the sole
property of the Company, shall not be removed from the Company's premises by the
Employee, and upon termination of Employee's employment by the Company, or upon
request of the Company during Employee's employment by the Company, Employee
shall promptly deliver the same to the Company. In addition, upon termination of
Employee's employment by the Company, Employee will deliver to the Company all
other Company property in Employee's possession or under Employee's control,
including, but not limited to, financial statements, marketing and sales data,
customer and supplier lists, account lists and other account information,
database information and other documents, and any Company credit cards.
(g) The Employee acknowledges that the covenants contained in this
Section 7 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 7 may be inadequate and that the violation of any of the covenants
contained in this Section 7 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 7 shall run in favor
of the Company and its successors and assigns. In
3
<PAGE>
addition, to the extent the Company is successful on the merits in any
proceeding to enforce the terms of this Section 7, the Employee agrees to pay
the Company the costs it incurs, including reasonable attorneys' fees and
expenses, in bringing and prosecuting any such proceeding.
(h) The provisions of this Section 7 shall survive the termination of
this Employment Agreement.
8. Non-Competition.
(a) During the term of this Agreement and for one year thereafter (the
"Restricted Period"), the Employee shall not, without the written consent of the
Company, directly or indirectly,
(i) become associated with, render services to, invest in,
represent, advise or otherwise participate in as an officer, employee, director,
stockholder, partner, promoter, agent of, consultant for or otherwise, any
business which is conducted in any of the jurisdictions in which the Company's
business is conducted and which is competitive with the business conducted by
the Company ; provided, that this Section 8(a)(i) shall not prohibit the
Employee from purchasing or owning up to one percent (1%) of the outstanding
capital stock of a company which is listed or authorized for trading on any
national securities exchange, Nasdaq or the OTC Electronic Bulletin Board or is
a company with a class of securities registered under Section 12 of the
Securities Act of 1934, as amended;
(ii) for the Employee's own account or for the account of any other
person or entity (A) interfere with the Company's relationship with any of its
suppliers, customers, accounts, brokers, representatives or agents or (B)
contact, telephone, meet, solicit or transact any business with any material
customer, account or supplier of the Company who or which transacts or has
transacted business with the Company at any time during the term of this
Agreement; or
(iii) employ or otherwise engage, or solicit, entice or induce on
behalf of the Employee or any other person or entity, the services, retention or
employment of any person who has been an employee, principal, partner,
stockholder, sales representative, trainee, consultant to or agent of the
Company within one year of the date of such offer or solicitation.
(b) Nothing herein contained shall be construed as prohibiting the
Company from pursuing any other remedies available to it for such violation,
including but not limited to any injunctive or other equitable relief or the
recovery of damages from the Employee.
(c) The Employee acknowledges that the covenants contained in this
Section 8 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 8 may be inadequate and that the violation of any of the covenants
contained in this Section 8 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 8 shall run in favor of
the Company and its successors and assigns. In addition, to the extent the
Company is successful on the merits in any proceeding to enforce the terms of
this Section 8, the Employee agrees to pay the Company the costs it incurs,
including reasonable attorneys' fees and expenses, in bringing and prosecuting
any such proceeding.
4
<PAGE>
(d) In case any one or more of the terms or provisions contained in
this Section 8 shall for any reason be held invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect any other terms
or provisions hereof, but such term or provision shall be deemed modified or
deleted as or to the extent required by applicable law, and such modification or
deletion shall not affect the validity of the other terms or provisions of this
Section 8. In addition, if any one or more of the restrictions contained in this
Section 8 shall for any reason be held to be unreasonable with regard to time,
duration, geographic scope or activity, the parties contemplate and hereby agree
that such restriction shall be modified and shall be enforced to the full extent
compatible with applicable law. The parties hereto intend that the covenants
contained in this Section 8 shall be deemed a series of separate covenants for
each country, state, county and city. If, in any judicial proceeding, a court
shall refuse to enforce all the separate covenants deemed included in this
Section 8 because, taken together, they cover too extensive a geographic area,
the parties intend that those of such covenants (taken in order of the cities,
counties, states and countries therein which are lease populous) which if
eliminated would permit the remaining separate covenants to be enforced in such
proceeding shall, for the purpose of such proceeding, be deemed eliminated from
the provisions of this Section 8.
(e) The provisions of this Section 8 shall survive the termination of
this Employment Agreement.
9. Termination.
(a) The Company may terminate the Employee's services hereunder "for
cause" by delivering to Employee not less than ten (10) days prior to the date
on which the termination is to be effective, a written notice of termination for
cause specifying the act, acts or failure to act that constitute the cause. For
the purposes of this agreement, "for cause" shall mean; (i) any act of fraud or
embezzlement which materially adversely affects the financial or market
interests of the Company or any affiliate thereof, (ii) in the event of a
conviction of the Employee for any violent felony or other serious crime or any
knowing violation of any federal or state securities law or regulation, (iii)
repeated failure to perform Employee's duties hereunder after notice and
opportunity to cure, (iv) any material breach by the Employee of this Agreement,
or (v) the death of the Employee.
(b) If the Company terminates Employee's employment hereunder for any
reason other than "for cause" as set forth in Section 9(a) hereof, the Company
shall pay to the Employee compensation pursuant to Sections 4(a) and 4(b) hereof
at the time and in the manner provided for herein, and no other compensation
payable hereunder shall be payable to the Employee. If the Company terminates
Employee's employment hereunder "for cause" as set forth in Section 9(a) hereof
or if Employee resigns voluntarily from Employee's employment by the Company,
Employee shall be paid the compensation pursuant to Sections 4(a) and 4(b)
hereof through the date of such termination but shall not be entitled to receive
any further compensation hereunder. Employee and the Company acknowledge that
the foregoing provisions of this paragraph 9(b) are reasonable and are based
upon the facts and circumstances of the parties at the time of entering into
this Agreement, and with due regard to future expectations.
10. Notices. Any notice to be given to the Company hereunder shall be
deemed sufficient if addressed to the Company in writing and delivered or mailed
by certified or registered mail to it at 1223 NW Finn Hill Road, Poulsbo
Washington 98730, Attention: President, or to such other address as the Company
may hereafter designate, and a copy to Neil M. Kaufman, Esq., Kaufman &
Moomjian, LLC, 50 Charles Lindbergh Boulevard, Suite 206, Mitchel Field, New
York 11553. Any notice to be given to Employee hereunder shall be delivered or
mailed by certified or registered mail to her at the address set forth at the
head of this Agreement or such other address as he may hereafter designate.
11. Change of Control. (a) In the event that at any time after any
securities of the Company are publicly traded there shall be a change in the
control of the Company, as hereinafter defined, or in any person directly or
indirectly presently controlling the Company, as hereinafter defined, Employee
shall have the option, exercisable within six (6) months of Employee's becoming
aware of such event, to terminate Employee's
5
<PAGE>
employment by the Company pursuant to this Employment Agreement forthwith.
Upon such termination, Employee shall have the right to immediately receive as a
lump sum payment an amount equal to three (3) times the average of the total
annual compensation paid by the Company to Employee, with respect to the five
fiscal years of the Company prior to the change of control, minus $1.00.
(b) For purposes of this Agreement, a change in control of the Company, or
in any person directly or indirectly controlling the Company, shall mean:
(i) A change in control as such term is presently
defined in Regulation 240.12b-2 under the Securities Exchange Act of
1934 ("Exchange Act); or
(ii) if any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act) other than the Company or any
"person" who on the date of this Agreement is a director or officer of
the Company, becomes the "beneficial owner" (as defined in Rule
13(d)-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing twenty (20%) percent of the voting power
of the Company's then outstanding securities, unless such person
becomes such a beneficial owner as a result of a transaction approved
by a majority of the board of directors of the Company; or
(iii) if during any period of two (2) consecutive years
during the term of this Agreement, individuals who at the beginning of
such period constitute the Board of Directors cease for any reason to
constitute at least a majority thereof, unless the election of each
director who is not a director at the beginning of such period has
been approved in advance by directors representing at least two-thirds
(2/3) of the directors then in office who were directors at the
beginning of the period.
12. Successors and Assigns; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of the successors and assigns of the
Company, and unless clearly inapplicable, all references herein to the Company
shall be deemed to include any such successor. In addition, this Agreement shall
be binding upon and inure to the benefit of the Employee and Employee's heirs,
executors, legal representatives and assigns; provided, however, that the
obligations of Employee hereunder may not be delegated without the prior written
approval of the Board of Directors of the Company. In the event of any
consolidation or merger of the Company into or with any other corporation during
the term of this Agreement, or the sale of all or substantially all of the
assets of the Company to another corporation, person or entity during the term
of this Agreement, such successor corporation shall assume this Agreement and
become obligated to perform all of the terms and provisions hereof applicable to
the Company, and Employee's obligations hereunder shall continue in favor of
such successor corporation.
13. Amendments. This Agreement may not be altered, modified, amended
or terminated except by a written instrument signed by each of the parties
hereto.
14. Prior Agreements Superseded. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
any other agreements, oral or written, entered into between Employee and the
Company prior to the date of this Agreement relating thereto.
15. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington, without regard
to conflicts of laws.
16. Severability. If any provision of this Agreement shall be held by
a court of competent jurisdiction to be contrary to law or public policy, the
remaining provisions shall remain in full force and effect.
6
<PAGE>
17. Waiver. No term or provision hereof shall be deemed waived and no
breach consented to or excused, unless such waiver, consent or excuse shall be
in writing and signed by the party claimed to have waived, consented or excused.
A consent, waiver or excuse of any breach shall not constitute a consent to,
waiver or, or excuse of any other or subsequent breach whether or not of the
same kind of the original breach.
18. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
agreement.
19. Acknowledgment. Employee acknowledges that he has carefully read this
Agreement, has had an opportunity to consult counsel regarding this Agreement
and hereby represents and warrants to the Company that Employee's entering into
this Agreement, and the obligations and duties undertaken by Employee hereunder,
will not conflict with, constitute a breach of or otherwise violate the terms of
any other agreement to which Employee is a party and that Employee is not
required to obtain the consent of any person, firm, corporation or other entity
in order to enter into and perform Employee's obligations under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
eAcceleration Corp.
By: /s/ Diana T. Ballard
-------------------------------
Name: Diana T. Ballard
Title: Chairman of the Board
/s/ Clint Ballard
-----------------------------------
Clint Ballard
7
<PAGE>
EXHIBIT A
Inventions
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of services pursuant to this Agreement that
have been made or conceived or first reduced to practice by Employee, alone
or jointly with others, prior to the first effective date of this Agreement
that Employee desires to remove from the operation of this Agreement
entered into between the Company and Employee.
(a) No inventions or improvements.
(b) Any and all inventions regarding: Nothing
2. Employee proposes to bring to this relationship the following materials
and documents of a former employer.
(a) No materials or documents.
/s/ Clint Ballard
----------------------------
Clint Ballard
8
<PAGE>
Clint Ballard
P.O. Box 3546
Silverdale, Washington 98383
February 15, 2000
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
Re: Employment Agreement between eAcceleration Corp.
and Clint Ballard
------------------------------------------------
Ladies and Gentlemen:
Reference is made to that certain Employment Agreement, dated as of
November 1, 1999 (the "Employment Agreement"), between the undersigned and
eAcceleration Corp. (the "Company"). All capitalized terms not otherwise defined
herein shall have the meanings set forth in the Employment Agreement. In order
to clarify certain terms of the Employment Agreement, the undersigned agrees to
the following terms:
1. The incentive compensation referred to in Section 4(b) of the
Employment Agreement is based on prospective earnings by the Company
during the term of the Employment Agreement only. Accordingly,
no incentive compensation will be payable to the undersigned
under Section 4(b) of the Employment Agreement with respect to the
Company's 1999 Pre Tax Income.
2. This letter agreement may be executed in counterparts, each of
which shall be deemed to be an original, and such counterparts, taken
together, shall constitute one and the same agreement.
3. This letter agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington,
without regard to conflicts of laws.
Sincerely yours,
/s/ Clint Ballard
---------------------------
Clint Ballard
Confirmed and Agreed to by:
eAcceleration Corp.
By: /s/ Clint Ballard
--------------------------
Clint Ballard
President
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of November, 1999 by and between
eAcceleration Corp. , a Delaware corporation (the "Company") and Diana T.
Ballard, an individual with an address at P.O. Box 3546, Silverdale, Washington
98383 (hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, this Agreement is intended to supersede and replace all prior
agreements, understandings and arrangements between or among the Company and the
Employee relating to the employment of the Employee.
NOW, THEREFORE, it is agreed as follows:
1. Retention of Services. The Company hereby retains the services of
Employee, and Employee agrees to furnish such services, upon the terms and
conditions hereinafter set forth.
2. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, and further subject to certain provisions hereof which
survive the term hereof, the term of this Agreement shall be comprised of a five
(5) year period of employment commencing on the date of the first closing of the
proposed public offering of shares of common stock pursuant to a registration
statement on form SB-2 filed with the Securities and Exchange Commission in
November 1999, and shall be extended thereafter for additional one-year periods
unless or until the Company or the Employee provides sixty (60) days' notice to
the other party of the termination of this Agreement.
3. Duties and Extent of Services During Period of Employment.
(a) During the term of employment, Employee shall be employed by the
Company as Chairman of the Board or in such other equivalent positions with the
Company and its affiliates, as may be determined by the Board of Directors of
the Company, and shall also serve as a director of the Company. In such
capacity, Employee agrees that he shall devote Employee's full time business
efforts to serving the Company and its affiliates under the direction of the
Board of Directors of the Company, shall perform all duties incident to
Employee's position on behalf of the Company to the best of Employee's ability
and shall perform such other duties as may from time to time be assigned to him
by the Board of Directors of the Company.
(b) The Company and Employee agree that Employee shall perform
Employee's basic responsibilities and duties hereunder at the office of the
Company in Kitsap County, Washington, or at Employee's home office consistent
with past practice; subject, however, to the travel requirements of Employee's
position, including that Employee may be required to perform services on a
temporary basis at the offices of the Company and its affiliates outside Kitsap
County, Washington and travel to visit certain customers of the Company, in
connection with the Company acquiring the rights or license to market and sell
certain products or otherwise in connection with the business and investor
relations of the Company.
4. Remuneration. During the period of employment, Employee shall be
entitled to receive the following compensation for Employee's services:
(a) The Company shall pay to Employee a salary at the rate of $104,000
per annum, payable in equal bi-weekly installments, or in such other manner as
shall be consistent with the Company's payroll practices.
