<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 1999
REGISTRATION NO. 333-80849
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUNHAWK.COM CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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WASHINGTON 2741 91-156830
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
223 TAYLOR AVENUE NORTH, SUITE 200
SEATTLE, WASHINGTON 98109
(206) 728-6063
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
MARLIN ELLER
CHIEF EXECUTIVE OFFICER AND PRESIDENT
SUNHAWK.COM CORPORATION
223 TAYLOR AVENUE NORTH, SUITE 200
SEATTLE, WASHINGTON 98109
(206) 728-6063
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
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THE OTTO LAW GROUP, PLLC KELLEY DRYE & WARREN LLP
DAVID M. OTTO, ESQ. M. RIDGWAY BARKER, ESQ.
4553 52ND AVENUE NE TWO STAMFORD PLAZA
SEATTLE, WASHINGTON 98105 281 TRESSER BOULEVARD
(206) 985-1820 STAMFORD, CONNECTICUT 06901
(203) 351-8032
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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,
check the following box. [ ]
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the registration
statement filed with the Securities and Exchange Commission is 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 AUGUST , 1999
PROSPECTUS
1,200,000 Shares
LOGO
Common Stock
-------------------------
This is an initial public offering of 1,200,000 shares of common stock of
Sunhawk.com Corporation.
No public market currently exists for our shares.
It is expected that the initial public offering price will be between $8.00
and $9.00 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF FACTORS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Sunhawk.com................... $ $
</TABLE>
The underwriters may, under certain circumstances, for 30 days after the
date of this prospectus purchase up to an additional 180,000 shares of common
stock from us at the initial public offering price less the underwriting
discount.
-------------------------
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 1999.
-------------------------
COLEMAN AND COMPANY SECURITIES, INC.
NOLAN SECURITIES CORPORATION
WIN CAPITAL CORP.
, 1999
<PAGE> 3
[Inside Cover Page]
Fore front: Various screens from Sunhawk.com's web site depicting different
screens and features of the Sunhawk.com web site
Background: Sheet music and sampling of sheet music covers
Text: Sunhawk.com.
Digital Print Audio
The complete solution for delivering music on-line. Sunhawk.com is a
leading digital music producer dedicated to enhancing the enjoyment of
music worldwide.
[Inside Back Cover]
Sampling of sheet music covers representing a few of the currently available
sheet music titles offered by Sunhawk.com
Text: Sunhawk.com
Your Interactive Music Store
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus.
SUNHAWK.COM CORPORATION
We provide digital sheet music over the Internet. We have proprietary
technology that allows customers to download encrypted sheet music files over
the Internet in a playable, interactive digital format, also known as the
Solero(R) format, which can then be viewed, played, stored on and printed from
IBM and compatible personal computers. Our patented electronic commerce and
other proprietary technologies provide music publishers with greater control
over the distribution of their digital sheet music by enabling us to limit the
unauthorized redistribution of this digital sheet music and efficiently monitor
and report the royalties due upon purchases by customers. We also process and
fulfill orders over the Internet for traditional printed sheet music from our
online catalog.
We currently have contracts with Warner Bros. Publications U.S., Inc.,
which owns 7.1% of our common stock prior to this offering and is entitled to
designate a nominee for director so long as it owns at least 2% of our
outstanding common stock, and EMI Christian Music Publishing, a subsidiary of
EMI Music Publishing. These contracts provide us with the right to sell and
distribute digital editions of selected musical compositions from Warner's and
EMIC's catalogs. We are continuing to convert music from the Warner and EMIC
catalogs into our Solero format and are selling this digital sheet music, in
addition to other song titles, on our Internet retail site at www.sunhawk.com.
Our digital sheet music is also sold through referrals from Warner's web site
and EMIC's web site, as well as through our associates program, in which web
site owners receive sales-based referral fees when they link customers to us
from their web sites. We have both domestic in-house and overseas third-party
production capabilities that complete the conversion of the printed sheet music
into digital format in preparation for distribution and sale over the Internet.
As of June 30, 1999, we had approximately 23,000 pages of digital sheet music,
representing approximately 4,900 song titles, archived and available for
distribution and sale.
We also compress digitally recorded music files utilizing MPEG-1 Audio
Layer-3 technology, or MP3, encrypt these recorded music files and sell the
recorded music in our proprietary audio format, known as Sunhawk Audio(TM), over
the Internet. When Sunhawk Audio files are delivered and downloaded, they can
only be played using our proprietary Solero viewer and, by virtue of our
encryption technology, can be accessed only by the purchasing customer. This
enables us to securely distribute digitally recorded music over the Internet and
provide the owner of the music with royalty payments and better control over the
distribution of their recorded music. While we presently have a limited number
of recorded music files in Sunhawk Audio format, we expect to expand the number
of recorded music files and song titles available for distribution by broadening
our existing strategic alliances with Warner and EMIC, developing alliances with
record companies and other music publishers, and securing the rights to
distribute the recorded music complement of the Solero digital sheet music we
sell.
According to Internet Industry Almanac, the number of Internet users is
expected to grow from approximately 1.1 million in 1989 to approximately 330
million at year-end 2000. This growth in the number of Internet users expands
the opportunities for e-commerce. Moreover, according to The Music Trades, in
1997 the worldwide music products industry was estimated to be $15 billion and
the sale of print music in the U.S. alone generated revenues of $433.5 million.
By leveraging the growth of the Internet and the shop-at-home convenience of
e-commerce with our proprietary technology, we offer customers and retailers
worldwide an alternative to the traditional printed sheet music distribution
channel, featuring a larger selection of song titles than previously available
in most traditional retail music stores. Our goal is to be the leading provider
of digital sheet music and related products over the Internet.
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Sunhawk(R), Sunhawk.com, the Sunhawk.com logo and Solero(R) are trademarks
or registered trademarks of Sunhawk.com Corporation. All other trademarks and
trade names appearing in this prospectus are the property of their respective
holders.
We were incorporated in the State of Washington on August 20, 1992. Our
principal executive offices are located at 223 Taylor Avenue North, Suite 200,
Seattle, Washington 98109, and our telephone and fax numbers are (206) 728-6063
and (206) 728-6416, respectively. Our e-mail address is [email protected], and
our web site address is www.sunhawk.com. Information accessed on or through our
web site does not constitute a part of this prospectus.
We have applied for quotation of the common stock on the Nasdaq SmallCap(R)
market under the symbol "SNHK," and listing on the Pacific Stock Exchange under
the symbol "SNH."
THE OFFERING
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Common stock offered by us............... 1,200,000 shares
Common stock outstanding prior to this
offering............................... 1,954,442 shares
Common stock to be outstanding after this
offering............................... 3,154,442 shares
Over-allotment option.................... 180,000 shares
Use of proceeds.......................... We anticipate that the net proceeds from this offering will
be used for:
- sales and marketing activities;
- acquiring rights to digitize and sell additional music in
the Solero music format and in the Sunhawk Audio format
as well as the audio complement to the digital sheet
music we sell;
- working capital to finance, among other things, the
hiring of additional management and other personnel and
other general corporate purposes;
- increasing our production of Solero digital sheet music
and of Sunhawk Audio files as well as the audio
complement to the digital sheet music we sell;
- one-time payment to Eller McConney LLC in connection with
the assignment of Eller McConney LLC's right to receive
for ten years, at no additional cost to us, production
services for digital sheet music from a new independent
Russian production company;
- upgrading and acquiring computer hardware and software;
and
- upgrading existing facilities (including leasehold
improvements).
Proposed Nasdaq SmallCap(R) Market
Symbol................................. "SNHK"
Proposed Pacific Stock Exchange Symbol... "SNH"
</TABLE>
Except as otherwise indicated, all information in this prospectus assumes
that the underwriters do not exercise the option granted by Sunhawk.com to
purchase additional shares in this offering.