(b) In addition to the salary provided in clause (a) above, not later
than one hundred ten (110) days after the end of each fiscal year of the
Company, the Company shall pay to Employee, as incentive compensation, an amount
equal to two and one-half percent (2.5%) of the Company's Pre-Tax Income (as
defined
<PAGE>
below) for such immediately preceding fiscal year. For purposes of this
Agreement, "Pre-Tax Income" shall mean an amount equal to the net income of the
Company before taxes, depreciation, amortization, and extraordinary items, in
each case computed in accordance with United States generally accepted
accounting principles, consistently applied. The Company agrees to furnish to
Employee a copy of the Company's financial statements not later than one hundred
and five (105) days after the end of each fiscal year of the Company during the
term of this Agreement. In the event that this Agreement is terminated other
than pursuant to Section 9(a), the Employee shall be entitled to receive the
amount which would be payable under this clause (b) for each fiscal quarter of
any fiscal year in which Employee was employed by the Company at the date of
such termination.
5. Employee Benefits; Expenses.
(a) During the term of this Agreement, the Company shall provide to
the Employee the right to participate in the Company's then existing medical and
dental insurance and other employee benefit plans and policies on the same terms
as are then generally available to the Company's executive and managerial
employees.
(b) Employee shall be entitled to paid vacation each year during the
term of this Agreement at the rate of four (4) weeks per annum. Vacation shall
be taken each year and, if not taken, shall be carried over for one (1) year
and, if not taken during such carry-over period, shall be forfeited.
(c) The Corporation shall reimburse Employee, in accordance with the
practice followed from time to time for other executive and managerial officers
of the Company, for all reasonable and necessary business and traveling
expenses, and other disbursements incurred by Employee for or on behalf of the
Corporation in the performance of Employee's duties hereunder, upon presentation
by Employee to the Company of an appropriate accounting or documentation of
such.
6. Disability. If Employee, during the period of employment, becomes unable
for any 120 days in any twelve-month period due to ill health or other physical
or mental incapacity, to perform Employee's services hereunder, the Company may
thereafter, upon at least 100 days' written notice to Employee, place him on
disability status. After such action by the Company, Employee shall no longer be
entitled to receive any compensation hereunder until the Employee returns to
full-time status.
7. Confidential Information.
(a) In the course of Employee's employment by the Company, Employee
will have access to and possession of valuable and important confidential or
proprietary data or information of the Company and its operations. Employee will
not during Employee's employment by the Company or at any time for a period of
five (5) years thereafter divulge or communicate to any person nor shall
Employee direct any employee, representative or agent of the Company or its
affiliates to divulge or communicate to any person or entity (other than to a
person or entity bound by confidentiality obligations similar to those contained
herein and other than as necessary in performing Employee's duties hereunder) or
use to the detriment of the Company or for the benefit of any other person or
entity, including without limitation any competitor, supplier, licensor,
licensee or customer of the Company , any of such confidential or proprietary
data or information or make or remove any copies thereof, whether or not marked
or otherwise identified as "confidential" or "secret." Employee shall take all
reasonable precautions in handling the confidential or proprietary data or
information within the Company to a strict need-to-know basis and shall comply
with any and all security systems and measures adopted from time to time by the
Company to protect the confidentiality of confidential or proprietary data or
information.
(b) The term "confidential or proprietary data or information" as used
in this Agreement shall mean information not generally available to the public,
including, without limitation, all database information, personnel information,
financial information, customer lists, account lists or other account
information, names, telephone numbers or addresses, supplier lists, trade
secrets, patented or proprietary information, forms,
2
<PAGE>
information regarding products, operations, systems, methods, financing,
services, know how, computer and any other processed or collated data, computer
programs, pricing, marketing, media and advertising data.
(c) Employee will at all times promptly disclose to the Company in
such form and manner as the Company may reasonably require, any inventions,
improvements or procedural or methodological innovations, including without
limitation relating to programs, methods, forms, systems, services, designs,
marketing ideas, products or processes (whether or not capable of being
trademarked, copyrighted or patented) conceived or developed or created by
Employee during or in connection with Employee's employment hereunder and which
relate to the business of the Company ("Intellectual Property"). Employee agrees
that all such Intellectual Property shall be the sole property of the Company.
Employee further agrees that Employee will execute such instruments and perform
such acts as may reasonably be requested by the Company to transfer to and
perfect in the Company all legally protectable rights in such Intellectual
Property.
(d) In accordance with RCW 49.44.140, any assignment of inventions
required by this Agreement does not apply to an invention for which no
equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on the Employee's own time, unless (a) the
invention relates (i) directly to the business of the Company or (ii) to the
Company's actual or demonstrably anticipated research or development or (b) the
invention results from any work performed by the Employee for the Company.
(e) As a matter of record Employee attaches hereto as Exhibit A a
complete list of all inventions (including patent applications and patents)
relevant to the subject matter of Employee's engagement pursuant to this
Agreement which have been made, conceived, developed or first reduced to
practice by Employee, alone or jointly with others, prior to Employee's
engagement with Company pursuant to this Agreement that Employee desires to
remove from the operation of this Agreement, and Employee covenants that such
list is complete. If no such list is attached to this Agreement, Employee
represents that it has no such inventions at the time of signing this Agreement.
(f) All written materials, books, records and documents made by
Employee or coming into Employee's possession during Employee's employment by
the Company concerning any products, processes or equipment manufactured, used,
developed, investigated, purchased, sold or considered by the Company or
otherwise concerning the business or affairs of the Company, including without
limitation any files, customer records such as names, telephone numbers and
addresses, lists, firm records, brochures and literature, shall be the sole
property of the Company, shall not be removed from the Company's premises by the
Employee, and upon termination of Employee's employment by the Company, or upon
request of the Company during Employee's employment by the Company, Employee
shall promptly deliver the same to the Company. In addition, upon termination of
Employee's employment by the Company, Employee will deliver to the Company all
other Company property in Employee's possession or under Employee's control,
including, but not limited to, financial statements, marketing and sales data,
customer and supplier lists, account lists and other account information,
database information and other documents, and any Company credit cards.
(g) The Employee acknowledges that the covenants contained in this
Section 7 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 7 may be inadequate and that the violation of any of the covenants
contained in this Section 7 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 7 shall run in favor of
the Company and its successors and assigns. In addition, to the extent the
Company is successful on the merits in any proceeding to enforce the terms of
this
3
<PAGE>
Section 7, the Employee agrees to pay the Company the costs it incurs,
including reasonable attorneys' fees and expenses, in bringing and prosecuting
any such proceeding.
(h) The provisions of this Section 7 shall survive the termination of
this Employment Agreement.
8. Non-Competition.
(a) During the term of this Agreement and for one year thereafter (the
"Restricted Period"), the Employee shall not, without the written consent of the
Company, directly or indirectly,
(i) become associated with, render services to, invest in,
represent, advise or otherwise participate in as an officer, employee, director,
stockholder, partner, promoter, agent of, consultant for or otherwise, any
business which is conducted in any of the jurisdictions in which the Company's
business is conducted and which is competitive with the business conducted by
the Company ; provided, that this Section 8(a)(i) shall not prohibit the
Employee from purchasing or owning up to one percent (1%) of the outstanding
capital stock of a company which is listed or authorized for trading on any
national securities exchange, Nasdaq or the OTC Electronic Bulletin Board or is
a company with a class of securities registered under Section 12 of the
Securities Act of 1934, as amended;
(ii) for the Employee's own account or for the account of any other
person or entity (A) interfere with the Company's relationship with any of its
suppliers, customers, accounts, brokers, representatives or agents or (B)
contact, telephone, meet, solicit or transact any business with any material
customer, account or supplier of the Company who or which transacts or has
transacted business with the Company at any time during the term of this
Agreement; or
(iii) employ or otherwise engage, or solicit, entice or induce on
behalf of the Employee or any other person or entity, the services, retention or
employment of any person who has been an employee, principal, partner,
stockholder, sales representative, trainee, consultant to or agent of the
Company within one year of the date of such offer or solicitation.
(b) Nothing herein contained shall be construed as prohibiting the
Company from pursuing any other remedies available to it for such violation,
including but not limited to any injunctive or other equitable relief or the
recovery of damages from the Employee.
(c) The Employee acknowledges that the covenants contained in this
Section 8 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement. The Employee further acknowledges that any remedy at law for
any breach or threatened or attempted breach of the covenants contained in this
Section 8 may be inadequate and that the violation of any of the covenants
contained in this Section 8 will cause irreparable and continuing damage to the
Company. Accordingly, the Company shall be entitled to specific performance or
any other mode of injunctive and/or other equitable relief to enforce its rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, without
the necessity of showing any actual damage or irreparable harm or the posting of
any bond or furnishing of other security, and that such injunctive relief shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 8 shall run in favor of
the Company and its successors and assigns. In addition, to the extent the
Company is successful on the merits in any proceeding to enforce the terms of
this Section 8, the Employee agrees to pay the Company the costs it incurs,
including reasonable attorneys' fees and expenses, in bringing and prosecuting
any such proceeding.
(d) In case any one or more of the terms or provisions contained in
this Section 8 shall for any reason be held invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect any
4
<PAGE>
other terms or provisions hereof, but such term or provision shall be
deemed modified or deleted as or to the extent required by applicable law, and
such modification or deletion shall not affect the validity of the other terms
or provisions of this Section 8. In addition, if any one or more of the
restrictions contained in this Section 8 shall for any reason be held to be
unreasonable with regard to time, duration, geographic scope or activity, the
parties contemplate and hereby agree that such restriction shall be modified and
shall be enforced to the full extent compatible with applicable law. The parties
hereto intend that the covenants contained in this Section 8 shall be deemed a
series of separate covenants for each country, state, county and city. If, in
any judicial proceeding, a court shall refuse to enforce all the separate
covenants deemed included in this Section 8 because, taken together, they cover
too extensive a geographic area, the parties intend that those of such covenants
(taken in order of the cities, counties, states and countries therein which are
lease populous) which if eliminated would permit the remaining separate
covenants to be enforced in such proceeding shall, for the purpose of such
proceeding, be deemed eliminated from the provisions of this Section 8.
(e) The provisions of this Section 8 shall survive the termination of
this Employment Agreement.
9. Termination.
(a) The Company may terminate the Employee's services hereunder "for
cause" by delivering to Employee not less than ten (10) days prior to the date
on which the termination is to be effective, a written notice of termination for
cause specifying the act, acts or failure to act that constitute the cause. For
the purposes of this agreement, "for cause" shall mean; (i) any act of fraud or
embezzlement which materially adversely affects the financial or market
interests of the Company or any affiliate thereof, (ii) in the event of a
conviction of the Employee for any violent felony or other serious crime or any
knowing violation of any federal or state securities law or regulation, (iii)
repeated failure to perform Employee's duties hereunder after notice and
opportunity to cure, (iv) any material breach by the Employee of this Agreement,
or (v) the death of the Employee.
(b) If the Company terminates Employee's employment hereunder for any
reason other than "for cause" as set forth in Section 9(a) hereof, the Company
shall pay to the Employee compensation pursuant to Sections 4(a) and 4(b) hereof
at the time and in the manner provided for herein, and no other compensation
payable hereunder shall be payable to the Employee. If the Company terminates
Employee's employment hereunder "for cause" as set forth in Section 9(a) hereof
or if Employee resigns voluntarily from Employee's employment by the Company,
Employee shall be paid the compensation pursuant to Sections 4(a) and 4(b)
hereof through the date of such termination but shall not be entitled to receive
any further compensation hereunder. Employee and the Company acknowledge that
the foregoing provisions of this paragraph 9(b) are reasonable and are based
upon the facts and circumstances of the parties at the time of entering into
this Agreement, and with due regard to future expectations.
10. Notices. Any notice to be given to the Company hereunder shall be
deemed sufficient if addressed to the Company in writing and delivered or mailed
by certified or registered mail to it at 1223 NW Finn Hill Road, Poulsbo
Washington 98730, Attention: President, or to such other address as the Company
may hereafter designate, and a copy to Neil M. Kaufman, Esq., Kaufman &
Moomjian, LLC, 50 Charles Lindbergh Boulevard, Suite 206, Mitchel Field, New
York 11553. Any notice to be given to Employee hereunder shall be delivered or
mailed by certified or registered mail to her at the address set forth at the
head of this Agreement or such other address as he may hereafter designate.
11. Change of Control. (a) In the event that at any time after any
securities of the Company are publicly traded there shall be a change in the
control of the Company, as hereinafter defined, or in any person directly or
indirectly presently controlling the Company, as hereinafter defined, Employee
shall have the option, exercisable within six (6) months of Employee's becoming
aware of such event, to terminate Employee's employment by the Company pursuant
to this Employment Agreement forthwith. Upon such termination, Employee shall
have the right to immediately receive as a lump sum payment an amount equal to
three (3) times the average of
5
<PAGE>
the total annual compensation paid by the Company to Employee, with respect
to the five fiscal years of the Company prior to the change of control, minus
$1.00.
(b) For purposes of this Agreement, a change in control of the Company,
or in any person directly or indirectly controlling the Company, shall mean:
(i) A change in control as such term is presently defined in
Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act);
or
(ii) if any "person" (as such term is used in Section 13(d) and 14(d)
of the Exchange Act) other than the Company or any "person" who on the date of
this Agreement is a director or officer of the Company, becomes the "beneficial
owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing twenty (20%) percent of
the voting power of the Company's then outstanding securities, unless such
person becomes such a beneficial owner as a result of a transaction approved by
a majority of the board of directors of the Company; or
(iii) if during any period of two (2) consecutive years during the
term of this Agreement, individuals who at the beginning of such period
constitute the Board of Directors cease for any reason to constitute at least a
majority thereof, unless the election of each director who is not a director at
the beginning of such period has been approved in advance by directors
representing at least two-thirds (2/3) of the directors then in office who were
directors at the beginning of the period.
12. Successors and Assigns; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of the successors and assigns of the
Company, and unless clearly inapplicable, all references herein to the Company
shall be deemed to include any such successor. In addition, this Agreement shall
be binding upon and inure to the benefit of the Employee and Employee's heirs,
executors, legal representatives and assigns; provided, however, that the
obligations of Employee hereunder may not be delegated without the prior written
approval of the Board of Directors of the Company. In the event of any
consolidation or merger of the Company into or with any other corporation during
the term of this Agreement, or the sale of all or substantially all of the
assets of the Company to another corporation, person or entity during the term
of this Agreement, such successor corporation shall assume this Agreement and
become obligated to perform all of the terms and provisions hereof applicable to
the Company, and Employee's obligations hereunder shall continue in favor of
such successor corporation.
13. Amendments. This Agreement may not be altered, modified, amended or
terminated except by a written instrument signed by each of the parties hereto.
14. Prior Agreements Superseded. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
any other agreements, oral or written, entered into between Employee and the
Company prior to the date of this Agreement relating thereto.
15. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington, without regard
to conflicts of laws.
16. Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to law or public policy, the
remaining provisions shall remain in full force and effect.
17. Waiver. No term or provision hereof shall be deemed waived and no
breach consented to or excused, unless such waiver, consent or excuse shall be
in writing and signed by the party claimed to have waived, consented or excused.
A consent, waiver or excuse of any breach shall not constitute a consent to,
waiver or, or excuse of any other or subsequent breach whether or not of the
same kind of the original breach.
6
<PAGE>
18. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
agreement.