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SUMMARY FINANCIAL INFORMATION
The following table summarizes the financial data of our business and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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FISCAL YEAR NINE MONTHS
ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------- ------------------------
1997 1998 1998 1999
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(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................... $ 15,066 $ 27,263 $ 18,810 $ 75,941
Gross profit (loss)..................... 10,052 4,746 8,292 (31,579)
Loss from operations.................... (844,406) (1,349,125) (902,804) (1,797,106)
Net loss................................ (910,983) (1,475,579) (994,553) (1,900,445)
Net loss per share --
basic and diluted..................... $ (0.78) $ (1.19) $ (0.80) $ (1.33)
Weighted average common shares for net
loss per share computations -- basic
and diluted........................... 1,173,402 1,239,790 1,236,681 1,433,274
</TABLE>
The following table provides a summary of our balance sheet as of June 30,
1999. The as adjusted column reflects the sale of 1,200,000 shares of common
stock in this offering at an assumed initial public offering price of $8.50 per
share after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
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AT JUNE 30, 1999
------------------------
ACTUAL AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Working capital............................................. $ 194,609 $ 8,958,733
Total assets................................................ 3,254,212 11,520,212
Total shareholders' equity.................................. 2,679,177 10,945,177
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
------------- -------------- TOTALS AS OF
1997 1998 1998 1999 JUNE 30, 1999
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SUMMARY OPERATING DATA:
Solero song titles published................... 411 1,420 1,086 3,032 4,894
Solero pages published......................... 1,898 5,088 3,836 15,527 22,631
Total online digital products sold............. 124 3,387 1,717 13,868 17,379
</TABLE>
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RISK FACTORS
WE HAVE INCURRED LOSSES SINCE INCEPTION AND MAY INCUR FUTURE LOSSES.
To date, we have had limited revenues and have not shown a profit in our
operations. We incurred net losses of $910,983 in 1997, $1,475,579 in 1998 and
$1,900,443 for the nine months ended June 30, 1999. We expect to continue to
devote substantial resources to the production of Solero digital sheet music and
Sunhawk Audio files, sales and marketing activities and the acquisition of
rights to additional sheet music and recorded music. As a result, we will need
to generate significant revenues to achieve and maintain profitability. Our
business strategy may not be successful, and we cannot predict when, or if, we
will become profitable. If we achieve profitability, we may not be able to
sustain it.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
We were incorporated in August 1992 but did not go online with our web site
until February 1997 and did not make our first sale online until March 1997.
Accordingly, we have a limited operating history upon which you can evaluate our
business and prospects, which makes it difficult to forecast our future
operating results. The new and evolving nature of using e-commerce for the
digital sheet music distribution business increases these uncertainties. You
must consider our business in light of the risks, uncertainties and problems
frequently encountered by companies with limited operating histories.
DIGITAL SHEET MUSIC IS AN UNPROVEN PRODUCT.
Our future success will depend on our ability to significantly increase
sales of our Solero digital sheet music over the Internet, while successfully
managing costs. If music publishers, other music content providers and consumers
do not adopt the Internet as a means of distributing digital sheet music in
general, and our technology in particular, our business would be harmed.
THERE IS NO EXISTING INDUSTRY STANDARD FOR THE DISTRIBUTION OF DIGITAL SHEET
MUSIC.
The market for digital music products is characterized by new developments
in technology and evolving industry standards. There is currently no generally
adopted industry standard, and one may never materialize, for the creation,
storage and distribution of playable, interactive digital sheet music. We cannot
assure you that our Solero format will be a successful format for the creation,
storage and distribution of playable, interactive digital sheet music, or that
it will be adopted by customers in sufficient numbers for us to be successful.
Further, if another format for the creation, storage and delivery of playable,
interactive digital sheet music emerges, we cannot assure you that it will be
possible to convert Solero digital sheet music into that alternate format.
WE DEPEND ON OUR EXISTING AND FUTURE RELATIONSHIPS WITH MUSIC PUBLISHERS AND
OTHER SHEET MUSIC PROVIDERS TO FURTHER EXPAND OUR CATALOG.
In order to expand our catalog of song titles, we must negotiate and enter
into license agreements with music publishers and other sheet music providers.
Our ability to maintain existing relationships with music publishers and record
companies is critical to the success of our business. In addition, our success
will depend on our ability to build relationships with additional music
publishers to expand our catalog of song titles. While we have rights to convert
and distribute a number of sheet music titles, other music publishers have a
substantial number of sheet music titles to which we will continue to solicit
conversion and distribution rights. We cannot assure you as to when those rights
will be available to us, if at all, or that such rights will be available to us
on commercially reasonable
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terms. Our failure to expand our catalog of digital sheet music titles may
affect the growth of our sales and could harm our business.
WE DEPEND ON TWO MUSIC PUBLISHERS FOR A MAJORITY OF OUR CATALOG.
As of May 24, 1999, a majority of our catalog of Solero digital song titles
was licensed from Warner and EMIC. Although our agreements with Warner and EMIC
are for initial terms of ten and five years, respectively, from the date of
execution, the agreements could be terminated prior to the normal expiration of
their terms in the event of any uncured material breach or default. Any
termination of the Warner or EMIC agreements would decrease the availability of
digital sheet music that we offer customers and would harm our business.
WE RELY ON THIRD PARTIES IN FULFILLING ORDERS FOR TRADITIONAL PRINTED SHEET
MUSIC.
Although we have accounts with several distributors, we obtain
substantially all of our traditional printed sheet music directly from an
unaffiliated third-party distributor with whom we do not have a written
agreement. There can be no assurance that if our distributor relationship was
terminated, we would be able to find an alternative, comparable supplier capable
of providing printed sheet music on terms that we would find satisfactory. To
the extent our distributor does not have sufficient capacity or is otherwise
unable to fulfill orders on a timely basis, such capacity constraints could harm
our business. We also rely on third-party carriers for traditional printed sheet
music shipments and are therefore subject to the risks, including employee
strikes and inclement weather, associated with these carriers' ability to
provide delivery services to meet our shipping needs. If we fail to adequately
address these and other order fulfillment risks, our business would be harmed.
NEW SOURCES OF PUBLISHING RIGHTS MAY COST MORE.
We may be required to pay substantial royalty advances or be required to
make payments to acquire additional music conversion and distribution rights
from new sources in the future. We cannot assure you that we will be able to
recoup advances or payments, if any, that may be payable for such rights. Our
failure to make such payments could harm our relationships with our licensors,
including, but not limited to, cancellation of our license agreements. In
addition, license fees payable to music publishers and other licensing agencies
may increase as we continue to expand our catalog and as competition for these
titles increases. Music publishers, record companies, copyright owners,
performance rights societies, licensing agencies and others may make claims for
royalties in addition to those we are currently paying. If we are required to
pay increased or additional licensing fees, these increased payments could
reduce our margins and could harm our business.
THE MUSIC PRODUCTS BUSINESS IS FRAGMENTED AND HIGHLY COMPETITIVE.
Our competition includes:
- traditional retail sheet music merchants, including conventional
mail-order companies;
- various music merchandisers that sell instruments and related music
products over the Internet;
- music publishers that sell products directly over the Internet on a
mail-order basis; and
- assorted e-commerce web sites selling books and music over the Internet,
including print sheet music at lower prices in some cases than we
currently offer.
With respect to digital sheet music, we do not believe any of our
competitors have converted substantial portions of sheet music into an
interactive digital format that can be stored, encrypted, previewed, played and
printed via a PC. However, companies that are currently in similar or
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potentially competing businesses include Sheet Music Direct, which is affiliated
with Hal Leonard Corporation and Music Sales Corporation, Infomusique S.A. and
Coda Music Technology. If these or other companies successfully develop
competing technologies or acquire significant catalogs of music, our business
could be harmed. In addition, in expanding the Sunhawk Audio portion of our
business, we will face significantly increased competition and different
competitive challenges from other Internet audio providers than we currently
experience.
WE MAY NOT BE ABLE TO INFLUENCE TRADITIONAL METHODS OF PURCHASING MUSIC
PRODUCTS.
Many of our current and potential competitors are well-established
companies that have greater financial, marketing, distribution, brand
recognition and other resources than we have, and there can be no assurance that
we will be able to compete effectively against these companies. Additionally,
larger, well-established and well-financed entities such as major music
publishers may acquire, invest in, or form joint ventures with our e-commerce
competitors or other sheet music publishers or suppliers who develop their own
Internet distribution channels, any of which could harm our business.
WE DEPEND ON FOREIGN SUBCONTRACTORS TO CONVERT SHEET MUSIC INTO THE SOLERO
FORMAT.