19. Acknowledgment. Employee acknowledges that he has carefully read this
Agreement, has had an opportunity to consult counsel regarding this Agreement
and hereby represents and warrants to the Company that Employee's entering into
this Agreement, and the obligations and duties undertaken by Employee hereunder,
will not conflict with, constitute a breach of or otherwise violate the terms of
any other agreement to which Employee is a party and that Employee is not
required to obtain the consent of any person, firm, corporation or other entity
in order to enter into and perform Employee's obligations under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
eAcceleration Corp.
By: /s/ Clint Ballard
---------------------------------
Name: Clint Ballard
Title: President and Chief Executive
Officer
/s/ Diana T. Ballard
--------------------------------------
Diana T. Ballard
7
<PAGE>
EXHIBIT A
Inventions
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of services pursuant to this Agreement that
have been made or conceived or first reduced to practice by Employee, alone
or jointly with others, prior to the first effective date of this Agreement
that Employee desires to remove from the operation of this Agreement
entered into between the Company and Employee.
(a) No inventions or improvements.
(b) Any and all inventions regarding: Nothing
2. Employee proposes to bring to this relationship the following materials
and documents of a former employer.
(a) No materials or documents.
/s/ Diana T. Ballard
----------------------------
Diana T. Ballard
<PAGE>
Diana T. Ballard
P.O. Box 3546
Silverdale, Washington 98383
February 15, 2000
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98370
Re: Employment Agreement between eAcceleration Corp.
and Diana T. Ballard
------------------------------------------------
Ladies and Gentlemen:
Reference is made to that certain Employment Agreement, dated as of
November 1, 1999 (the "Employment Agreement"), between the undersigned and
eAcceleration Corp. (the "Company"). All capitalized terms not otherwise defined
herein shall have the meanings set forth in the Employment Agreement. In order
to clarify certain terms of the Employment Agreement, the undersigned agrees to
the following terms:
1. The incentive compensation referred to in Section 4(b) of the
Employment Agreement is based on prospective earnings by the Company
during the term of the Employment Agreement only. Accordingly,
no incentive compensation will be payable to the undersigned
under Section 4(b) of the Employment Agreement with respect to the
Company's 1999 Pre Tax Income.
2. This letter agreement may be executed in counterparts, each of
which shall be deemed to be an original, and such counterparts, taken
together, shall constitute one and the same agreement.
3. This letter agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington,
without regard to conflicts of laws.
Sincerely yours,
/s/ Diana T. Ballard
---------------------------
Diana T. Ballard
Confirmed and Agreed to by:
eAcceleration Corp.
By: /s/ Clint Ballard
---------------------------
Clint Ballard
President
SUBSCRIPTION AGREEMENT
Persons interested in purchasing shares of the common stock, par value
$0.0001 per share (the "Shares") of eAcceleration Corp. (the "Company"), must
complete and return this Subscription Agreement along with their check or money
order (unless they are sending a wire transfer) to American Stock Transfer &
Trust Co., as escrow agent for eAcceleration Corp., Attention: Corporate Trust
Department, 6201 15th Avenue, Brooklyn, New York 11219.
The Shares involve a high degree of risk and immediate and substantial
dilution. No person should complete and sign a Subscription Agreement unless he
or she has received and read the Company's prospectus dated
_____________________ (the "Prospectus").
The Company reserves the right to completely or partially accept or reject
any subscription for any reason or for no reason. If and when accepted by the
Company, this Subscription Agreement shall constitute a subscription for such
number of Shares equal to or less than the number that you have requested below,
as determined by the Company. The minimum subscription is $625 for 100 shares.
Method of Payment: Check, Money Order or Wire Transfer payable to "eAcceleration
Corp., Subscription Escrow Account." Checks or money orders should be sent,
together with the completed Subscription Agreement, to the Escrow Agent at the
address provided above. Wire transfers should be sent to the Escrow Agent using
the following wire transfer instructions:
A copy of this Agreement will be returned to you as your receipt within
thirty (30) days, confirming your subscription and indicating the extent to
which your subscription has been accepted by the Company. As discussed in the
Prospectus, until 400,000 shares (the "Minimum Shares") are sold, all proceeds
of this offering will be held in an escrow account (the "Escrow Account") at
American Stock Transfer & Trust Co. When the Minimum Shares are sold, the funds
held in the Escrow Account will be disbursed to the Company and stock
certificates will be issued within thirty (30) days. Thereafter, a subscriber
will be mailed his or her stock certificates within thirty (30) days of the date
of the Company has mailed written confirmation of the subscription. In the event
the Minimum Shares are not sold prior to the termination date of this offering,
all deposits will be returned to subscribers as soon as practicable, with
interest earned, if any.
I hereby irrevocably tender this Subscription Agreement for the purchase of
_______ [insert number of Shares] Shares at $6.25 per Share. With this
Subscription Agreement, I tender payment in the amount of $_______ [insert total
price of Shares] ($6.25 per Share) for the Shares subscribed.
I am a bona fide resident of the state of _______________ [insert state of
residence].
Please register the Shares which I am purchasing as follows:
Check one:
___ Individual
___ Tenants-in-Common in Trust
___ Joint Tenants
___ Corporation
___ Minor with adult custodian under the Uniform Gifts to Minor's Act
___ Existing Partnership
<PAGE>
For the person(s) who will be registered stockholder(s):
- ---------------------------------- -----------------------------------
Investor No. 1 (print name above) Investor No. 2 (print name above)
- ---------------------------------- -----------------------------------
Street (residence address) Street (residence address)
- ---------------------------------- -----------------------------------
City State Zip City State Zip
- ---------------------------------- -----------------------------------
Home Phone Home Phone
- ---------------------------------- -----------------------------------
Social Security Number Social Security Number
- ---------------------------------- -----------------------------------
Date of Birth Date of Birth
- ---------------------------------- -----------------------------------
Signature Signature
- ---------------------------------- -----------------------------------
Date Date
To be completed by the Company:
Accepted by:
eAccleration Corp.
By: Date:
------------------------------ ------------------------------------
Name:
Title:
Number of Shares accepted:
--------.
2
eACCELERATION CORP.
AMENDED AND RESTATED
ESCROW AGREEMENT
with
AMERICAN STOCK TRANSFER & TRUST CO.
This Agreement is made and entered into as of February __, 2000 by and
among eACCELERATION CORP. a Delaware corporation (the "Company") and AMERICAN
TRANSFER & TRUST CO., a New York corporation with a principal corporate trust
office at 6201 15th Avenue, Brooklyn, New York 11219 (the "Escrow Agent").
WHEREAS, the Company proposes to offer for sale to investors through a
direct public offering (the "Offering") up to 3,000,000 shares of common stock,
par value $.0001 per share (the "Shares") with a minimum offering of 400,000
Shares (the "Minimum Offering), at a proposed price of $6.25 per Share.
WHEREAS, the Offering will terminate at the close of business on the date
which is nine (9) months after the effective date of the registration statement
for the Shares unless otherwise terminated by the Company (the "Termination
Date"), except that the Termination Date will be no longer than 180 days after
the effective date of the registration statement for the Shares in the event
that Minimum Offering has not been fully subscribed, and if acceptable
subscriptions for the minimum number of Shares have not been received by the
Company on or before such date, no Shares will be sold and all payments made by
subscribers will be refunded with any earned interest by the Escrow Agent as
soon as practicable upon written authorization of fund destination by the
subscribers. The Company reserves the right, in its sole discretion, to reject
any subscription, in whole or in part, for the purchase of the Shares offered in
the Offering. In the case of orders which are rejected or partially rejected,
the Escrow Agent will promptly refund, without interest, the amount of the
subscription price representing the entire rejected order or that portion
thereof which has not been accepted.
WHEREAS, with respect to all subscription payments for Shares received from
subscribers, the Company proposes to establish an escrow account with the Escrow
Agent at its office, 6201 15th Avenue, Brooklyn, New York 11219.
WHEREAS, the Company intends to sell the Shares on a "best efforts all or
none" basis as to the Minimum Offering, and on a "best efforts" basis as to an
additional 2,600,000 Shares.
WHEREAS, the Company desires to establish an escrow account in which funds
received from subscribers of Shares ("subscribers") will be deposited pending
completion of the escrow period (the "Escrow Fund Account"), and the Escrow
Agent has agreed to serve as escrow agent in accordance with the terms and
conditions set in the Escrow Agreement, between the Company and the Escrow
Agent, dated as of November 12, 1999.
WHEREAS, the Escrow Agent and the Company agree to amend and restate the
Escrow Agreement with the terms and conditions set forth herein.
NOW THEREFORE, the parties hereto agree as follows:
1. The Escrow Agent shall hold the Escrow Fund Account subject to the
terms of this Escrow Agreement and shall act in accordance with the instructions
contained in this Escrow Agreement.
<PAGE>
2. Upon the written instructions of the Company, the Escrow Agent shall
deliver all or a part of the Escrow Fund at such times and in such manner as
shall be set forth in such instructions. Any such written instruction of the
Company shall be accompanied by a written opinion of counsel to the Company to
the effect that all conditions to the release of the subject funds have been
satisfied.
3. (a) The proceeds from the sale of the Shares in the Offering will be
deposited into an interest bearing account until the Minimum Offering is sold;
(b) In the event the proceeds from the sale of the Shares in the
Offering are insufficient to meet the Minimum Offering requirement, such
proceeds will be returned directly to investors by the Escrow Agent with
interest without deduction for expenses, including escrow agent fees;
(c) The Escrow Fund Account is not subject to claims by the Company's
creditors, affiliates, associates or underwriters, if any, until such funds have
been released under the terms hereof; and
(d) 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 Offering upon the reasonable request of such
administrator, during the regular business hours of the Escrow Agent.
4. This Escrow Agreement shall terminate upon the final distribution of
all amounts in the Escrow Account and any income earned thereon.
5. (a) The Escrow Agent shall not in any way be bound or affected by any
notice of modification or cancellation of this Escrow Agreement unless in
writing signed by the Company, nor shall the Escrow Agent be bound by any
modification hereof unless the same shall be satisfactory to it. The Escrow
Agent shall be entitled to rely upon any notice, certification, demand or other
writing delivered to it hereunder by the Company without being required to
determine the authenticity or the correctness of any facts stated therein, the
propriety or validity of the service thereof, or the jurisdiction of the court
issuing any judgment.
(b) The Escrow Agent may act in reliance upon any signature believed
by it to be genuine, and may assume that any person purporting to give any
notice or receipt, or make any statements in connection with the provisions
hereof has been duly authorized to do so.
(c) The Escrow Agent may act relative hereto in reliance upon advice
of counsel in reference to any matter connected herewith, and shall not be
liable for any mistake of fact or error or judgment, or for any acts or
omissions of any kind, unless caused by its willful misconduct or gross
negligence.
(d) The Escrow Agent may resign and be discharged of its duties as
Escrow Agent hereunder by giving ten (10) days written notice to the Company.
Such resignation shall take effect ten (10) days after the giving of such
notice, or upon receipt by the Escrow Agent of an instrument of acceptance
executed by a successor escrow agent and upon delivery by the Escrow Agent to
such successor of all of the escrowed documents and funds or securities then
held by it. If no successor escrow agent is appointed in writing ten (10) days
after giving such notice, the Escrow Agent shall deliver all funds in the Escrow
Account to the Company.
(e) The Company hereby agrees to indemnify and hold the Escrow Agent
harmless from any loss, liability or expense, arising out of or related to this
Escrow Agreement, and for all costs and expenses, including the fees and
expenses of counsel, incurred in connection with this Escrow Agreement. The
provisions of this paragraph shall survive the termination of this Agreement.
(f) The duties and obligations of the Escrow Agent shall be determined
solely by the express provisions of this Agreement and the Escrow Agent shall
not be liable except for the performance of such duties
2
<PAGE>
and obligations as are specifically set forth in this Escrow Agreement. The
Escrow Agent shall have no liability or duty to inquire into the terms and
conditions of any agreement to which it is not a party.
(g) If a controversy arises between one or more of the parties hereto,
or between any of the parties hereto and any person not a party hereto, as to
whether or not or to whom the Agent shall deliver the Escrow Account or any
portion thereof or as to any other matter arising out of or relating to this
Agreement or the Escrow Account deposited hereunder, the Escrow Agent shall not
be required to determine same and need not make any delivery of the funds in the
Escrow Account or any portion thereof but may retain such funds until the rights
of the parties to the dispute shall have finally been determined by agreement or
by final order of court of competent jurisdiction, provided, however, that the
time of appeal of any such final order has expired without an appeal having been
made. The Escrow Agent shall deliver the Escrow Account or any portion thereof
within 15 days after the Escrow Agent has received written notice of any such
agreement or final order (accompanied by an affidavit that the time for appeal
has expired without an appeal having been made). The Escrow Agent shall be
entitled to assume that no such controversy has arisen unless it has received a
written notice that such a controversy has arisen which refers specifically to
this Agreement and identifies by name and address the adverse claimants to the
controversy. If a controversy of the type referred to in this paragraph arises,
the Escrow Agent may, in its sole discretion but shall not be obligated to,
commence interpleader or similar actions or proceedings for determination of the
controversy.
(h) The Escrow Agent shall not be required to institute or defend any
action (including interpleader) or legal process involving any matter referred
to herein which in any manner affects it or its duties or liabilities hereunder.
In the event the Escrow Agent shall institute or defend any such action or legal
process, it shall do so only upon receiving full indemnity in an amount and of
such character as it shall require, against any and all claims liabilities,
judgments, attorney's fees and other expenses of every kind in relation thereto,
except in the case of its own willful misconduct or gross negligence.
(i) In the event that the Escrow Agent receives or becomes aware of
conflicting demands or claims with respect to any funds, securities, property or
documents deposited or delivered in connection herewith, or the parties disagree
about the interpretation of this Agreement, or about the rights and obligations,
or the propriety, of any action contemplated by the Escrow Agent hereunder, or
if the Escrow Agent otherwise has any doubts as to the proper disposition of
funds or the execution of any of its duties hereunder, the Escrow Agent shall
have the right to discontinue any or all further acts on its part until such
conflict, disagreement or doubt is resolved to its satisfaction. In addition,
the Escrow Agent may, in its sole discretion, file an action in interpleader in
any court of competent jurisdiction to resolve the dispute or uncertainty. The
Company agrees to indemnify the Escrow Agent and hold it harmless from and
against all costs, including reasonable attorney's fees and expenses incurred by
it in connection with such action. In the event that the Escrow Agent files an
action in interpleader, it shall thereupon be fully released and discharged from
all further obligations to perform any and all duties or obligations imposed
upon it by this Agreement, other than safekeeping of the assets in the Escrow
Account, if not paid into Court.
6. Any notice, direction, request, instruction, legal process, or other
instrument to be given or served hereunder by any party to another shall be in
writing, shall be delivered personally or sent by certified mail, return receipt
requested, to the respective party or parties at the following addresses, and
shall be deemed to have been given when received.
IF TO THE COMPANY,
eAcceleration Corp.