While our encryption, quality control and Internet operations are located
at our offices in Seattle, Washington, substantially all of our digital sheet
music is produced by third-party subcontractors in the Philippines and Russia.
These relationships may be affected by political or economic uncertainties,
termination of our existing agreements or personnel shortages. Although domestic
third-party providers of these services are available, we believe that such
services are more costly. If the supply of music converted into our Solero
format from foreign third-party subcontractors is disrupted for any reason, our
ability to produce additional Solero music titles will be disrupted until other
service providers are contracted with, and our business could be harmed.
WE DEPEND ON THE CONTINUED GROWTH OF E-COMMERCE.
Our future revenues and any potential future profits are dependent upon
widespread acceptance and increased use of the Internet as a medium for
commerce. We cannot predict whether customers who have used traditional means of
commerce will instead purchase digital and pre-printed sheet music or digitally
recorded music over the Internet. Customer concerns over the security of
transactions conducted on the Internet, together with concerns over the privacy
of users, may inhibit the growth of the Internet and e-commerce. If use of the
Internet does not continue to grow, or if the necessary Internet infrastructure
or complementary services are not developed and maintained to effectively
support any growth that may occur, our business could be harmed.
WE FACE RISKS ASSOCIATED WITH UNANTICIPATED INCREASES IN CUSTOMER TRAFFIC.
We believe our present digital encrypted download and order delivery
systems are adequate for the foreseeable future. Nonetheless, an unanticipated
increase in customer web site traffic could require us to upgrade our existing
software and hardware, secure additional services and equipment, and add
capacity to our system. Our success will depend in part on our ability to
quickly and effectively scale our operations to accommodate any significant
increase in customer traffic and orders. If we do not successfully scale our
operations to accommodate increased customer demands for our products, our
business could be harmed.
SYSTEMS FAILURE COULD DISRUPT OUR ABILITY TO CONDUCT OUR BUSINESS.
Our ability to sell digital sheet music over the Internet successfully and
provide high quality customer service depends on the efficient and uninterrupted
operation of our computer and communications systems. Our systems are vulnerable
to damage from fires, earthquakes, floods and other natural disasters as well as
telecommunications failures, power losses, computer viruses,
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vandalism and similar events. The occurrence of any of the foregoing could lead
to interruptions, delays, loss of data or the inability to sell our products.
Our customers may become dissatisfied by any system failure or delay that
interrupts our ability to provide service. Sustained or repeated system failures
could affect our reputation, which would harm our business. Substantially all of
our computer hardware for operating Sunhawk.com is currently located at a single
facility in Seattle, Washington. We are in the process of installing a redundant
system and designing a formal disaster recovery plan. The failure to complete
any of the foregoing could harm our business.
UNDETECTED ERRORS IN OUR SOFTWARE MAY HARM OUR BUSINESS.
We offer complex products and services. They may contain undetected errors
when first introduced or when new versions are released. If we market products
and services that contain errors or that do not function properly, we may
experience negative publicity, loss of or delay in market acceptance, or claims
against us by customers, any of which could harm our business.
OUR SALES AND OTHER TAX OBLIGATIONS MAY INCREASE IN THE FUTURE.
We collect sales taxes for transactions in the State of Washington only.
One or more local, state, federal or foreign jurisdictions may seek to impose
additional sales or other tax obligations on us. Proposals have been made at
various state and local levels that would impose additional taxes on the sale of
goods and services over the Internet. None of these has been adopted as of this
date. If adopted, however, such taxes could impair the growth of e-commerce and
our business could be harmed. In 1998, Congress passed the Internet Freedom Act,
which imposes a three-year moratorium on state and local taxes on Internet-based
transactions. We cannot assure you that this moratorium will be extended.
Failure to renew this moratorium would allow various states to impose taxes on
e-commerce, which could harm our business.
OUR FAILURE TO EFFECTIVELY MANAGE GROWTH COULD HARM OUR BUSINESS.
While we have experienced rapid growth, we believe anticipated growth may
place a significant strain on our operations. Any such growth may require
significant additional costs and expenses. To manage growth, we must train,
manage and motivate our employees and efficiently manage our systems and
resources. We cannot assure you that we will be able to effectively manage the
expansion of our operations. Our failure to effectively manage growth could harm
our business.
WE MAY ENCOUNTER SECURITY RISKS ASSOCIATED WITH OUR BUSINESS ON THE INTERNET.
A significant concern regarding e-commerce over the Internet has been the
need for secure transmission of consumer information. We rely on encryption and
credit card authentication technology for the purpose of securely transmitting
confidential information such as customer credit card numbers. We cannot predict
whether events or developments in technology could result in a compromise or
breach of the technology we use to protect customer transaction data and other
information. Despite our security efforts, if third persons were able to breach
our network security or otherwise misappropriate our users' personal information
or credit card information, we could be subject to liability. We may need to
expend significant capital and other resources to protect against security
breaches or to remedy problems caused by any breaches. Our insurance policies
may not be adequate to reimburse us for losses caused by security breaches. Any
compromise of our encryption and authentication technology could harm our
business.
THE LOSS OF THIRD-PARTY TECHNOLOGIES COULD HARM OUR BUSINESS.
While a substantial portion of our software and technology has been
internally developed, we rely on third parties for other components of our
software and technology. There can be no assurance that third-party
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technology licenses or agreements will continue to be available to us on
commercially reasonable terms, or at all.
THE FAILURE OF OUR SERVICE PROVIDERS TO PROVIDE NECESSARY INTERNET SERVICES
COULD HARM OUR BUSINESS.
Our success depends, in large part, upon third parties maintaining the
Internet infrastructure to provide a reliable network with the speed, ease of
use, data capacity, security and hardware necessary for reliable Internet access
and services. The failure by these parties to provide the necessary services to
maintain the viability of the Internet could harm our business.
OUR TECHNOLOGY IS SUSCEPTIBLE TO YEAR 2000 RISKS.
Our software, products and information systems were developed using a
four-digit year code. As a result, we believe that our software, products and
information systems will function properly with respect to dates in the Year
2000 and thereafter. We cannot assure you, however, that our technology will do
so. Any resulting system failures could harm our business. We are in the process
of establishing our contingency plans. The failure by us to successfully
implement our contingency plans could harm our business.
THIRD-PARTY PRODUCTS AND SERVICES ON WHICH WE RELY ARE SUSCEPTIBLE TO YEAR 2000
RISKS.
There can be no assurance that the products, software and systems of other
companies on which our products, software, systems and operations rely will
function properly with respect to dates in the Year 2000 and thereafter. We have
identified our critical vendors and are monitoring their Year 2000 compliance
programs. The failure of any of our critical vendors to adequately address the
Year 2000 problem could harm our business.
WE DEPEND UPON OUR INTELLECTUAL PROPERTY RIGHTS, WHICH ARE SUBJECT TO
INFRINGEMENT BY OTHERS.
We consider our patents, trademarks, trade secrets and other similar
intellectual property to be a valuable part of our business. To protect our
intellectual property rights, we rely upon copyright, trademark, patent and
trade secret laws and generally enter into confidentiality agreements with our
employees, consultants, vendors and corporate business partners. We cannot
assure you that applicable U.S. or foreign laws or our use of confidentiality
agreements will provide sufficient protection from misappropriation or
infringement of our intellectual property rights or the unauthorized use or
distribution of our products, particularly in foreign countries where laws or
law enforcement practices may not protect our intellectual property rights as
fully as in the United States. If third parties were to use or otherwise
misappropriate our copyrighted materials, trademarks or other intellectual
property rights without our consent or approval, independently develop products
utilizing our technologies or breach the security provided by our encryption and
e-commerce technology, our competitive position could be harmed, or we could
become involved in litigation to enforce our rights. Our failure or inability to
protect our intellectual property rights could harm our business.
OUR RIGHTS TO OUR DOMAIN NAMES ARE SUBJECT TO REGULATORY CHANGE.
We currently hold various Internet domain names relating to our brands,
including the "Sunhawk.com" domain name. Domain names generally are regulated by
Internet regulatory bodies. The manner in which domain names are regulated in
the United States and in foreign countries is subject to change, and any adverse
change in these regulations could harm our business.
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<PAGE> 12
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT AND OTHER CLAIMS IN CONNECTION
WITH THE USE OF OUR TECHNOLOGY.
Although we do not believe we infringe upon the intellectual property or
other rights of any third parties, we cannot assure you that third parties will
not assert such claims against us in the future or that such claims will not be
successful. We may also face claims based on the software, technology and other
materials that we obtain from third parties. Our insurance may not adequately
protect us against these types of claims and, even if these claims do not result
in liability, we could incur significant costs and a diversion of technical and
management resources in investigating and defending ourselves against these
claims, which could harm our business. Although we are generally indemnified
against claims related to software and other materials licensed from third
parties, such indemnity may not be available or adequate in all cases.
ASSERTING OUR INTELLECTUAL PROPERTY RIGHTS MAY SUBJECT US TO LITIGATION.
Circumstances may arise that would cause us to pursue legal remedies in
order to protect our rights and interests in our intellectual property. Any such
litigation, while in our best interests, may be lengthy and expensive. In
addition, any such litigation may be against parties better able than we are to
afford the extensive costs often associated with such litigation. We cannot
assure you that we will be able to bear the expense required to pursue prolonged
litigation to the best conclusion for us.
WE RELY ON KEY EMPLOYEES, WHOSE KNOWLEDGE OF OUR TECHNOLOGY, DIGITAL SHEET MUSIC
AND THE MUSIC PRODUCTS INDUSTRY WOULD BE DIFFICULT TO REPLACE.
Our success depends substantially on the continued services of our
executive officers and key employees, in particular Marlin Eller, our Chairman
of the Board, Chief Executive Officer and President. The loss of the services of
Mr. Eller or any of our other executive officers or key employees could harm our
business. We have obtained a $1,000,000 key man life insurance policy on the
life of Mr. Eller. None of our executive officers or key employees currently has
a contract that guarantees employment. There can be no assurance that any of
these persons will remain employed by us or that these persons will not
participate in businesses that compete with us in the future.
OUR OFFICERS AND DIRECTORS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER
SUNHAWK.COM AFTER THIS OFFERING.
Immediately after the closing of this offering, the Eller and McConney 1995
Family Living Trust, of which Mr. Eller, our Chairman of the Board, Chief
Executive Officer and President, and Mary McConney, our Treasurer, serve as the
trustees, will own 1,430,565 shares of our outstanding common stock, which will
represent 45.4% of our outstanding common stock or 42.9% if the underwriters'
over-allotment option is exercised in full. Accordingly, the Eller and McConney
1995 Family Living Trust will have significant influence over the election of
directors and other matters submitted to a vote of our shareholders. Moreover,
our executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own 49.7% of our outstanding common stock, or 47.1% if
the underwriters' over-allotment option is exercised in full, upon the
completion of this offering. As a result, these shareholders will possess
significant influence over us, with the ability to significantly influence all
matters requiring approval by our shareholders.
WE MAY BE EXPOSED TO LIABILITY FOR MUSIC AND OTHER CONTENT ON OUR WEB SITE.
We may be subject to claims for copyright or trademark infringement,
negligence, defamation, obscenity or on other grounds related to the music and
information available for download or use on our web site. The area of law
relating to the digital distribution of music and other materials over the
Internet is unsettled, and we face risks associated with, for example, content
appearing on sites to which we link, content appearing on sites created by
members of our associates program, and a
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<PAGE> 13
failure by us to obtain all necessary rights to distribute our music products.
Any liability incurred as a result of such claims or from the loss of the rights
to distribute our music products could harm our business.
WE MAY DESIRE TO RAISE ADDITIONAL FINANCING IN THE FUTURE, WHICH MAY NOT BE
AVAILABLE.
We have no current arrangements with respect to, or potential sources of,
additional financing. If we seek to raise additional capital, we cannot assure
you that any future financing will be available to us if needed, on commercially
reasonable terms, or at all. Any inability to obtain additional financing if
needed could harm our business.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY DEVELOP THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
As commerce on the Internet continues to evolve, federal, state, local or
foreign agencies may adopt laws and regulations that may impact our business,
including legislation and regulations relating to the distribution of music and
other content over the Internet and privacy and encryption issues. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain.
Further, the growing use of the Internet has burdened the existing
telecommunications infrastructure and has caused interruptions in telephone
service. Telephone carriers have petitioned the government to regulate the
Internet and impose usage fees on Internet service providers. The imposition of
such laws and regulations could expose us to significant liability. In addition,
any such new legislation or regulation or government enforcement of existing
regulations may limit the growth of the Internet, increase our cost of doing
business or increase our legal exposure, any of which could harm our business.
UNLESS A PUBLIC MARKET DEVELOPS FOR OUR COMMON STOCK, YOU MAY NOT BE ABLE TO
SELL YOUR SHARES.
Prior to this offering, there has been no public market for our common
stock. Accordingly, we cannot assure you that an active trading market will
develop and be sustained upon the completion of this offering or that the market
price of our common stock will not decline below the initial public offering
price. The initial public offering price was determined by negotiations between
us and the Representative. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS OR IN THE STOCK MARKET GENERALLY
COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY.
The stock market and Internet stocks specifically have experienced
significant price and volume fluctuations that have affected the market price of
common stock for many companies engaged in industries similar to that of
Sunhawk.com. In addition, sheet music purchases have traditionally been subject
to seasonality fluctuations. We expect our future quarterly operating results to
experience significant fluctuations caused by a variety of factors, many of
which are outside of our control. Period-to-period comparisons of our results of
operations may not be meaningful and should not be relied upon as an indication
of our future performance. As a result, investors purchasing in this offering
may not be able to resell their shares at or above the initial public offering
price and could lose all of their investment.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO
ACQUIRE US.
Provisions of our Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws, as well as certain provisions of Washington law,
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our shareholders.
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<PAGE> 14
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements include statements about our plans, objectives, expectations and
intentions and other statements that are not historical facts. When we use the
words "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions, we are generally identifying
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are many factors that could cause actual results
to differ materially from those expressed or implied by these forward-looking
statements, including the factors discussed below.
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<PAGE> 15
USE OF PROCEEDS
The estimated net proceeds to us of this offering, assuming an initial
public offering price of $8.50 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, will be approximately $8,266,000 ($9,612,400, if the underwriters'
over-allotment option is exercised in full). We currently expect to apply the
estimated net proceeds as follows:
<TABLE>
<CAPTION>
USE AMOUNT PERCENTAGE
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Sales and marketing activities, including expenditures
associated with the production and distribution of CD-ROMs
and enhanced CDs containing the Solero Viewer for
installation by prospective customers, distribution of
promotional inserts in direct mailings to targeted
audiences, web site advertising, seasonal promotions and
the hiring of additional personnel........................ $2,000,000 24%
Acquiring rights to digitize and sell additional music in
the Solero music format and in the Sunhawk Audio format as
well as the audio complement to the digital sheet music we
sell...................................................... 2,000,000 24%
Working capital to finance, among other things, the hiring
of additional management and other personnel and other
general corporate purposes................................ 1,716,000 21%
Increasing our production of Solero digital sheet music and
of Sunhawk Audio files as well as the audio complement to
the digital sheet music we sell........................... 1,500,000 18%
One-time payment to Eller McConney LLC in connection with
the assignment to us of Eller McConney LLC's right to
receive a total of 270,000 pages of digital sheet music
over ten years, at no additional cost, from a new
independent Russian production company.................... 600,000 7%
Upgrading and acquiring computer hardware and software,
including the purchase of a redundant server and an
additional server which we expect to locate in Europe..... 250,000 3%
Upgrading existing facilities (including leasehold
improvements)............................................. 200,000 3%
---------- ---
Total............................................. $8,266,000 100%
========== ===
</TABLE>
We cannot assure you that the above dollar amounts will be specifically
allocated as set forth in the foregoing table. As a result, our management will
have discretion in the application of the proceeds. Allocation of net proceeds
is further subject to future events including general economic conditions,
changes in our strategy and response to competitive pressures and consumer
preferences associated with the music industry and Internet commerce. Pending
ultimate application, the net proceeds will be invested in interest-bearing
securities guaranteed by the U.S. government or its agencies.