1223 NW Finn Hill Road
Poulsbo, Washington 98730
Attn: President
Tel: (360) 697-9260
Fax: (360) 598-2450
Tax ID#: 91-2006409
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<PAGE>
WITH A COPY TO,
Kaufman & Moomjian, LLC
50 Charles Lindbergh Boulevard
Suite 260
Mitchel Field, New York 11553
Attn: Neil M. Kaufman, Esq.
Tel: (516) 222-5100
Fax: (516) 222-5110
If to the Escrow Agent, 6201 15th Avenue, Brooklyn, New York 11219,
Attention: Corporate Trust Department.
Any party may change its or his address by written notice to each of
the other parties.
7. The Escrow Agent's fee for acting under this Escrow Agreement shall be
set forth in a separate letter and agreed to by the party or parties responsible
for payment. The Escrow Agent's fees and expenses, including counsel fees, shall
be paid by the Company. The Escrow Agent is hereby given a first priority lien
on the Escrow Fund to protect, indemnify and reimburse itself for all fees,
costs, expenses and liabilities arising out of this Escrow Agreement and the
performance of its duties hereunder.
8. This Escrow Agreement shall be binding upon the parties hereto, and
their respective successors, legal representatives and assigns.
eACCELERATION CORP.
By:
-------------------------
Name:
Title:
AMERICAN STOCK TRANSFER & TRUST CO., as
Escrow Agent
Date:
------------------------
By:
------------------------
Name:
Title:
4
<PAGE>
EXHIBIT A
AMERICAN STOCK TRANSFER & TRUST CO. AS ESCROW AGENT FOR EACCELERATION CORP.
Escrow Agent Fee: $15,000
Out-of-Pocket Expenses: billed as incurred
Out-of-Pocket expenses shall include but are not limited to: legal, travel,
telephone, facsimile, postage, overnight courier and other related expenses. In
the event special administrative attention is required due to unusual
circumstances, an additional maintenance fee will be charged to cover time and
expenses.
5
LEASE BETWEEN:
eAcceleration Corporation
And
Olympic Place II, L.L.C.
For the term:
February 1, 2000 to January 31, 2004
<PAGE>
TABLE OF CONTENTS
COMMENCEMENT OF LEASE AND OCCUPANCY. . . . . . . . . . . . . . . . . . . 1
PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
COSTS OF OPERATIONS AND REAL ESTATE TAXES. . . . . . . . . . . . . . . . 3
DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ACCEPTANCE OF PREMISES AND REPAIRS . . . . . . . . . . . . . . . . . . . 6
CARE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ACCIDENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LIENS AND INSOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ACCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
POSSESSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DAMAGE OR DESTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . 10
NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
GOVERNMENTAL FEES (TAXES). . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DEFAULT AND RE-ENTRY . . . . . . . . . . . . . . . . . . . . . . . . . . 12
COSTS AND ATTORNEYS FEES . . . . . . . . . . . . . . . . . . . . . . . . 13
REMOVAL OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
NON-WAIVER OF BREACH . . . . . . . . . . . . . . . . . . . . . . . . . . 14
HEIRS AND SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
HOLDOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ESTOPPEL CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . . 15
MUTUAL WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . . . . . 15
BROKER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
LANDLORD'S LIMITED LIABILITY . . . . . . . . . . . . . . . . . . . . . . 17
CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
INCORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
CONDITIONS OF OCCUPANCY. . . . . . . . . . . . . . . . . . . . . . . . . 18
ADDENDUM A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ADDENDUM B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
OFFICE LEASE
In consideration of the rents and covenants set forth below, this Lease is
made in duplicate this 10th day of December, 1999 between Olympic Place II,
L.L.C. hereinafter referred to as "Landlord," and eAcceleration Corporation
hereinafter referred to as "Tenant."
RECITALS
A. Landlord is owner of the real property known as Olympic Place II which
street address is 1050 Hostmark Street, Poulsbo, Washington, 98370, and which is
leased for commercial office space and legally described as: See Exhibit A.
B. Tenant desires to take possession of the leased premises hereunder
described for the purpose of a business office and training center and for no
other business or purposes without the written consent of the Landlord.
LEASE TERMS AND CONDITIONS
1. COMMENCEMENT OF LEASE AND OCCUPANCY:
The Landlord agrees that the premises shall be made ready for occupancy,
and the Tenant agrees to occupy the premises and to commence the payment of rent
on February 1, 2000.
2. PREMISES:
The Landlord hereby leases and demises unto the Tenant, and the Tenant
hereby leases and takes from the Landlord, for the term, at the rental, and upon
the covenants and conditions hereinafter set forth, the office space referred to
herein as the "premises," and described as follows: The entire lower level of
Olympic Place II (except for elevator, electrical, sprinkler system and
maintenance storage rooms) consisting of approximately 10,190 square feet.
3. TERM:
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<PAGE>
The term of this Lease shall commence on the 1st day of February, 2000 for
a period of four (4) years terminating on the 31st of January, 2004 (with the
understanding that Raytheon Systems Company Lease expires January 31, 2000.
Raytheon shall vacate premises prior to January 31, 1999). Tenant may take
possession upon the move out of present Tenant and Landlord shall notify
Acceleration when present Tenant has vacated. Rent shall not commence until
February 1, 2000. If the Lease has been and continues to be in good standing,
Tenant, with one hundred twenty (120) day written notice to Landlord prior to
the expiration date of this Lease, shall have the option to renew this Lease for
additional three year term under the same terms and conditions except for rent
which shall be negotiated and agreed to ninety (90) days prior t the expiration
of this Lease. If the parties cannot agree within the time allowed then they
shall agree on an arbitrator to set rent for the renewal term, or failing to
agree on an arbitrator, either party may apply to the Kitsap County Superior
Court for the designation of an arbitrator to set rent for the renewal term. If
the Lease has been and continues to be in good standing, Tenant, with one
hundred twenty (120) day written notice to Landlord prior to the expiration date
of the first option period, shall have the option to renew this Lease for a
second additional three year term under the same terms and conditions except for
rent which shall be negotiated and agreed to ninety (90) days prior to the
expiration of the first optioned period. If the parties cannot agree within the
time allowed then they shall agree on an arbitrator to set rent for the renewal
term, or failing to agree on an arbitrator, either party may apply to the Kitsap
County Superior Court for the designation of an arbitrator to set rent for the
renewal term. Tenant shall have the right to cancel this Lease during the last
two years of the initial term by providing at least six (6) months written
notice to Landlord and the payment of any unamortized leasing commissions and
tenant improvements. In the event the Landlord for any reason is unable to
deliver said premises on the date specified, the Lease shall not be void or
voidable, but rent shall be abated in the proportion to the time delay in the
availability of said premises. Inability to deliver said premises on the date
above stated shall not effect the termination date as stated in this paragraph.
4. RENT:
2
<PAGE>
Annual Rental. Tenant shall pay to Landlord during the term of this Lease
as rental for the premises the sum $7,642.50 ($9.00 per square foot) for months
1-4, $8,491.67 ($10.00 per square foot) for months 5-12 in advance of the first
day of each calendar month. Thereafter, the rent will be increased on each
anniversary date of the Lease by .30 cents (year 2 - $10.30 psf, year 3 - $10.60
psf, year 4 - $10.90 psf) during the initial four year term of the Lease. All
rental to be paid by Tenant to the Landlord shall be in lawful money of the
United States of America and shall be paid without deduction or offset, prior to
notice or demand at Olympic Place II, L.L.C., c/o Pioneer Square Properties, 318
First Avenue South, Seattle, WA 98104, or at such other place as Landlord may
hereafter designate. There will be a $25.00 late charge for any check received
after the 10th of the month. There will also be an interest charge of 1 1/2% per
month on any unpaid balance over 30 days.
5. COSTS OF OPERATIONS AND REAL ESTATE TAXES:
(a) Definitions. In addition to the Rent provided in Section 4 of this
Lease, Tenant shall pay to Landlord increases under this Section 5 as
AAdditional Rent , utilizing the following definitions:
(I) AOperating Costs shall mean:
(1) Taxes on real property and personal property; charges and
assessments levied with respect to the Land, the Building, any improvements,
fixtures and equipment, and all other property of Landlord, real or personal,
used directly in the operation of the Building; and any taxes levied or assessed
in addition to or in lieu of, in whole or in part, such real property or
personal property taxes, or any other tax upon leasing of the Building or rents
collected, but not including any federal or state income, estate, inheritance or
franchise tax; and
(2) All other expenses paid or incurred by Landlord for obtaining
services and products for maintaining, operating and repairing the Building and
the personal property used in conjunction therewith, including without
limitation, the costs of garbage collection, water, sewer and other utilities
3
<PAGE>
services, electricity, gas and other similar energy sources, supplies,
janitorial and cleaning services, window washing, landscape maintenance,
services of independent contractors, compensation (including employment taxes
and fringe benefits) of all persons who perform duties in connection with the
operation, maintenance and repair of the Building, its equipment and the Land
upon which it is situated, insurance premiums, licenses, permits, and inspection
fees, customary management fees, legal and accounting expenses and any other
expenses or changes whether or not hereinabove described, which in accordance
with generally accepted accounting and management practices would be considered
an expense of maintaining, operation, or repairing the Building, excluding or
deducting, as appropriate:
(A) Costs of any special services rendered to individual tenants
(including Tenant) for which a special charge is collected:
(ii) ALease Year shall mean the twelve-month period commencing
January 1 and ending December 31.
(iii) AActual Operating Costs means the actual expenses paid or
incurred by Landlord for Operating Costs during any Lease Year of the term
hereof.
(iv) AActual Operating Costs Allocable to the Premises means the
Tenant=s share of the Actual Operating Costs determined by multiplying Tenants=s
Percentage of the Building be the Actual Operating Costs.
(v) AEstimated Operating Costs Allocable to the Premises means
Landlord=s estimate of Actual Operating Costs Allocable to the Premises for
the following Lease year to be given by Landlord to Tenant pursuant to
Section 5(b)(I) below.
(vi) ABase Service Year shall be 2000.
(b) Additional Rent for Estimated Increases in Operating
Costs.
(I) At the beginning of each Lease Year after the Base Service Year,
during the term hereof, Landlord shall furnish
4
<PAGE>
Tenant a written statement of the Estimated Operating Costs Allocable to the
Premises for such Lease Year, and a calculation of the Additional Rent as
follows: One-twelfth (1/12) of the amount, if any, by which such amount exceeds
the Operating Costs Allocable to the Premises for the Base Service Year shall be
Additional Rent payable by Tenant as provided in Section 4 for each month during
such Lease Year.
(ii) Within ninety (90) days after the close of each Lease Year during
the term hereof for which an estimated statement was delivered to Tenant
pursuant to subsection (b) (I) above, or as soon thereafter as practicable,
Landlord shall deliver to Tenant a written statement setting forth the Actual
Operating Costs Allocable to the Premises during the preceding Lease Year or
such prorated portion thereof if this Lease commences or terminates on a day
other than the first or last day of a Lease Year (based on a 365 day Lease
Year). If such costs for any Lease Year exceed Estimated Operating Costs
Allocable to the Premises paid by Tenant to Landlord pursuant to subsection (b)
(I), Tenant shall pay the amount of such excess to Landlord as Additional Rent
within thirty (30) days after receipt of such statement by Tenant. If such
statement shows such costs to be less than the amount paid by Tenant to Landlord
pursuant to subsection (b) (I), then the amount of such overpayment by Tenant
shall be credited by Landlord to the next Rent payable by Tenant.
(c) Determinations. The determination of Actual Operating Costs and
Estimated Operating Costs Allocable to the Premises shall be made by Landlord.
Landlord or its agent shall keep records in reasonable detail showing all
expenditures made for the items enumerated above, which records shall be
available for inspection by Tenant at any reasonable time.
(d) Base Rent, Notwithstanding anything to the contrary in this Section 5,
the Rent payable by Tenant shall in no event be less than the Rent specified in
Section 4 of this Lease.
(e) Tenant s Percentage of the Building. 29.8% calculated by dividing the
area of the Premises (10,190 net rentable square feet) by the area of the
Building (34,190 net rentable square feet).
5
<PAGE>
6. DEPOSIT:
Tenant shall deposit with Landlord upon execution of this lease the sum of
$8,600.00 as security for Tenant's faithful performance of Tenant's obligations
hereunder. If Tenant fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provisions of this lease, Landlord may
without notice to Tenant use, apply or retain all or any portion of said deposit
for the payment of any rent or other charges in default or for the payment of
any other sum to which Landlord may become obligated by reason of Tenant's
default or to compensate Landlord for any loss or damage which Landlord may
suffer thereby, including costs of storing tenant's personal property upon
execution of termination of this lease. If Landlord so uses or applies all or
any portion of said deposit, Tenant shall within five (5) days after written
demand therefore deposit cash with Landlord in an amount sufficient to restore
said deposit to the full amount hereinabove stated. The deposit referenced
herein shall not be maintained in a segregated account and will not accrue
interest for the benefit of the Tenant. If Tenant performs all of Tenant's
obligations hereunder, said deposit or so much thereof as has not theretofore
been applied by Landlord shall be returned, without payment of interest or other
increment for its use, to Tenant (or at Landlord's option, to the last assignee,
if any, of Tenant's interest hereunder) within sixty (60) days of either the
expiration of the term hereof or after Tenant has vacated the premises,
whichever is later. Landlord shall deliver the funds deposited herein to the
purchaser of the building, in the event the building is sold (or give such
purchaser a credit against the purchase price in the amount of such deposit) and
thereupon Landlord shall be discharged from all
further liability with respect to such deposit.
7. SERVICES:
The Landlord, so long as Tenant is not in default of any provisions of this
Lease, shall furnish the leased premises with a self-service elevator, and
shall, during the ordinary business hours provide heating and air conditioning,
water, electrical current for normal office equipment, and the garbage pickup in
reasonable amounts for office purposes. Ordinary business hours are defined as
Monday through Friday, 7:30 am to 6:00 pm.
6
<PAGE>
Janitorial services and supplies for the leased premises shall not be provided
by the Landlord and shall be the responsibility of the Tenant. The Landlord
shall not be liable for any losses or damages caused by or resulting from any
interruption or failure of any municipal utility service, or as the result of
mechanical breakdown of elevator, heating or air conditioning due to causes
beyond the control or responsibility of the Landlord, and no such temporary
interruption or temporary failure of such services incident to restoring
services to the building or due to accident or strike or other conditions or
events not under Landlord's control or responsibility, shall be deemed an
eviction of the Tenant or relieve the Tenant of any of the Tenant's obligations
hereunder. (If Tenant uses more than normal power for office use due to special
equipment or longer than regular business hours, then Tenant will pay the
difference in costs for said extra power use.)
8. ACCEPTANCE OF PREMISES AND REPAIRS:
The Tenant accepts the premises in its present condition except for those
items specified in Addendum B. All normal repairs necessary to maintain premises
in a tenantable condition shall be done by or under the direction of the
Landlord, at Landlord's expense, except those caused by negligence or acts of
Tenant, his agents or invitees, which repairs shall be made at sole cost of
Tenant. Landlord shall be the sole judge of what repairs are necessary. Tenant
will at all times keep the premises neat, clean and in a sanitary condition.
Except for reasonable wear and tear and damage by unavoidable casualty, Tenant
will at all times preserve said premises in as good a repair as they now are or
may hereafter be put to. Tenant agrees that at the expiration or sooner
termination of this Lease, Tenant will quit and surrender the said premises in a
neat and clean condition, and will deliver up all keys belonging to said
premises to the Landlord or Landlord's agent.
9. CARE OF PREMISES:
The Landlord shall not be called upon to make any improvements of any kind
upon said premises. The premises shall at all times be kept and used in
accordance with the laws of the State of Washington and ordinances of the City
of Poulsbo, and in accordance with all directions, rules and regulations of the
7
<PAGE>
health officer, fire marshall, building inspector, or other proper officer of
the City of Poulsbo at the sole cost and expense of Tenant, and Tenant will
permit no waste, damage or injury to the premises; nor will Tenant maintain
anything that might be dangerous to life or limb or overload the floors, or
permit any objectionable noise or odor to escape from said premises, or permit
anything to be done upon the leased premises in any way that will tend to create
a nuisance or to disturb any other tenant of the building, or use or permit the
use of the premises for any illegal purpose. The Landlord will make all repairs
they, at their sole discretion, shall deem reasonably necessary for the
continued operation of the building unless otherwise provided in this agreement.
10. ACCIDENTS:
All personal property on said leased premises shall be at the risk of
Tenant. Landlord shall not be liable for any damage, either to person or
property, sustained by Tenant or others, caused by any defects now in said
premises or hereafter occurring therein, or due to the condition of any
buildings hereafter erected to any part or appurtenance thereof becoming out of
repair, or caused by fire or by the bursting or leaking water, gas, sewer or
steam pipes. Tenant agrees to defend and hold Landlord and Landlord's agent
harmless from any and all claims arising out of Tenant's negligence for damages
suffered or alleged to be suffered in or about the leased premises by any
person, firm or corporation. Tenant shall defend, indemnify, and hold Landlord
harmless from and against any claim, loss, expense or damage to any person or
property in or upon the demised premises or any area allocated to or used
exclusively by the Tenant or its agents, employees, or invitees arising out of
Tenant's use or occupancy of said premises, or any act of neglect of Tenant or
Tenant's servants, employees, or agents, or any change, alteration or
improvement made by Tenant in the demised premises, including injury to persons
or damage to property occasioned in part but not wholly by defect in premises.
11. USE:
The Tenant shall conduct and carry on in said premises, continuously during
the term hereof, the business for which said premises are leased, and shall not
use the premises for lodging
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or sleeping purposes, or any illegal purposes. The Tenant agrees that no stock
of goods will be carried, or anything done in or about the premises which will
increase the present rate of insurance, provided, however, if the Tenant shall
engage in such business with the consent of the Landlord, which business shall
increase insurance rates, Tenant shall pay such increase. The Tenant agrees that
no hazardous materials as defined in WAC 173.303 as currently adopted or as may
be amended and RCW 70.105D.020(5) will be handled, stored or disposed of within
the leased premises or common areas of the building. Tenant agrees that it has
determined to Tenant's satisfaction that the premises can be used for the
purpose for which they are leased and waives any right to terminate this lease
in the event the premises cannot be used for such purposes or for any reason may
not be used for purposes during the term of this Lease.
12. LIENS AND INSOLVENCY:
Tenant shall keep the leased premises and the property in which the leased
premises are situated, free from any liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. In the event Tenant
becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver,
assignee or other liquidating officer is appointed for the business of the
Tenant, then the Landlord may cancel this Lease at Landlord's option.
13. ASSIGNMENT:
Tenant shall not assign this Lease or any part thereof and shall not let or
sublet the whole or any portion of the premises without the prior written
consent of Landlord or Landlord's agent such consent shall not be unreasonably
withheld. However, Landlord may reasonably consider the financial condition,
nature of business activities and need for modifications to the premises in
exercising its reasonable decision to allow or disallow a proposed assignment.
This Lease shall not be assignable by operation of law. If Tenant is a
corporation, then any transfer of this Lease from Tenant by merger,
consolidation or liquidation and any change in the ownership of, or power to
vote, the majority of its outstanding voting stock shall constitute an
assignment for the purposes of this paragraph. Any assignment of this Lease
shall not extinguish or diminish the liability of the
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Tenant herein. If consent is once given by the Landlord to the assignment of
this Lease, or any interest therein, Landlord shall not be bound from afterwards
refusing to consent to any further assignment.
14. ACCESS:
Tenant will allow Landlord or Landlord's agent free access at all
reasonable times to said premises for the purpose of inspection or of making
repairs, additions or alterations to the premises or any property owned by or
under control of the Landlord but this right shall not be construed as an
agreement on the part of the Landlord to make repairs, additions or alterations.
The Landlord shall have the right to show the premises to prospective tenants
during business hours only for ninety (90) days prior to the expiration of this
Lease.
15. POSSESSION:
In the event of the inability of Landlord to deliver possession of the
premises, or any portion thereof, at the time of commencement of the term of
this Lease, neither Landlord nor Landlord's agent shall be liable for any damage
caused thereby, nor shall this Lease thereby become void but can be voidable,
nor shall the term herein specified be in any way extended, but in such event,
Tenant shall not be liable for any rent until such time as Landlord can deliver
possession of the premises to the Tenant. Tenant agrees to accept same at such
time and both Landlord and Tenant agree to be bound by all of the provisions and
obligations hereunder during such prior period, except that no rental shall be
payable for such prior period.
16. DAMAGE OR DESTRUCTION:
In the event that the premises are damaged to such an extent as to render
the same untenantable in whole or in a substantial part thereof or are destroyed
so as to render the premises untenantable for the stated purposes, it shall be
optional with the Landlord or Tenant to terminate this Lease. After the
happening of any such contingency, the Tenant shall give the Landlord or
Landlord's agent immediate written notice thereof. Landlord shall have not more
than 30 days after the date of such notification to notify the Tenant in writing
of Landlord's
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intentions to repair or rebuild said premises, or the part so damaged as
aforesaid, and if Landlord elects to repair or rebuild said premises, Landlord
shall prosecute the work of such repairing or rebuilding without unnecessary
delay and during such period, the rent of said premises shall be abated in the
same ratio that the portion of the premises rendered for the time being unfit
for occupancy shall bear to the whole of the leased premises. If the Landlord
shall fail to give notice aforesaid, and if the premises have been rendered
untenantable in whole or in substantial part, Tenant shall have the right to
declare this lease terminated by written notice served upon the Landlord or
Landlord's agent.
In the event the building in which the premises hereby leased are located
shall be damaged (even though the premises hereby leased shall not be damaged
thereby) to such an extent that in the opinion of the Landlord it shall not be
practicable to repair or rebuild, or is destroyed, then it shall be optional
with the Landlord to terminate this Lease by written notice serviced within 30
days after such damage or destruction.
If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi-public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim for the
value of any unexpired term of said lease.
17. NOTICES:
All notices to be given by the parties hereto shall be in writing and may
either be delivered: (a) personally, or (b) by depositing same in the United
States Mail, postage prepaid, regular mail and certified or registered mail. If
such notice is to be given to the Landlord, the notice shall be addressed to the
Landlord or Landlord's agent. If such notice is to be given to Tenant, notice
may be addressed to Tenant at the leased premises or at such other address as
Tenant may direct in writing.
18. GOVERNMENT FEES (TAXES):
The Tenant shall pay prior to delinquency all taxes assessed against and
levied upon leasehold improvements, fixtures,
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furnishings, equipment, and all other personal property of Tenant contained in
the premises or elsewhere. Tenant shall cause said leasehold improvements, trade
fixtures, furnishings, equipment and all other personal property to be assessed
and billed separately from the real property of Landlord. If any of Tenant's
personal property shall be assessed with Landlord's real property, Tenant shall
pay Landlord taxes attributable to Tenant within ten (10) days after receipt of
written notice from Landlord setting forth the taxes applicable to Tenant's
property, and if Tenant fails to do so, Landlord may make such payment and the
amount so paid, together with interest thereon from the date paid shall be
additional rent and shall be due and payable to Landlord on the next succeeding
date on which a base rental installment is due.
19. SIGNS:
All signs or symbols placed in the windows or doors of the premises, or
upon any exterior part of the building by the Tenant shall be subject to the
prior written approval of the Landlord or Landlord's agent. Any signs so placed
on the premises shall be so placed with the understanding and agreement that
Tenant will remove same at the termination of the tenancy herein created and
repair any damage or injury to the premises caused thereby and if not so removed
by Tenant then Landlord may have same so removed and undertake such repairs and
restorative work at Tenant's expense.
20. ALTERATIONS:
Tenant shall not make any material alterations, additions or improvements,
including painting, in said premises or in common areas without the consent of
Landlord in writing, and all alterations, additions and improvements which shall
be made, shall be at the sole cost and expense of Tenant, and shall become the
property of the Landlord and shall remain in and be surrendered with the
premises as a part thereof at the termination of this Lease, without
disturbance, molestation or injury. If the Tenant shall perform work with the
consent of the Landlord as aforesaid, Tenant agrees to comply with all laws,
ordinances, rules and regulations of the City of Poulsbo, Kitsap County, or any
other authorized public authority. The Tenant further agrees to save the
Landlord free and harmless from
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damage, loss or expense arising out of the said work. Tenant agrees that
Landlord has the right, though not the duty, to make alterations to the premises
and to the building in which the premises are situated, and Landlord shall not
be liable for any damage which Tenant might suffer by reason of such
undertaking. See Addendum B for Tenant Improvement provisions.
21. DEFAULT AND RE-ENTRY:
If Tenant fails to keep or perform any covenants and agreements herein
contained, then the same shall constitute a breach hereof, and if Tenant has not
remedied such breach within three (3) business days after written notice thereof
with respect to monetary obligations of Tenant, and within ten (10) calendar
days after written notice with respect to nonmonetary obligations of Tenant,
then Landlord may, at its option, without further notice or demand:
(a) cure such breach for the account and at the expense of Tenant, and such
expense shall be deemed additional rent due on the first of the following month;
or
(b) re-enter the premises, remove all persons therefrom, take possession of
the premises, and remove all equipment, fixtures and personal property therein
at Tenant's risk and expense, and (1) terminate this lease, or (2) without
terminating the lease or in any way affecting the rights and remedies of
Landlord or the obligations of Tenant, relet the whole or any part of the
premises, as agent for Tenant, upon such terms and conditions and for such term
as Landlord may deem advisable, in which event the rents received shall first be
applied to the costs and expenses of reletting, including necessary repairs and
removal of Tenant=s improvements and any real estate commission incurred, the
balance of such rent shall be applied toward payment of all sums due or to
become due to Landlord hereunder, and Tenant shall pay monthly to Landlord any
deficiency; however, Landlord shall not be required to pay any excess to Tenant.
For purposes of determining such deficiency, monthly percentage rent shall be
included by taking the average percentage rent during the 12 months preceding
the default or breach by Tenant.
The failure of Landlord to terminate this lease at any time for the breach
of any of the terms hereof shall be deemed only an
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indulgence by Landlord, and shall not be construed to be a waiver of rights of
Landlord as to any continued or subsequent breach. All past due amounts owing to
Landlord under this lease including rent shall be assessed interest at an annual
percentage rate of eighteen percent (18%) from the date due or date of invoice,
whichever is earlier, until paid, and shall be in addition to the late charge
referenced in paragraph 4 of this lease.
The above remedies are cumulative and in addition to any other remedies now
or hereinafter allowed by law or elsewhere provided in this lease.
22. COSTS AND ATTORNEYS FEES:
If by reason of any default on the part of the Tenant it becomes necessary
for the Landlord to employ an attorney or in case Landlord shall bring suit to
recover any rent due hereunder, or for breach of any provision of this Lease or
to recover possession of the leased premises, or if Tenant shall bring any
action for any relief against Landlord, declaratory or otherwise, arising out of
this Lease, the prevailing party shall have and recover against the other party
in addition to the cost allowed by law, such sum as the court may adjudge to be
a reasonable attorney's fee. In the event the Tenant defaults in the payment of
rental, the Tenant agrees to pay for the cost of any collection agency, or
attorney, employed by the Landlord.
23. REMOVAL OF PROPERTY:
Upon court order or abandonment, in the event of any entry in or taking
possession of, the leased premises, the Landlord shall have the right, but not
the obligation, to remove from the leased premises all personal property located
therein, and may store the same in any place selected by Landlord, including but
not limited to a public warehouse or other space owned or controlled by Landlord
or managed by agent, at the expense and risk of the owners of such personal
property, and the expense and/or risk of Tenants with the right to sell such
stored property, without notice to Tenant, after it has been stored for a period
of thirty (30) days or more, the proceeds of such sale to be applied first to
the cost of such sale, second to the payment of the charges for storage, if any,
and third to the payment of other sums of money which may then be due from
Tenant
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to Landlord under any of the terms hereof, the balance, if any, to be paid to
Tenant. Tenant hereby waives all claims for damages that may be caused by
Landlord's re-entry and taking possession of the premises or removing and
storing the property of Tenant as provided in this Lease, and will hold Landlord
harmless from loss, costs or damage occasioned by Landlord thereof, and no such
re-entry shall be considered or construed to be a forcible entry.
24. NON-WAIVER OF BREACH:
The failure of the Landlord or Tenant to insist upon strict performance of
any of the covenants and agreements of this Lease, or to exercise any option
herein conferred in any one or more instances, shall not be construed to be a
waiver or relinquishment of any such, or any other covenants or agreements, but
the same shall be and remain in full force and effect.
25. HEIRS AND SUCCESSORS:
Subject to the provisions hereof pertaining to assignment and subletting,
the covenants and agreements of this Lease shall be binding upon the heirs,
legal representatives, successors and assigns of any or all of the parties
hereto.
26. HOLDOVER:
If the Tenant shall, with the written consent of Landlord, hold over after
the expiration of the term of this Lease, such tenancy shall be for an
indefinite period of time on a month to month tenancy, which tenancy may be
terminated as provided by the Laws of the State of Washington. During such
tenancy, Tenant agrees to pay to the Landlord the same rental as set forth
herein unless the Landlord shall, upon 20 days notice, notify Tenant in writing
of an adjustment in rent claimed during such holdover tenancy, in which case
such adjustment rent shall be effective on the first day of the month following
the twenty (20) day notice period. Tenant agrees to be bound by all of the
terms, covenants, and conditions as herein specified, so far as applicable.
27. SUBORDINATION:
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This Lease is subject and is hereby subordinated to all present and future
mortgages, deed of trust, and other encumbrances affecting the demised premises
of the property of which said premises are a part. The Tenant agrees to execute
at no expense to the Landlord any documentation reasonably necessary to further
effect the subordination of this Lease to any mortgage, deed of trust or
encumbrances. Tenant hereby irrevocably appoints and constitutes the Landlord as
the true and lawful attorney of Tenant at any time for Tenant and in Tenant's
name, place and stead, to execute proper subordination agreements to this
effect.