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<PAGE> 16
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis; and
- on an as adjusted basis to reflect the receipt by us of the estimated
net proceeds from this offering.
You should read this information together with our financial statements and
the notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares
authorized; none issued and outstanding................ $ -- $ --
Common Stock, no par value; 20,000,000 shares authorized;
1,953,693 shares issued and outstanding, actual;
3,153,693 shares issued and outstanding, as adjusted... 3,344,994 11,610,994
Accumulated deficit......................................... (665,187) (665,817)
----------- -----------
Total shareholders' equity............................. 2,679,402 10,945,177
----------- -----------
Total capitalization.............................. $ 2,679,402 $10,945,177
=========== ===========
</TABLE>
The foregoing table assumes no exercise of any outstanding stock options.
In addition to the shares of common stock to be outstanding after this offering,
we may issue additional shares of common stock under the following plans and
arrangements:
- 26,214 shares of common stock subject to options outstanding under our
1996 Stock Option Plan and 225,939 shares available for future issuance
under the plan as of June 30, 1999;
- 120,000 shares of common stock reserved for issuance upon exercise of the
representative's warrants; and
- 180,000 shares of common stock reserved for issuance upon exercise of the
underwriters' over-allotment option.
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<PAGE> 17
DILUTION
Our net tangible book value at June 30, 1999 was $815,445, or $0.42 per
share. Net tangible book value per share represents the amount of our total
tangible assets less our total liabilities divided by the number of shares of
common stock outstanding as of June 30, 1999. After giving effect to the sale of
the 1,200,000 shares of common stock offered in this prospectus at an assumed
initial public offering price of $8.50 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our as adjusted net tangible book value at June 30, 1999 would have been
$9,081,445, or $2.88 per share. This represents an immediate increase in net
tangible book value of $2.46 per share to existing shareholders and an immediate
dilution of $5.62 per share to new investors purchasing shares of common stock
in this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $8.50
Net tangible book value per share at June 30, 1999........ $ .42
Increase per share attributable to new investors.......... 2.46
-----
As adjusted net tangible book value per share after this
offering.................................................. 2.88
-----
Dilution per share to new investors......................... $5.62
=====
</TABLE>
The table below sets forth on an adjusted basis at June 30, 1999, after
giving effect to the sale of the 1,200,000 shares of common stock offered in
this prospectus at an assumed initial public offering price of $8.50 per share,
the following information both for our existing shareholders and for investors
purchasing shares of common stock in this offering:
- the number of shares of common stock purchased from us;
- the total consideration paid to us; and
- the average price paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 1,953,693 61.9% $ 5,883,272 36.6% $3.01
New investors...................... 1,200,000 38.1% 10,200,000 63.4% 8.50
--------- ----- ----------- -----
Total.................... 3,153,693 100.0% $16,083,272 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of any outstanding stock options.
As of June 30, 1999, there were outstanding options to purchase 26,214 shares of
common stock under the 1996 Stock Option Plan, at a weighted average exercise
price of $7.64 per share. To the extent that outstanding options are exercised,
there will be further dilution to new investors.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
we do not anticipate paying cash dividends in the foreseeable future. Any future
determination with regard to the payment of dividends will be at the sole
discretion of our board of directors.
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<PAGE> 18
SELECTED FINANCIAL DATA
The following selected financial data for the years ended September 30,
1997 and 1998 are derived from our financial statements, which have been audited
by Ernst & Young LLP, independent auditors. The selected financial data at June
30, 1999 and for the nine months ended June 30, 1998 and 1999 are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring adjustments, which we consider
necessary for a fair presentation of our financial position and results of
operations for these periods. When you read the selected financial data below,
it is important that you also read the historical financial statements and
related notes to those statements appearing elsewhere in this prospectus, as
well as the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The historical
results and the results for the nine months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending September 30, 1999 or future results.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
-------------------------- ------------------------
1997 1998 1998 1999
----------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales.................................. $ 15,066 $ 27,263 $ 18,810 $ 75,941
Cost of goods sold..................... 5,014 22,517 10,518 107,520
---------- ----------- ---------- -----------
Gross profit (loss).................... 10,052 4,746 8,292 (31,579)
Selling, general and administrative
expenses............................ 854,458 1,353,871 911,096 1,765,527
---------- ----------- ---------- -----------
Loss from operations................... (844,406) (1,349,125) (902,804) (1,797,106)
Interest income........................ -- -- -- 10,589
Interest expense on notes payable to
shareholders........................ (66,577) (126,454) (91,749) (113,928)
---------- ----------- ---------- -----------
Net loss............................... $ (910,983) $(1,475,579) $ (994,553) $(1,900,445)
========== =========== ========== ===========
Net loss per share -- basic and
diluted............................. $ (0.78) $ (1.19) $ (0.80) $ (1.33)
========== =========== ========== ===========
Weighted average common shares for net
loss per share computations -- basic
and diluted......................... 1,173,402 1,239,790 1,236,681 1,433,274
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------- AT JUNE 30,
1997 1998 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................... $(1,602,704) $(3,213,584) $ 194,609
Total assets....................................... 212,831 508,516 3,254,212
Total shareholders' equity (deficit)............... (1,432,323) (2,807,902) 2,679,177
</TABLE>
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements and other financial information included elsewhere in
this prospectus.
OVERVIEW
We were incorporated in August 1992 and began distributing and selling
digital sheet music over the Internet in March 1997. From the date of
incorporation until March 1997, our operating activities consisted principally
of the following:
- creating our digital sheet music catalog;
- developing and patenting our technology;
- establishing international operations for the production of digital sheet
music;
- negotiating for the rights to distribute and sell sheet music;
- developing a corporate infrastructure for the management of data;
- producing digital sheet music;
- creating and distributing CD-ROM collections; and
- developing the Sunhawk.com web site.
In September 1996, we began selling CD-ROMs of the complete works of Scott
Joplin, and in July 1997, we began selling CD-ROMs of Handel's Messiah, both
containing digital sheet music in our Solero format. We launched our web site in
February 1997 and made our first sale of digital sheet music in March 1997. In
1998, we established our strategic alliances and entered into contracts with
Warner and EMIC for the right to sell and distribute selected portions of their
sheet music catalogs. From March 1997 through June 30, 1999, we sold
approximately 17,400 digital sheet music products and approximately 1,400
traditional printed sheet music products and CD-ROMs. Through June 30, 1999,
substantially all of our sales have been derived from the sale of digital or
printed sheet music and CD-ROMs through our web site and from special promotions
and services for our strategic partners.
Sales are primarily derived from digital and printed sheet music offered
over the Internet and either downloaded directly from our web site or ordered
from our web site and delivered via regular mail or overnight courier. Sales are
net of any applicable discounts, and sales of traditional printed sheet music
include shipping and handling charges. A customer's account is settled by
directly charging his credit card. For digital sheet music downloaded over the
Internet, revenues are recognized upon execution of the order. Revenues from
sales of traditional printed sheet music are recognized upon shipment of the
printed sheet music from our offices in Seattle, Washington.
Cost of goods sold consists principally of the costs associated with
royalty payments, materials, amortization of the cost of producing digital
masters, shipping costs and credit card processing fees. In order to expand our
digital sheet music catalog, we entered into contracts with Warner and EMIC for
initial terms of ten and five years, respectively, from the date of execution.
These contracts provide us with access to selected portions of the music
catalogs of Warner and EMIC. Upon the sale of any digital title licensed from
Warner or EMIC, we are required to remit the appropriate royalty to the
respective publisher. Royalty payments range from 10% to 70% and are based on
actual sales, less credit card processing fees and shipping costs, if any.
Inventory consists of CD-ROMs and the cost of the printed sheet music books.
Amortization of the cost of producing digital masters
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<PAGE> 20
relates to the digital sheet music and is based on the shorter of estimated
useful lives or the term of the distribution contracts for the digital masters.