28. ESTOPPEL CERTIFICATES:
Tenant shall, within five (5) business days following written notice by the
Landlord, execute, acknowledge and deliver to the Landlord a statement in
writing certifying that this lease is unmodified and in full force and effect
(or, if there have been modifications, that the same is in full force and effect
as modified and stating the modifications), and the dates to which the rent and
other payments due hereunder from the Tenant have been paid in advance, if any,
and stating whether or not to the best knowledge of the Tenant, the Landlord is
in default in the performance of any covenant, agreement or condition contained
in this Lease, and, if so, specifying each such default of which the signer may
have knowledge.
29. MUTUAL WAIVER OF SUBROGATION:
Landlord and Tenant shall each procure an appropriate clause in, or an
endorsement on, any policy of fire or extended coverage insurance covering the
Premises and the Olympic Place II Building, and the personal property, fixtures,
and equipment located in or on the Premises, pursuant to which the insurance
companies waive subrogation or consent to waiver of right of recovery, and,
conditioned upon either party to this lease having obtained such clauses or
endorsements or waiver of subrogation or consent to a waiver of right of
recovery, such party hereby agrees that it shall not make any claim against or
seek to recover from the other for any loss or damage to its property, or the
property of the other, resulting from fire or other hazards covered by such
insurance, notwithstanding other provisions of
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this lease; provided, however, that the release, discharge, exoneration and
covenant not to sue herein contained shall be limited by the terms and
provisions of the waiver of subrogation clauses or endorsements consenting to a
waiver of right of recovery, and shall be coextensive therewith. If either
Landlord or Tenant is unable to obtain such a clause or endorsement, such party
shall promptly give the other party notice of such inability.
30. BROKER:
Tenant and Landlord each warrant to the other that they have had no
dealings with any broker or agent in connection with this lease other than the
agent named herein and each covenants to pay, hold harmless and indemnify the
other from and against any and all cost, expense or liability for any
compensation, commissions and charges claimed by any other broker or agent with
respect to this lease or the negotiation thereof with whom they had dealings.
Jerry Knipe, The Sunrise Group, is the broker for Landlord and Joe Michelson,
Windermere Real Estate, Silverdale, is the broker for Tenant.
31. INSURANCE:
Tenant agrees that during the term of this Lease, and for any option
periods thereafter, Tenant, at his sole cost and expense, and for the mutual
benefit of Landlord and Tenant, shall carry and maintain the following types of
insurance for the premises leased in the amounts specified.
a) Bodily Injury and Property Damage Liability Insurance with a combined
single limit for bodily injury and property damage of not less than
$1,000,000.00.
b) Fire and Extended Coverage Insurance, including vandalism and malicious
mischief coverage, in an amount equal to the full replacement value of all
fixtures, furniture and improvements installed by or at the expense of Tenant.
The aforementioned minimum limits of policies shall in no event limit the
liability of Tenant hereunder. The aforesaid insurance shall name Landlord as an
additional insured. Said insurance shall be with companies having a rating of
not less
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than AAA in "Best's Insurance Guide." Tenant shall furnish from the insurance
companies or cause the insurance companies to furnish certificates of coverage.
No such policy shall be cancelable or subject to reduction of coverage or other
modification or cancellation except after thirty (30) days prior written notice
to Landlord by the insurer. All policies shall be written as primary policies
and not as contributing policies and shall not be written so as to provide
coverage only in excess of coverage which the Landlord may carry. Tenant shall,
at least twenty (20) days prior to the expiration of such policies, furnish
Landlord with renewals or binders. Tenant agrees that if Tenant does not take
out and maintain such insurance, Landlord may (but shall not be required to)
procure said insurance on Tenant's behalf and charge Tenant the premiums
together with a twenty-five percent (25%) handling charge, payable upon demand.
Tenant shall have the right to provide such insurance coverage pursuant to
blanket policies obtained by Tenant provided such blanket policies expressly
afford coverage to the premises and to Tenant as required by this Lease.
32. LANDLORD'S LIMITED LIABILITY
Notwithstanding any provision in this Lease to the contrary, all
obligations, covenants and agreements made by the Landlord are intended not as
personal obligations, covenants, undertakings and agreements, and are not
intended to personally bind the Landlord or the Landlord's assets, except for
the Landlord's interest in the property of which the leased premises are a part,
but, rather, are made and intended for the purpose of binding only the
Landlord's interest in the property of which the leased premises are a part.
Redress for any claims against the Landlord under this Lease shall only be made
against the Landlord to the extent of the Landlord's interest in the property of
which the leased premises are a part. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted or enforceable
against, the Landlord, its partners, its board of directors and officers, as the
case may be, or any shareholders, employees, agents, heirs, legal
representatives, successors and assigns on account of this Lease, or on account
of any covenants, undertakings or agreements with the Landlord contained in this
Lease.
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33. CAPTIONS:
Paragraph headings are for convenience and ease of reference, and shall
neither be deemed part of the paragraph or considered in the construction
thereof.
34. INCORPORATION:
All Exhibits referred to in this Lease, all materials referred to and
incorporated in said Exhibits shall be incorporated herein by such reference.
35. CONDITIONS OF OCCUPANCY:
Tenant agrees to abide and be bound by the following rules and policies of
the Landlord, which shall be considered as covenants of this Lease and are
listed as Addendum A.
IN WITNESS WHEREOF, the Landlord and Tenant have signed, sealed and
executed the Lease, the day and year first above written.
Olympic Place II, L.L.C. eAcceleration Corporation
/a/ Alan F. Black /s/ Clinton Ballard
- ------------------------------ --------------------------------
Alan F. Black, Managing Member Clinton Ballard, CEO
STATE OF WASHINGTON )
) ss. CORPORATE
COUNTY OF KING )
On this 3rd day of January, 2000 before me personally appeared
Allan F. Black to me known to be the Managing Member and
to me known to be the of
Olympic Place II, L.L.C., the corporation that executed the within and
foregoing instrument, and acknowledged the same instrument to be
the free and voluntary act and deed of said corporation for the uses and
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purposes therein mentioned, and on oath stated that they were
authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal, the day and year first above written.
/s/Rosemary Rice
-------------------------------------------
NOTARY PUBLIC in and for the State
Washington residing at
My Commission expires: 5/28/00
STATE OF WASHINGTON )
) ss. CORPORATE
COUNTY OF KITSAP )
On this 17 day of December, 1999, before me personally
appeared Clinton Ballard to me known to be the CEO and
to me known to be the of
eAcceleration Corporation, the corporation that executed the
within and foregoing instrument, and acknowledged the same
instrument to be the free and voluntary act and deed of said
corporation for the uses and purposes therein mentioned, and on
oath stated that they were authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal, the day and year first above written.
/s/ Susan Lopez
-------------------------------------------
NOTARY PUBLIC in and for the State
Washington residing at Silverdale
My Commission expires: 10-27-2001
ADDENDUM A
Light and Air
a) This Lease does not grant or purport to grant any rights to access to
Light or air over property, and this Lease does not warrant or protect against
interferences with light or
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air in the leased premises by and construction upon adjacent,
abutting or nearby property.
Admittance by Pass-Key
b) The Landlord shall not be liable for the consequences of admitting by
pass-key or refusing to admit to said premises the Tenant or any of the Tenant's
agents or employees. No lock or alarm shall be put on any door without the
written consent of Landlord and Landlord will be given access codes to any
alarm.
Electrical Installations
c) Tenant shall not without written consent of Landlord operate or install
any electrical equipment or machinery (other than ordinary office equipment), or
replace or move any electric light fixtures provided; however, that with the
consent of Landlord, Tenant may replace building light fixtures of his own
choice with the express understanding that such installation will not increase
the Tenant's consumption of electricity, and that the cost of such fixtures and
installations shall be at Tenant's sole expense. If is further agreed that
Tenant shall at the expiration or sooner termination of this Lease upon demand
of Landlord pay the cost of replacing the standard fixtures belonging to
Landlord.
Awnings
d) No awnings shall be attached to the outside of any windows of the
premises hereby issued.
Windows
e) The Tenant shall not allow anything to be placed on the outside window
ledges of said premises; and nothing shall be thrown by the Tenant or others out
of the windows of said building.
Floor Coverings
f) The Tenant or other person shall not lay linoleum or other similar floor
covering with any paste materials save and excepting that which may be easily
removed with water. The use of cement or similar adhesive material is expressly
prohibited. Tacking strips installed by Tenant, with Landlord's consent, shall,
at the option of the Landlord, be removed and floor repaired at the expiration
of the Lease at Tenant's expense.
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Furniture and Bulky Articles
g) Safes, furniture or bulky articles shall be moved in or out of said
premises only at such hours and in such manner as shall least inconvenience
other tenants, and as the Landlord shall decide, and no safe or other article or
over 1,000 pounds shall be moved into said premises without the consent of the
Landlord, the Landlord to have the right to fix the position of
any article of weight in said premises.
Windows - Rain and Snow
h) Tenant shall use great care not to leave windows open when it rains or
snows. Damage resulting either to Landlord or to other tenants from failure to
observe this precaution shall be chargeable to the tenant on which premises the
neglect occurred. If space is air conditioned, windows will be closed at all
times.
Miscellaneous
i) Water closet and other water fixtures shall not be used for any purposes
other than those for which they are intended, and any damage resulting from
misuse on the part of the Tenant, its agents or employees, shall be paid for by
Tenant. No person shall waste water by interfering or tampering with the faucets
or otherwise.
j) Landlord reserves the right to close and keep locked all entrance and
exit doors of the building during such hours as Landlord may deem to be
advisable for the adequate protection of the property.
k) In the interest of security, keys and key changing for the Tenant=s
space on the lower level shall be the responsibility of the tenant after the
suite is first keyed for the tenant. Tenant shall not issue keys to non-tenants
and shall provide Landlord with master key access to Tenant=s space for
emergency and maintenance purposes.
l) Bicycles shall not be brought onto the building carpeting.
m) Tenant shall turn off all lights when office is not in use.
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n) Smoking is not allowed in offices or common areas of the building.
o) Tenant shall not paint the premises nor any part of the premises without
written permission from Landlord. Any painting shall be done by a licensed
contractor approved by Olympic Place, L.L.C. or agent.
p) Tenant shall store nothing in the common area hallways, stairwells,
lobbies, elevators or anywhere in a common area.
q) Landlord reserves the right to make such other and further reasonable
regulations as in its judgment may from time to time be needed or desirable for
the safety, care and cleanliness of the premises or the building and the
preservation of good order therein.
ADDENDUM B
Tenant Improvements: The premises to be occupied by the Tenant is represented at
this time by the Landlord to be fully compliant to City, State and County codes
and the space will be taken on an Aas-is basis, and the tenant will be solely
responsible for any upgrades of the facility to include meeting any code
requirements and any upgrading or relocation of the HVAC system, including
ducting, if necessary for the Tenants use. Depending upon the number of
employees and use, code and or Fire Department requirements may require restroom
and exiting modifications which will be at the sole cost to Tenant. All tenant
improvements shall be done with appropriate City and Fire Department permits and
performed by a licensed, insured contractor or subcontractors. Significant
tenant improvements must be approved by Landlord in writing in advance.
Parking: If parking becomes congested, overcrowded, or inadequate for the other
tenants in Olympic Place II the Tenant shall occupy no more than 50 parking
places at any one time. Parking requirements required beyond 50 spaces shall be
arranged for and provided off site by the Tenant. In any case, no parking for
Tenant shall be provided in area immediately in front of the main entrance side
of the building (northeast). It is understood that parking for the tenant is not
available or permitted
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anywhere to the southwest of the building. This area is under different
ownership and management. (See Exhibit D).
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Consulting Agreement
Agreement, made on the 12th day of July 1999, by and between Acceleration
Software International Corporation, 1223 NW Finn Hill Road, Poulsbo, WA 98370
(the "Company") and Millennium Capital Quest, 222 Munson Road., Wolcott, CT
06716 (the "Consultant")
In consideration of the mutual covenants contained herein, the parties hereto
agree as follows::
1. The Consultant, together with Gregg R. Nolan, Chairman/CFO, C. James
Margelot, President/CEO and T. Garcia, CIO, for the Consultant will provide
consulting services consisting of financial public relations, advise regarding
corporate structuring and marketing advice. Additionally, the Consultants
shall assist Company management and legal counsel in structuring the Company
for expanded marketing operations and business development and other general
management consulting services as required during the term of this Agreement.
Further the Consultants will coordinate communication with the Board of
Directors, appropriate federal agencies, internet webpage developers and
ISP's, affiliated companies, banking institutions, investment banks, equity
investor groups and by assisting attorneys and accountants selected by the
Company familiar with such procedures. The Consultants shall advise the
Company on structure of the promotion, and assist the Company in development
of its financial marketing plan.
2. Further, the Consultants will prepare a summary financing plan, assist
attorneys who will review draft offering memorandum, facilitate web site
productions for the internet and act as a consultant to the attorney and
accountants for the Company and assist attorneys and accountants where
necessary. The Consultants acknowledge that all "Confidential Information"
provided to them by the Company is proprietary and shall be treated in strict
confidence. Further, The Consultants agree that the distribution of any such
information to third parties in the normal course of business and the
operations of this engagement shall only be made upon the written consent of
the Company. Further, the Consultants agree to return any Confidential
Information upon the termination or conclusion of the assignment. For purposes
of this Agreement, the term "Confidential Information" means any Company
proprietary information, technical data, trade secrets or know-how, including,
but not limited to, computer software, documentation, research, product plans,
products, services, suppliers, customer lists, prices and costs, markets,
developments, inventions, notebooks, processes, formulas, technology, designs,
drawings, engineering, hardware configuration information, marketing,
licenses, finances, budgets or other business information disclosed to
Consultant by Company either directly or indirectly in writing, orally or by
drawings or observation. Confidential Information includes, but is not limited
to, information pertaining to any aspects of the Company's business which is
either information not known by actual or potential competitors of the Company
or is proprietary information of the Company or its customers or suppliers,
whether of a technical nature or otherwise.
3. The Company fully understands that the Consultants are not lenders,
broker-dealers, investment bankers, underwriters or securities sales agents in
any form. They do not have or control investment capital. The Consultants may
not by law, solicit the sale of any securities for any compensation
whatsoever, but will act as financial and public relations advisors to the
Company and advise the Company on presentations to new business clients and
its full range of financial resources. Consultant is an independent
contractor. This Agreement shall not create nor be deemed to create any other
relationship between Company and Consultant. Neither Consultant nor any of its
agents shall create any obligation, responsibility, express or implied, on
behalf of or in the name of Company or by Company in any way except as
specifically authorized in this Agreement. Consultant shall maintain its own
workers' compensation coverage, and shall pay any and all tax due on amounts
it receives hereunder, and neither Consultant nor any of its agents or
employees shall be entitled to participate in or receive benefits under any
Company employee-benefit plans.