Shipping costs and credit card processing fees include costs related to the
shipping of traditional printed sheet music and the processing of credit card
payments for printed and digital sheet music. We expect that our cost of goods
sold will increase significantly as we accelerate our production of digital
sheet music and enter into additional strategic partnerships to further develop
and expand our catalog of digital sheet music and recorded music. Furthermore,
amortization of the music catalog distribution rights began in the quarter ended
June 30, 1999, resulting in an increase in cost of goods sold. The amortization
of music catalog distribution rights is estimated at $38,000 per quarter through
the remaining term of the Warner contract, which ends December 31, 2007.
Selling expenses consist primarily of trade shows and other promotional and
advertising expenditures, including payroll and payroll-related expenses. We
have incurred minimal advertising expenditures to date as we have focused our
efforts on creating our digital sheet music catalog and securing strategic
alliances and the rights to digitize sheet music. We expense all advertising
costs as incurred, and we expect selling expenses to increase significantly as
we seek to increase the number of Solero Viewers downloaded from our web site or
distributed on CD-ROMs and enhanced CDs, drive customer traffic to our web site,
enhance our brand name awareness and otherwise promote the sale of our products.
General and administrative expenses consist primarily of management salaries and
expenses, insurance premiums, rent, telephone costs, travel expenses for general
business, legal and professional fees, staff salaries, other payroll expenses
and other related expenses for general corporate functions.
To date we have incurred and expect to continue to incur substantial costs
in order to:
- expand our sheet music catalog;
- produce, distribute and sell digital and printed sheet music;
- develop our technologies;
- acquire patents and other intellectual property rights;
- acquire the rights to sheet music;
- secure and maintain relationships with Warner and EMIC;
- further develop our operational infrastructure and web site;
- distribute and sell certain recorded music;
- increase the size of our staff;
- expand our sales and marketing efforts; and
- upgrade our software and hardware.
To the extent that increases in operating expenses precede or are not
followed by increases in sales, our business could be harmed.
We have a limited operating history upon which to base an evaluation of our
business and prospects. We have yet to achieve significant sales, and our
ability to generate significant sales in the future is uncertain. Further, in
view of the rapidly evolving nature of our business and our very limited
operating history, it is not possible to forecast sales. We believe, therefore,
that period-to-period comparisons of our financial results are not necessarily
meaningful, and you should not rely upon them as an indication of future
performance.
Our business and prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in
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<PAGE> 21
new and rapidly evolving markets such as the Internet and e-commerce. In
addition, our sales depend substantially upon the level of activity on our web
site and our ability to successfully create brand name awareness and market
recognition for our product. Although we have experienced growth in our sales,
there can be no assurance that our sales will continue at their current rate of
growth.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 1998
Sales
Sales for the nine months ended June 30, 1999, were $75,941 compared to
$18,810 for the nine months ended June 30, 1998. This increase in sales resulted
from entering into strategic alliances with Warner and EMIC, offering printed
sheet music on our web site and providing a wider selection of music titles in
our Solero format. We also benefitted from the overall increase in Internet
shopping. In addition, in order to increase customer traffic, we offered certain
promotional features on our web site and provided special services for our
strategic partners.
Cost of goods sold
Cost of goods sold for the nine months ended June 30, 1999 were $107,520
compared to $10,518 for the nine months ended June 30, 1998. The increase in
cost of goods sold as a percentage of sales was primarily due to commencement of
the amortization of the music catalog distribution rights during the third
quarter of fiscal year 1999. The increase was also due to an increase during the
nine months ended June 30, 1999 in the proportion of royalty-bearing sales to
sales of public domain titles which do not bear royalties. Additionally, the
increased amortization of digital sheet music masters during the nine months
ended June 30, 1999 resulted from the increased number of digital sheet music
titles available during that period. For the nine months ended June 30, 1999,
royalty payments accounted for $25,440, or 34% of sales. Costs associated with
the amortization of digital sheet music masters accounted for $23,546, or 31% of
sales and costs associated with the amortization of music catalog distribution
rights were $37,689, or 49.6% of sales. For the nine months ended June 30, 1998,
royalty payments accounted for $1,134, or 6% of sales, and costs associated with
the amortization of digital sheet music masters accounted for $5,602, or 30% of
sales.
Selling, general and administrative expenses
Selling expenses for the nine months ended June 30, 1999, were $157,670
compared to $38,522 for the nine months ended June 30, 1998. Selling expenses
for both nine-month periods consisted primarily of expenditures incurred in
connection with advertising, attending trade shows, establishing and maintaining
our strategic alliances with Warner and EMIC, expansion of our web site and
payroll-related expenses. In the third quarter of 1999, we initiated our
strategic marketing plan in accordance with the guidance of a consultant engaged
by us under retainer. As part of this plan, we experienced a significant
increase in advertising costs as part of the new strategic marketing plan.
General and administrative expenses for the nine months ended June 30, 1999 were
$1,607,857 compared to $872,574 for the nine months ended June 30, 1998. This
increase was primarily due to the expansion of our production capabilities and
our digital sheet music catalog, hiring additional key employees, incurring
corporate facility expenses necessary to operate the business, the relocation of
our office and additional professional services.
Interest expense on notes payable to shareholder
Interest expense for the nine months ended June 30, 1999, was $113,928
compared to $91,749 for the nine months ended June 30, 1998. While such interest
amount remains outstanding, it ceased accruing as of March 31, 1999. We intend
to pay off the balance of $113,928 on September 29, 1999.
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<PAGE> 22
The interest expense was attributable to loans to us made by the Eller and
McConney 1995 Family Living Trust, which loans were converted into common stock
on March 31, 1999.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR
ENDED SEPTEMBER 30, 1997
Sales
Sales for the year ended September 30, 1998 were $27,263 compared to
$15,066 for the year ended September 30, 1997. Sales for the year ended
September 30, 1997 consisted of sales over the Internet of sheet music converted
into Solero format and CD-ROMs. The increase in sales was principally due to the
expansion of our music catalog and customer base, which resulted from the
inclusion of song titles from the Warner and EMIC catalogs and the addition of
traditional printed sheet music on our web site.
Cost of goods sold
Cost of goods sold for the year ended September 30, 1998 was $22,517
compared to $5,014 for the year ended September 30, 1997. The increase in cost
of goods sold was due to an increase in the proportion of royalty-bearing sales
to sales of public domain titles which do not bear royalties and an increase in
the amortization of digital sheet music masters due to the increase in the
number of digital sheet music titles from $1,804, or 12% of the sales for the
year ended September 30, 1997, to $8,347, or 31% of sales for the year ended
September 30, 1998.
Selling, general and administrative expenses
Selling expenses for the year ended September 30, 1998 were $82,915
compared to $65,021 for the year ended September 30, 1997. This increase was due
primarily to our attendance at more trade shows and general advertising. General
and administrative expenses for the year ended September 30, 1998 were
$1,270,956 compared to $789,437 for the year ended September 30, 1997. This
increase was primarily due to the expenses associated with operating a larger
office, improvements and upgrades to our facilities and software and hardware,
increases in the number of personnel necessary to support the growth of our
business and operations, and costs incurred in connection with adding production
and programming functions and enhancing the features and functionality of our
web site and related technology.
Interest expense on notes payable to shareholder
Interest expense for the year ended September 30, 1998 was $126,454
compared to $66,577 for the year ended September 30, 1997. This increase was due
to the additional debt we incurred in order to satisfy our operating costs and
expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily with funds
received from the sale of equity to and loans from the Eller and McConney 1995
Family Living Trust. As of June 30, 1999, we had cash and cash equivalents of
$705,320 and working capital of $194,609. We are currently financing our daily
operations primarily through an equity investment made by the Eller and McConney
1995 Family Living Trust.
Net cash used in operating activities totaled $1,304,509 for the nine
months ended June 30, 1999 compared to $837,337 for the nine months ended June
30, 1998. The increases in net cash used in operating activities for both
nine-month periods were primarily attributable to increases in production staff.
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<PAGE> 23
Net cash used in investing activities was $406,140 for the nine months
ended June 30, 1999 compared to $158,678 for the nine months ended June 30,
1998. In both nine-month periods the cash used in investing activities was used
primarily for the acquisition of property, equipment, digital sheet music
masters, patents and trademarks.
Net cash provided by financing activities was $2,356,876 for the nine
months ended June 30, 1999 compared to $1,026,000 for the nine months ended June
30, 1998. The increase in net cash for financing activities for the nine months
ended June 30, 1999 was primarily derived from proceeds from the sale of common
stock to the Eller and McConney 1995 Family Living Trust in the aggregate amount
of $1,500,000 and proceeds from notes payable in the aggregate amount of
$1,355,000 issued to the Eller and McConney 1995 Family Living Trust which,
along with other notes payable to the Eller and McConney 1995 Family Living
Trust, were converted into common stock at a conversion price of $9.53 per share
on March 31, 1999. This was offset by an increase of $498,124 in deferred
offering costs in the nine months ended June 30, 1999 from the prior year. Net
cash provided by financing activities for the nine months ended June 30, 1998
was primarily derived from proceeds from notes payable issued to the Eller and
McConney 1995 Family Living Trust in the aggregate amount of $926,000, which,
along with other loans by the Eller and McConney 1995 Family Living Trust, were
converted into common stock at $9.53 per share on March 31, 1999.
We believe that we will need to acquire additional equipment, including
hardware, software, furniture and fixtures, to enhance our production
capabilities and upgrade our server and web site operations. We expect to fund
our purchase of additional capital equipment with our working capital, which
will include proceeds from this offering.
We believe that the net proceeds from our prior financing, a debt to equity
conversion by the Eller and McConney 1995 Family Living Trust, this offering and
cash flows from operations will be adequate to satisfy our operations, working
capital and capital expenditure requirements for at least the next 12 months. If
we seek to raise additional capital, however, there can be no assurance that
additional financing will be available on acceptable terms, if at all, or that
any additional financing will not dilute shares held by our shareholders.
YEAR 2000 COMPLIANCE
Our software, products and information systems were developed using a
four-digit year code. As a result, we believe that our software, products and
information systems will function properly with respect to dates in the Year
2000 and thereafter. We cannot assure you, however, that either our technology
or the products, software and systems of other companies on which our products,
software, systems and operations rely will function properly with respect to
dates in the Year 2000 and thereafter. Any resulting system failures could harm
our business. We have identified our critical vendors and are monitoring their
Year 2000 compliance programs. We are also in the process of establishing our
contingency plans, which we expect to substantially complete by October 1999.
The failure of any of our critical vendors to adequately address the Year 2000
problem or the failure by us to successfully implement our contingency plans
could harm our business. The cost of the Year 2000 monitoring of our critical
vendors is not expected to be material to our results of operations or financial
position.
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BUSINESS
OVERVIEW
We provide digital sheet music over the Internet. We have proprietary
technology that allows customers to download encrypted sheet music files over
the Internet in a playable, interactive digital format which can then be viewed,
played, stored on and printed from PCs. Our patented e-commerce and other
proprietary technologies provide music publishers with greater control over the
distribution of their digital sheet music by enabling us to limit the
unauthorized redistribution of this music and efficiently monitor and report the
royalties due upon purchases by customers. We also process and fulfill orders
over the Internet for traditional printed sheet music from our online catalog
and have a limited number of recorded music files available in our proprietary
audio format as well. We currently have contracts with Warner and EMIC which
provide us with the right to sell and distribute digital editions of selected
musical compositions from Warner's and EMIC's catalogs, and are seeking to
develop alliances with additional music publishers to further expand our online
catalog. Our digital sheet music is sold through referrals from Warner's web
site and EMIC's web site, as well as through our associates program, in which
web site owners receive sales-based referral fees when they link customers to us
from their web sites. We had approximately 23,000 pages of digital sheet music,
representing approximately 4,900 titles, archived and available for distribution
and sale as of June 30, 1999.
We also compress digitally recorded music files utilizing MP3 technology,
encrypt these recorded music files and sell the recorded music in our
proprietary Sunhawk Audio format over the Internet. When Sunhawk Audio files are
delivered and downloaded, they can only be played using our Solero Viewer and,
by virtue of our encryption technology, can be accessed only by the purchasing
customer. This enables us to securely distribute digitally recorded music and
provide the owner of the music with royalty payments and better control over the
distribution of their recorded music. While we presently have a limited number
of recorded music files in Sunhawk Audio format, we expect to expand the number
of recorded music files and titles available for distribution by broadening our
existing strategic alliances with Warner and EMIC, developing alliances with
record companies and other music publishers, and securing the rights to
distribute the recorded music complement of the Solero digital sheet music we
sell.
INDUSTRY BACKGROUND
Growth of Internet use
Internet use worldwide has grown dramatically since the end of 1989 when
there were approximately 1.1 million Internet users, according to the Internet
Industry Almanac. This source estimated the number of Internet users at end of
1997 to be approximately 100 million. Growth projections for the years 1998 to
2000 vary widely from approximately 50% to 100% per year, but assuming the more
conservative end of this range, the Internet Industry Almanac projects the
number of Internet users at the end of 2000 to be approximately 330 million.
Within the United States, this source estimates that the number of users will
grow from approximately 55 million at the end of 1997 to approximately 132
million by the end of 2000. As the number of Internet users grows, so too do the
opportunities for e-commerce.
The music product industry
Music is one of the oldest and most popular forms of entertainment and
constitutes a multi-billion dollar consumer industry. According to a 1998
industry report by The Music Trades, the worldwide music products industry was
estimated to be $15 billion in 1997. According to a 1999 report by The Music
Trades, U.S. businesses accounted for approximately $6.3 billion in total music
products sales in 1997, of which print music ranked fifth in all product
categories with retail value
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revenues of $433.5 million. However, the fragmented nature of print music retail
distribution and other inefficiencies inherent in print music production and
distribution present numerous challenges to traditional print music retailers.
Music publication and distribution
When songwriters or composers create musical compositions, they often do
not have the resources to fund the production and marketing of their
compositions in a cost-effective manner. In exchange for a percentage of
revenues, music publishers typically assume the production and promotion
responsibilities needed to bring a composition to market, including the audio
recording, the production and distribution of the print music, copyright and
royalty administration and marketing. Some of the major music publishers include
EMI Music Publishing, Warner/Chappell Music, BMG Music Publishing, Polygram
Music Publishing,* Sony/ATV Tree and MCA Music Publishing.* The approximate
sizes of their respective catalogs are illustrated below, according to a 1996
report by Larry Wacholtz, a music industry author.
NUMBER OF SONG TITLES
<TABLE>
<CAPTION>
EMI 1,000,000
- --- ---------
<S> <C>
Warner/Chappell 800,000
BMG 500,000
Polygram 250,000
Sony 100,000
MCA 100,000
</TABLE>
* MCA Music Publishing now includes Polygram Music Publishing pursuant to a 1998
merger.
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Music publishers either retain and manage print and distribution rights
themselves, or they may license these rights to other publishers or
distributors. These rights may be given worldwide, or they may be territorially
restricted. Sheet music distributors deliver sheet music to retail outlets or
other wholesalers which, in turn, sell the printed sheet music to customers.
[SUNHAWK DISTRIBUTION GRAPHIC]
The retail distribution of print music in the United States is highly
fragmented. According to a 1999 review by the National Association of Music
Merchants, of a total of 8,443 music retail stores in the United States, only
4,481 stores sold print music in 1998, of which 106 were print music specialty
stores. According to 1998 reports by The Music Trades, the combined 1997
revenues of Hal Leonard Corporation, Warner Brothers Publications, Music Sales,
Ltd., Alfred Publishing, Carl Fischer Music Group and Mel Bay Publishing
together amounted to approximately $219 million.
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Challenges faced by traditional print music retailers
The fragmented nature of print music retail distribution and other
inefficiencies inherent in print music production and distribution present
numerous challenges to traditional print music retailers. Printed sheet music
can occupy a significant amount of store space with high inventory risks for
music store owners, and shelf space constraints limit the titles immediately
available to consumers and also preclude access to lesser known or independent
artists. The fulfillment and distribution process for printed sheet music is
expensive and time-consuming, also affecting the supply and price of product
available to the consumers. These and other factors significantly affect the
cost, availability and variety of printed sheet music available to consumers
today.