<PAGE>
4. It shall be the Consultant's specific task to assist the Company by
rendering advice and assistance to a competent securities attorney and provide
the Company advice in marketing efforts. The Company understands that due to
the many variables involved, the Consultants make no representation whatsoever
as to its opinion of the Company's ability to sell any securities, such
opinion coming from the Company's attorney.
5. The Company agrees to compensate the Consultants for the work performed to
date and to be performed under this Agreement, based upon achieving certain
milestones, including development of financial and business plans and
development of a business financing package for the Company according to the
following schedule and as outlined below:
A. Consultants will be entitled to payments from Company in accordance with
the following:
(i) $25,000.00 upon the start of the preparation of Company disclosure
documents and its required attachments, marketing materials and its website;
(ii) $12,500.00 upon filing with the SEC of a registration statement on
form SB-2. (It being further understood that the entire package shall be
reviewed and filed subject to the advice of counsel for the Company and the
attachment of the opinion and consent letters of counsel);
(iii) $50,000 upon the Company having $3,000,000 in cash in the bank;
(iv) $100,000 upon the Company having $18,000,000 in cash in the bank; and
(v) A grant under the Company's 1999 stock option plan of options to
purchase shares of common stock of the Company for a ten (10) year period
at an exercise price of $1.50 per share in an amount equal to 0.1% of the
common stock of the Company outstanding.
Any fees actually paid to the Consultants are non-refundable and shall be
used to conduct due diligence, investigation of the corporate financing plan
and development program as appropriate and to coordinate the structure
of financings with legal and accounting counsel.
B. Further, all other fees and costs incurred by the Company on its own
behalf, such as legal, accounting, printing, promotion and travel are those of
the Company. In consideration of the above Agreements, the Consultants agree
to provide to the Company, financial public relations services, marketing and
consultation services, and its advise on document structure, filing, blue sky
regulations, contacting Investors, Syndicators, Broker-Dealers, databases and
access to its Web Page developer, telemarketing, internet and computer
systems.
6. The Company agrees to reimburse the Consultants for clerical, printing,
media placement, and other out-of-pocket expenses, if incurred, in connection
with its services to the Company. All such expenses shall be approved in
advance by the Company. These expenses shall include any advertising credit
advanced to the company by the consultants, to be repaid from the minimum
proceeds of the offering. At the sole discretion of the Company, ad credit may
be advanced to the Company in an amount not to exceed $500,000.00
7. In addition to the functions to be performed in connection with the
offering pursuant to this agreement, the consultants agree to make themselves
additionally available to the Company at all reasonable times as necessary for
the duration of the consulting and marketing phase of the project. This
Agreement may be terminated with or without cause by either party on thirty
days written notice. Unless terminated for cause by Company (which includes
any failure by the Consultants to abide by all terms of this agreement) (a)
the parties agree to delivery of all agreed-upon work product and the payment
of all installment fees and reimbursement of all outstanding pre-agreed upon
expenses of the Consultants due through the date of
2
<PAGE>
termination, and (b) in the event that at the date of Company's termination
notice, the Company shall have an effective offering, be in the process of
fund raising and materially be using the work product of the Consultants to
raise capital in accordance with this Agreement, the Company agrees to
provide proof of funds raised to date and pay to the Consultants the
compensation described in items (iii) through (v) in paragraph 5.A. above.
8. The Company understands that the Consultants must at all times rely upon
the information supplied to the Consultants by its members, managers,
officers, directors, agents and employees. Therefore, the Company agrees to
indemnify, hold harmless and defend the Consultants, its officers, directors,
agents and employees at the Company's expense (including attorneys' fees)
arising from any proceeding or suit relating to any material inaccuracy or
incompleteness of any information supplied to the Consultants by the Company,
and violation of any state or federal securities, franchise or business
opportunity law committed by the Company. The Consultants agree to indemnify,
hold harmless and defend the Company, its officers, directors, agents and
employees at the Consultant's expense (including attorneys' fees) in any
proceedings or suit and for any damages due to any negligence or unlawful or
intentional misconduct on the part of the Consultants, its agents or
employees.
9. The Company and the Consultants mutually agree that this Agreement and all
provisions and rights hereto shall not be assigned to any other party without
the mutual consent in writing by both parties to this Agreement. This
Agreement shall be binding on all sucessors and assigns of the parties hereto.
10. This contract shall be construed in accordance with the laws of the State
of Washington. The Company represents it will be in compliance with and
authorized to do business in any additional states in which it is required to
do so. Further, the parties agree that all disputes shall first be subject to
resolution by arbitration according to the rules and provisions defined by the
American Arbitration Association. Any arbitration shall be conducted in King
County, Washington. The arbitrators shall have no authority to award any
punitive or exemplary damages, or to vary or ignore the terms of the
Agreement. The costs of arbitration, including reasonable attorneys' fees
incurred by the prevailing party (including any such costs incurred on
appeal), shall be paid to the prevailing party by the party designated as such
by the arbitrator (or court, as applicable).
11. The term of this contract shall be for a period of 12 months, renewable by
mutual agreement of the parties.
12. The parties reserve the right to the control and use of their names and
all symbols, trademarks, or service marks presently existing or later
established. Neither party shall use the other party's name, symbols,
trademarks, or service marks or such marks as such party controls in
advertising or promotional materials or otherwise without the prior written
consent of such other party. Any use by a party, without the approval of the
other party, of the name, symbols, trademarks or service marks of such other
party shall cease immediately upon the earlier of written notice of such other
party or termination of this Agreement. Each party hereby grants the other the
right to use its name, address and telephone number in connection with the
other party's obligations hereunder.
13. Prior Agreements. No other prior agreements exist.
In witness whereof, the parties hereto have executed this Agreement on
the date above written.
MILLENNIUM CAPITAL QUEST CORP.
"The Consultants"
/s/ Gregg R. Nolan
-----------------------------
Authorized (for MCQ)
3
<PAGE>
ACCELERATION SOFTWARE INTERNATIONAL CORPORATION
"The Company"
/s/ Clint Ballard
------------------------------
Clint Ballard, CEO
4
SEVERANCE, SETTLEMENT AND GENERAL RELEASE AGREEMENT
THIS SEVERANCE, SETTLEMENT AND GENERAL RELEASE AGREEMENT (the "Agreement")
is made and entered into as of the 9th day of February, 2000 by and among Shane
H. Traveller ("SHT"), eAcceleration Corp., a Delaware corporation
("eAcceleration") and Acceleration Software International Corporation, a
Washington corporation ("ASIC", and together with eAcceleration, the "Company")
(collectively, the "Parties"). The Parties acknowledge that the terms and
conditions of this Agreement have been voluntarily agreed to and that such terms
are final and binding.
WHEREAS, SHT has been employed by the Company as Chief Financial Officer;
WHEREAS, the Company desires to accept SHT's resignation as employee and
officer; and
WHEREAS, the Parties now desire to settle fully and finally claims SHT may
have against the Company and that the Company may have against SHT and others
released herein, including, but not limited to, any matters arising out of his
employment with the Company and his separation therefrom.
NOW, THEREFORE, in consideration of the premises and mutual promises herein
contained, it is agreed as follows:
1. Non-Admission of Liability or Wrongdoing.
This Agreement shall not be construed in any way as an admission by the
Parties that any of them have acted wrongfully with respect to any other or any
other person or that any one of them has any rights whatsoever against the
others.
2. Resignation.
Effective as of the date hereof, SHT hereby resigns as an officer,
including as Chief Financial Officer, and employee of the Company. SHT agrees to
return to the Company all assets, equipment or other items which are owned by
the Company not later than ten (10) days after the date of this Agreement.
3. Consideration to SHT.
(a) The Company shall pay to SHT $1,000 within seven (7) days following the
execution and delivery of this Agreement;
<PAGE>
(b) The Company shall pay to SHT all salary payments for the month of
February 2000 that he would have received if his employment with the Company was
not terminated, at such times and in such manner as is in accordance with the
Company's normal payroll procedures;
(c) The Company shall pay to SHT the sum of $26,000 within ten (10) days
following the first closing, if and only if there is such a closing, of the
initial public offering of the Company's common stock in connection with the
Registration Statement on Form SB-2 filed by the Company with the Securities and
Exchange Commission on November 12, 1999 (the "Offering");
(d) The Company shall pay to SHT the sum of $15,000 within ten (10) days
following the date upon which the Company's common stock becomes publicly
traded; and
(e) Subject to the terms of the ASIC's 1999 Amended and Restated Stock
Incentive Compensation Plan and the Nonqualified Stock Option Letter Agreement
between ASIC and SHT, dated the date hereof (the "Option Agreement"), all stock
options previously granted SHT by ASIC shall be amended so that SHT has options
to purchase 20,000 shares of ASIC's common stock with an exercise price of $2.25
per share, which will fully vest and become exercisable immediately upon the
Company's common stock becoming publicly traded and shall at the time of the
proposed merger of ASIC with eAcceleration be options to purchase 10,000 shares
of eAcceleration's common stock with an exercise price of $4.50 per share. The
options shall be exercisable for a period of five (5) years from and after the
date such options vest, and thereafter shall terminate. Other than the options
set forth in this Section 3, SHT has no other options to purchase any other
securities of ASIC or eAcceleration.
4. Ongoing Consulting Obligations of SHT
From and after the date hereof, until immediately following the termination
of the Offering (the "Consulting Period"), SHT shall make himself available to
the Company at reasonable times and upon reasonable notice to assist and consult
with the Company's Chief Executive Officer with respect to marketing, financial,
accounting and administration matters and other activities of the Company which
SHT was involved in during his employment by the Company. SHT shall not be
entitled to any additional consideration for services rendered pursuant to this
Section 4, nor be entitled to participate in any benefits provided to Company
employees in connection with services provided to Company during the Consulting
Period. SHT shall have no communications about the affairs or operations of the
Company with Company employees or consultants, the public, suppliers, vendors or
industry participants without the express written authorization of the Chief
Executive Officer of the Company. SHT shall enter into no contracts and make no
commitments on behalf of or in the name of the Company on or following the
effective date of SHT's resignation in accordance with Section 2 including
during the Consulting Period or at any time thereafter.
5. Complete Release.
(a) As a material inducement to the Company to enter into this Agreement,
SHT hereby waives, releases and discharges the Company, its subsidiaries and
their respective officers, directors, stockholders, employees, agents,
attorneys, subsidiaries, servants, successors, insurers, affiliates and their
successors and assigns, from any and all manner of action, claims, liens,
demands, liabilities,
-2-
<PAGE>
causes of action, charges, complaints, suits (judicial, administrative or
otherwise), damages, debts, demands, obligations of any other nature, past or
present, known or unknown, whether in law or in equity, whether founded upon
contract (expressed or implied), tort (including, but not limited to,
defamation), statute or regulation (State, Federal or local), common law and/or
any other theory or basis, from the beginning of the world to the date hereof,
including, but not limited to, any claim that SHT has asserted, now asserts or
could have asserted, but not including any claim for the enforcement of this
Agreement. This includes, but is not limited to, claims arising under any
Federal, State or local laws (whether statutory, regulatory or judicial in
origin) or that prohibit employment or other discrimination or claims growing
out of any legal restrictions on the Company's rights to terminate its
employees, including without limitation any claim arising under Title VII of the
United States Code or under any age, gender or disability-related discrimination
law. Notwithstanding anything else contained in this Agreement, this Agreement
is not intended to release any rights SHT has to seek and obtain indemnification
and/or defense in the event that any claim is asserted against SHT by a third
party.
(b) As a material inducement to SHT to enter into this Agreement, the
Company and its subsidiaries hereby irrevocably and unconditionally waives,
releases and discharges SHT, his agents and attorneys, successors and assigns,
from any and all manner of action, claims, liens, demands, liabilities, causes
of action, charges, complaints, suits (judicial, administrative or otherwise),
damages, debts, demands, obligations of any other nature, past or present, known
or unknown to the Company, whether in law or in equity, whether founded upon
contract (expressed or implied), tort (including, but not limited to,
defamation), statute or regulation (State, Federal or local), common law and/or
any other theory or basis, from the beginning of the world to the date hereof,
arising out of his employment and position as an officer and/or employee, and
the resignation therefrom or the termination thereof, including, but not limited
to, any claim that the Company has asserted, now asserts or could have asserted,
but not including any (i) claims related to or for the enforcement of this
Agreement and (ii) action, claims, liens, demands, liabilities, causes of
action, charges, complaints, suits (judicial, administrative or otherwise),
damages, debts, demands or obligations of any other nature that arise out of or
relate to any willful misconduct, negligence or fraud committed by SHT, or any
violation thereby, unless such actions were taken in good faith with a
reasonable belief that such actions were in the best interests of the Company.
Notwithstanding anything else contained in this Agreement, this Agreement is not
intended to release any rights the Company has to seek and obtain
indemnification and/or defense in the event that any claim is asserted against
the Company by a third party.
(c) It is understood and agreed by the Parties that the facts and
respective assumptions of law in contemplation of which this Agreement is made
may hereafter prove to be other than or different from those facts and
assumptions now known, made or believed by them to be true. The Parties
expressly accept and assume the risk of the facts and assumptions to be so
different, and agree that all terms of this agreement shall be in all respects
effective and not subject to termination or reclusion by any such difference in
facts or assumptions of law.
6. Acknowledgments.
SHT acknowledges that:
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<PAGE>
(a) He has carefully read and fully understands all of the provisions of
this Agreement;
(b) He is, through this Agreement, releasing the Company and its affiliates
from any and all claims he or she may have against any of them and being
released from certain liabilities by the Company;
(c) He knowingly and voluntarily agrees to all of the terms set forth in
this Agreement;
(d) He knowingly and voluntarily intends to be legally bound by the same;
(e) He was advised and hereby is advised in writing to consider the terms
of this Agreement and consult with an attorney of his or her choice prior to
executing this Agreement; and
(f) He has a full seven (7) days following the execution of this Agreement
to revoke this Agreement and has been and hereby is advised in writing that this
Agreement shall not become effective or enforceable until the revocation period
has expired.
7. Non-Disclosure.
SHT shall not disclose or deliver to any other party any trade secrets or
confidential or proprietary information gained through employment with the
Company. This includes, but is not limited to, proprietary technologies,
patents, patent applications, software programs and tools, financial
information, business plans, systems, files, algorithms, file structures,
customer lists, supplier lists, internal program structures, options,
documentation and data developed by the Company or any subsidiary or division
thereof. SHT agrees that any breach of this Section 7 may cause the Company
substantial and irreparable damages that would not be quantifiable and
therefore, in the event of any such breach, in addition to other remedies that
may be available, the Company shall have the right to seek specific performance
and other injunctive and equitable relief.
8. Non-Disparagement.
The Parties mutually agree not to publish, communicate or disseminate any
negative information regarding this Agreement to the public, the media,
suppliers, vendors and/or other industry participants.
9. No Representations.
The Parties represent that in signing this Agreement, they do not rely on
nor have they relied on any representation or statement not specifically set
forth in this Agreement by any of the releasees or by any of the releasees'
agents, representatives or attorneys with regard to the subject matter, basis or
effect of this Agreement or otherwise.
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<PAGE>
10. Successors.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective administrators, representatives, executors,
successors and assigns, by reason of merger, consolidation, and/or purchase or
acquisition of substantially all of the Company's assets or otherwise.
11. Governing Law.
This agreement is made and entered into in this State of Washington, and
shall in all respects be interpreted, enforced and governed under the laws of
the State of Washington.
12. Arbitration.
(a) Any dispute arising between the Parties, including but not limited to
those pertaining to the formation, validity, interpretation, effect or alleged
breach of this Agreement ("Arbitrable Dispute") will be submitted to arbitration
in Seattle, Washington, before an experienced employment arbitrator and selected
in accordance with the rules of the American Arbitration Association labor
tribunal. Each party shall pay the fees of their respective attorneys, the
expenses of their witnesses and any other expenses connected with presenting
their claim. Other costs of the arbitration, including the fees of the
arbitrator, cost of any record or transcript of the arbitration, administrative
fees, and other fees and costs shall be borne equally by the Parties.
(b) Should any party to this Agreement hereafter institute any legal action
or administrative proceedings against another party with respect to any claim
waived by this Agreement or pursue any other Arbitrable Dispute by any method
other than said arbitration, the responding party shall be entitled to recover
from the initiating party all damages, costs, expenses and attorneys' fees
incurred as a result of such action.
13. Proper Construction.
(a) The language of all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning, and not strictly for or
against any of the parties;
(b) As used in this Agreement, the term "or" shall be deemed to include the
term "and/or" and the singular or plural number shall be deemed to include the
other whenever the context so indicates or requires;
(c) The paragraph headings used in this Agreement are intended solely for
convenience of reference and shall not in any manner amplify, limit, modify or
otherwise be used in the interpretation of any of the provisions hereof.
-5-
<PAGE>
14. Severability.
Should any of the provisions of this Agreement be declared or be determined
to be illegal or invalid, the validity of the remaining parts, terms or
provisions shall not be affected thereby and said illegal or invalid part, term
or provision shall be deemed not to be a part of this Agreement.
15. Entire Agreement.
This Agreement and the Option Agreement set forth the entire agreement
between the Parties, and fully supersede any and all prior agreements or
understandings between the Parties pertaining to the subject matter hereof. All
other contracts, agreements or understandings between the Parties are null and
void.
16. Non-Solicitation and Non-Interference.
For a period of twelve (12) months after the date of this Agreement, SHT
shall not:
(a) for SHT's own account or for the account of any other person or
entity, directly or indirectly interfere with the Company's or any of its
affiliates' or subsidiaries' relationship with any of its suppliers, customers,
accounts, brokers, representatives or agents; or
(b) employ or otherwise engage, or solicit, entice or induce on behalf of
himself or any other person or entity, directly or indirectly, the services,
retention or employment of any current employee or consultant of the Company or
of any affiliate or subsidiary of the Company.
17. Counterparts.
This Agreement may be executed in counterparts. Each counterpart shall be
deemed an original, and when taken together with the other signed counterpart,
shall constitute one fully executed Agreement.
18. Further Assurances.
From and after the date hereof, the parties hereto shall take all actions,
including the execution and delivery of all documents, necessary to effectuate
the terms hereof.
19. Survival.
All obligations of the Parties as set forth herein shall survive the
execution and delivery hereof.
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<PAGE>
PLEASE READ CAREFULLY. THIS SEVERANCE, SETTLEMENT AND GENERAL
RELEASE AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
Dated: Poulsbo, Washington Dated: Poulsbo, Washington
February 9, 2000 February 9, 2000
eACCELERATION CORP.
By: /s/ Clint Ballard /s/ Shane H. Traveller
---------------------------- -----------------------------
Name: Clint Ballard Shane H. Traveller
Title: CEO
ACCELERATION SOFTWARE INTERNATIONAL
CORPORATION
By: /s/Clint Ballard
---------------------------------
Name: Clint Ballard
Title: CEO
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PROMOTIONAL SHARES LOCK-IN AGREEMENT
This Promotional Shares Lock-In Agreement (the "Agreement"), was
entered into as of February 15, 2000, by and among eAcceleration Corp., a
Delaware corporation (the "Issuer"), Clint Ballard and Diana T. Ballard
(together with Clint Ballard, the "Security Holders").
WHEREAS, the Issuer has filed an application with the Securities
Administrator of several states (the "Administrators") to register certain of
its shares of Common Stock, par value $0.0001 per share ("Common Stock") for
sale to public investors who are residents of those states ("Registration") in
connection with the initial public offering by the Issuer of shares of its
Common Stock (the "Offering");
WHEREAS, the Securities Holders together own all right, title and
interest in 100% of the issued and outstanding shares of Common Stock, as of the
date hereof; and
WHEREAS, as a condition to the Registration, the Issuer and Security
Holders (the "Signatories") agree to be bound by the terms of this Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Each of the Security Holders agrees not to sell, pledge,
hypothecate, assign, grant any option for the sale of, or otherwise transfer or
dispose of, whether or not for consideration, directly or indirectly, 34,191,059
Promotional Shares (as defined in the North American Securities Administrators
Association Statement of Policy on Corporate Securities Definitions) and all
certificates representing stock dividends, stock splits, recapitalizations, and
the like, that are granted to, or received by, the Security Holders while the
Promotional Shares are subject to this Agreement (the "Restricted Securities").
2. Beginning one year from the completion date of the Offering, two
and one-half percent (2 1/2%) of the Restricted Securities shall be released
from the provisions set forth in paragraph 1 above as of the last day of each
fiscal quarter, pro rata among the Security Holders. All remaining Restricted
Securities shall be released from escrow on the second anniversary of the
completion date of the Offering.
3. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities (including
by way of tender offer), or any other transaction or proceeding with a person
who is not one of the Security Holders, which results in the distribution of the
Issuer's assets or securities ("Distribution"), while this Agreement remains in
effect that:
(a) All holders of the Issuer's Common Stock will
initially share on a pro rata, per share basis in the
Distribution, in proportion to the amount of cash or other
consideration that they paid per share for their Common Stock
<PAGE>
(provided that the Administrators have accepted the value of the
other consideration), until the shareholders who purchased the
Issuer's Common Stock pursuant to the Offering ("Public
Stockholders") have received, or have had irrevocably set aside
for them, an amount that is equal to one hundred percent (100%)
of the public offering's price per share times the number of
shares of Common Stock that they purchased pursuant to the public
offering and which they still hold at the time of the
Distribution, adjusted for stock splits, stock dividends
recapitalizations and the like; and
(b) All holders of the Issuer's Common Stock shall
thereafter participate on an equal, per share basis times the
number of shares of Common Stock they hold at the time of the
Distribution, adjusted for stock splits, stock dividends,
recapitalizations and the like.
(c) The Distribution may proceed on lesser terms and
conditions than the terms and conditions stated in paragraphs 1
and 2 above if a majority of the Common Stock that are not held
by the Security Holders, officers or directors, of the Issuer, or
their associates or affiliates vote, or consent by consent
procedure, to approve the lesser terms and conditions.
4. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities (including
by way of tender offer), or any other transaction or proceeding with a person
who is are of the Security Holders which results in a Distribution while this
Agreement remains in effect, the Restricted Securities shall remain subject to
the terms of this Agreement.
5. Restricted Securities may be transferred by will, the laws of descent
and distribution, the operation of law, or by order of any court of competent
jurisdiction and proper venue.
6. Restricted Securities of a deceased Security Holder may by
hypothecated to pay the expenses of the deceased Security Holder's estate. The
hypothecated Restricted Securities shall remain subject to the terms of this
Agreement. Restricted Securities may not be pledged to secure any other debt.
7. Restricted Securities may be transferred by gift to the Security
Holder's family members, provided that the Restricted Securities shall remain
subject to the terms of this Agreement.
8. With the exception of paragraph 3(c) above, the Restricted Securities
shall have the same voting rights as similar equity secutities not subject to
the Agreement.
9. A notice shall be placed on the face of each stock certificate of the
Restricted Securities covered by the terms of the Agreement stating that the
transfer of the stock evidenced by the certificate is restricted in accordance
with the conditions set forth on the reverse side of
2
<PAGE>
the certificate; and
10. A typed legend shall be placed on the reverse side of each stock
certificate of the Restricted Securities representing stock covered by the
Agreement which states that the sale or transfer of the shares evidenced by the
certificate is subject to certain restrictions pursuant to an agreement between
the Security Holder (whether beneficial or of record) and the Issuer, which
agreement is on file with the Issuer and the stock transfer agent from which a
copy is available upon request and without charge.
11. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrators ("Effective Date") and
shall terminate:
(a) On the second anniversary of the completion date of the Offering;
or
(b) On the date the Registration has been terminated if no securities
were sold pursuant thereto; or
(c) If the Registration has been terminated, the date that checks
representing all of the gross proceeds that were derived
therefrom and addressed to the public investors have been
placed in the U.S. Postal Service with first class postage
affixed; or
(d) On the date the securities subject to this Agreement
become "Covered Securities," as defined under the National
Securities Markets Improvement Act of 1996.
12. This Agreement can only be modified with the written approval of the
Administrators.
13. The Issuer will cause the following:
(a) A copy of the Agreement signed by the Signatories to be filed
with the Administrators prior to the Effective Date;
(b) Copies of the Agreement and a statement of the per share initial
public offering price to be provided to the Issuer's stock
transfer agent;
(c) Appropriate stock transfer orders to be placed with the Issuer's
stock transfer agent against the sale or transfer of the shares
covered by the Agreement prior to its expiration, except as
may otherwise be provided in this Agreement;
(d) The above stock restriction legends to be placed on the periodic
statement sent to the registered owner if the securities
subject to this Agreement are uncertificated securities.
3
<PAGE>
Pursuant to the requirements of this Agreement, the Signatories have
entered into this Agreement, which may be written in multiple counterparts and
each of which shall be considered an original. The Signatories have signed the
Agreement in the capacities, and on the dates, indicated.
IN WITNESS WHEREOF, the Signatories have executed this Agreement as of
the date first written above.
eAcceleration Corp.
/s/ Clint Ballard
By: --------------------------------------
Clint Ballard
President and Chief Executive Officer
/s/ Clint Ballard
--------------------------------------
Clint Ballard
/s/ Diana T. Balard
--------------------------------------
Diana T. Ballard
4
STOCKHOLDERS AGREEMENT
Stockholders Agreement (this "Agreement"), dated as of February 15,
2000, among Clint Ballard ("CB"), Diana T. Ballard (together with CB, the
"Stockholders") and eAcceleration Corp., a Delaware corporation (the "Company").
WHEREAS, the Stockholders own all right, title and interest in 100% of
the issued and outstanding shares of common stock, par value $0.0001 per share,
(the "Common Stock") of the Company.
WHEREAS, the Stockholders and the Company desire that the Company sell
up to 3,000,000 shares of Common Stock (the "Shares") in an initial public
offering (the "Offering") pursuant to a Registration Statement on Form SB-2, a
form of which is attached hereto as Exhibit A.
WHEREAS, in order to comply with certain registration requirements
imposed by certain states in which the Company plans to register Shares for
sale, the Stockholders have agreed to make a capital contribution to the Company
under the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements and covenants contained herein, the parties hereto agree as follows:
1. To the extent the Company's total stockholders' equity is below $578,750
immediately prior to the first closing of the Offering, the Stockholders
shall contribute to the capital of the Company, in the aggregate, such
amount of capital necessary to increase the Company's total stockholders'
equity to $578,750 at the time of the first closing of the Offering. If the
Company does not close the Offering, or if immediately prior to the first
closing of the Offering, the Company's total stockholders' equity is at
least $578,750, this Agreement will terminate and the Stockholders will
have no obligations hereunder.
2. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Washington, without regard to
conflicts of laws.
3. This Agreement may be executed in two or more counterparts, all of which
taken together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed, authorized
and delivered as of the date first written above.
eAcceleration Corp.
By: /s/ Clint Ballard
------------------------------
Clint Ballard
President
STOCKHOLDERS
/s/ Clint Ballard
----------------------------------
Clint Ballard
/s/ Diana T. Ballard
----------------------------------
Diana T. Ballard
2
Consent of Independent Accountants
We hereby consent to the use in this Amendment No. 1 to Registration Statement
No. 333- 90867, on Form SB-2 and the Prospectus contained therein, of our report
dated September 10, 1999, and for the matters described in Notes 1, 6 and 8, as
to which the date is December 17, 1999, relating to the financial statements of
eAcceleration Corp. which appears in such Prospectus. We also consent to the
reference to us under the heading experts, in such Prospectus.
/s/McKennon, Wilson & Morgan LLP
- --------------------------------
Irvine, California
February 14, 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> <C>
<PERIOD-TYPE> Year 10-Mos
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1999
<PERIOD-START> Jan-01-1998 Jan-01-1999
<PERIOD-END> Dec-31-1998 Oct-31-1999
<CASH> 239,193 188,850
<SECURITIES> 0 0
<RECEIVABLES> 241,667 580,766
<ALLOWANCES> 0 (30,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 480,860 855,858
<PP&E> 280,193 301,811
<DEPRECIATION> (215,417) (238,603)
<TOTAL-ASSETS> 609,917 1,101,747
<CURRENT-LIABILITIES> 141,613 539,660
<BONDS> 0 0
0 0
0 0
<COMMON> 3,430 3,430
<OTHER-SE> 464,874 558,657
<TOTAL-LIABILITY-AND-EQUITY> 609,917 1,101,747
<SALES> 1,919,149 3,361,536
<TOTAL-REVENUES> 1,919,149 3,361,536
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> (43,092) (3,996)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,557 465
<INCOME-PRETAX> 396,481 462,512
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 396,481 462,512
<EPS-BASIC> .01 .01
<EPS-DILUTED> .01 .01
</TABLE>
Consent
-------
February 14, 2000.
Re: eAcceleration Corp.
Registration Statement on Form SB-2
Registration No. 333-90867
--------------------------
To the Board of Directors of eAcceleration Corp.:
The undersigned hereby consents to the reference to the undersigned as director
nominee of eAcceleration Corp. in the above-referenced registration statement
and in all amendments and supplements thereto.
/s/ Edward P. Swain, Jr.
-------------------------
Edward P. Swain, Jr.
Consent
February 10, 2000.
Re: eAcceleration Corp.
Registration Statement on Form SB-2
Registration No. 333-90867
--------------------------
To the Board of Directors of eAcceleration Corp.:
The undersigned hereby consents to the reference to the undersigned as director
nominee of eAcceleration Corp. in the above-referenced registration statement
and in all amendments and supplements thereto.
/s/ Michael J. Clementz
-----------------------
Michael J. Clementz