SUNHAWK.COM SOLUTION
In converting traditional printed sheet music into a digital encrypted
format that can be delivered over the Internet and then viewed, listened to,
stored on and printed from a customer's computer, we are changing the manner in
which sheet music is published, distributed and purchased. We are replacing
traditional printed sheet music with a playable, interactive digital format
containing security and educational features. Our products offer customers a
highly efficient and more complete and enjoyable musical experience while
providing music publishers with a means to limit the unauthorized redistribution
of their digital sheet music and efficiently monitor the royalties due upon
purchase.
By leveraging the growth of the Internet and the shop-at-home convenience
of online retail with our proprietary technology, we have the ability to offer
customers and other retailers worldwide an alternative to the traditional
printed sheet music media distribution channel with the following features:
- a larger selection of song titles than previously available in most
traditional retail music stores;
- search engines and other methods to quickly locate items of interest;
- interactive functionality;
- decreased inventory risks and fulfillment costs; and
- immediate and direct delivery of music.
SUNHAWK.COM PRODUCTS, SERVICES AND PROPRIETARY TECHNOLOGY
We are in the business of delivering digital sheet music over the Internet
to individuals and businesses in a manner that is user-friendly and better
protects the copyrighted content of composers and publishers. Utilizing our
proprietary technology, we are able to convert scanned images of printed music
into interactive digital music, which customers are then able to download, play
and purchase. Through our encryption and e-commerce technologies, we are able to
limit the unauthorized distribution by the end-user of the music files and
efficiently track the royalty payments to be paid to the publisher and others.
As a result, our offerings are attractive both to end-user consumers as well as
to composers, publishers and other strategic partners.
OUR SOLERO MUSIC SOFTWARE ALLOWS US TO CREATE A LIBRARY OF DIGITAL
CONTENT. The Solero format provides a digital format for the creation, storage
and distribution of digital sheet music as well as other musical content. This
format can capture standard music notation, audio, lyrics, guitar tablature and
chords, big note formats and other forms of digital music
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content. The digital information is then stored in a sophisticated relational
database, which allows for advanced searches and efficient distribution to
end-users.
The Solero music software is a suite of three IBM PC compatible
object-oriented applications, each of which is written in the C++ computer
language, for converting, creating and enjoying digital sheet music.
Converting. The Solero musical optical character recognition software
performs "musical OCR" by converting scanned images of printed music into
digital music. We have developed a unique technology for electronically storing
the musical symbols contained in a musical score, such as note heads and stems,
in a nonsequential format. This process, which is protected by a patent entitled
"Method and Apparatus for Nonsequential Storage of and Access to Digital Musical
Score and Performance Information," works as follows:
- The digital music technology assigns a different table for each type of
symbol, such as a table for stems.
- Each table contains cross-references that enable the musical score to be
quickly and accurately generated in visual or audio form.
- The nonsequential format facilitates forward and backward compatibility
of different versions of the format and produces files that are highly
compressible.
Creating. The Solero Editor is used to complete the conversion to digital
music initiated by the Solero OCR software and is also used by composers to
create and engrave, the process of typesetting music notation, original music.
The Solero Editor was specifically developed with the needs of music publishers
in mind in order to encourage its adoption as a standard for music engraving.
The Solero Editor enables us to finalize and refine our digital sheet music.
Enjoying. The Solero Viewer is used to play and print the Solero format
files that have been created with the Solero OCR software and the Solero Editor,
and to play the Sunhawk Audio files.
OUR WEB SITE AND SOLERO VIEWER PROVIDE CUSTOMERS WITH EASY ACCESS TO OUR
PRINT AND DIGITAL SHEET MUSIC PRODUCTS. Our customers include musicians,
composers, educators, recreational musicians and other individuals interested in
music. A customer can access our store front at www.sunhawk.com or through
referrals from the Warner and EMIC web sites. Once a customer has entered our
web site, he may search for a song by composer, artist, title or keyword. In
addition, our titles are arranged by music type such as rock, classical,
Christian and country, and a customer can browse these pages based on his own
music preferences and interests. Our site also features "top ten" lists, new
releases and editor's picks to further stimulate customer interest in our
products.
Our library of interactive digital sheet music in the Solero format
contains numerous song titles and represents many genres of classical and
popular music. A sample of the composers and titles represented in the library
appears on the two inside cover pages of this prospectus. Customers may also
purchase traditional printed sheet music on our web site by ordering the
selected song titles online and having the sheet music delivered in print form
by mail or courier service.
We provide our Solero Viewer free of charge on our web site. Simply by
clicking the "download" button on the Sunhawk.com web site, customers can
download our Solero Viewer, thus gaining the ability to download and view our
digital sheet music products. As of June 30, 1999, approximately 32,000 Solero
Viewers had been downloaded and registered.
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Once a customer has selected a title that is available in our Solero
format, he can download the digitized music file onto his PC and listen to a
portion of the song before paying for the title, thus allowing him to preview
various selections before electing to purchase. In addition, our Solero Viewer
allows the customer, upon purchase, to view and print the music, or, when
listening to its audio playback, change its tempo, instruments or sing or play
his own musical instrument along with it. A screen shot of our Solero Viewer and
its various features is set forth below:
[SOLERO VIEWER PICTURE]
1) Open the music index
2) Purchase music
3) Print the score
4) Move from page to page
5) Select one or two page view
6) Visit Sunhawk.com
7) Change the instruments
8) Adjust the tempo
9) Start, stop or pause playback
10) Notes are highlighted on playback
11) Optional player piano view
12) View of the music index
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OUR E-COMMERCE TECHNOLOGY OFFERS ATTRACTIVE SECURITY AND ROYALTY-TRACKING
FEATURES TO COMPOSERS AND PUBLISHERS. Our e-commerce technology was designed to
enable us to:
- securely distribute digital sheet music, as well as text, graphics and
other types of copyright-protected digital content, in encrypted,
proprietary digital envelopes over the Internet;
- limit the unauthorized redistribution of digital music files by the
consumer; and
- meter and track digital music files over the Internet to help ensure that
appropriate royalties are paid upon purchase of the music content.
Encryption and e-commerce process. Our technology uses encryption as a
means to securely protect and distribute digital data. Encryption is the process
of changing data into a form that can be read only by the intended recipient.
The following is a description of how our system, many aspects of which are
protected by a patent entitled "Encryption System with Transaction Coded
Decryption Key," works:
- A customer identifies himself. In our system this is the registration of
the Solero Viewer, whereby each downloaded Solero Viewer is assigned a
unique identifier.
- When a customer requests data for download, the data is uniquely
encrypted for that customer's Solero Viewer based on the customer's
unique identifier.
- When a customer purchases a license to use the data, we also distribute
the unique digital "key" necessary to unlock the data.
- The distributed file remains encrypted at all times, and each time the
digital content is used, it is decrypted using the key provided to that
Solero Viewer system.
Since each digital file is uniquely encrypted and can only be decrypted by
the specific Solero Viewer which was used to purchase the digital music,
unauthorized redistribution of the digital music is limited. Specifically,
digital rights are protected at numerous levels:
- If a user passes a digital music file to a friend, because the file
remains encrypted at all times and can only be decrypted by the unique
"key" provided upon purchase, the recipient cannot open the encrypted
file and therefore it cannot be used.
- If a user is able to identify the key and decrypt a file, and then
attempts to pass the decrypted file along to a friend, the friend's
Solero Viewer will not read the decrypted file because only the original
user's key-enabled Solero Viewer works with that particular decrypted
file.
- If a user passes a decrypted file along with a purchased key to a friend,
the key identifies the user and can be used to track users who illegally
provide files to other users.
Our e-commerce technology also includes a download-then-pay feature, which
minimizes online transaction failures, such as customer cancellations and
download malfunctions. Our client-driven credit card software makes it easy to
use a credit card to complete purchases. The download-then-pay feature allows a
customer to first download the digital music file onto his PC and preview a
portion of the product before paying for the sheet music. Upon receipt of the
customer's credit card information, the digital content is "unlocked" with the
digital key described above, and the customer can then view, play and print the
sheet music.
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Benefits to publishers. Our e-commerce technology, with its encryption
software and digital rights management capabilities, provides an immediate
solution to the concerns of music publishers that their music content be
protected when distributed over the Internet. Further, our e-commerce and other
proprietary technology provides assurance to publishers that we have a method to
efficiently monitor the distribution of sheet music so that royalties due and
owing to the publisher are paid.
OUR TECHNOLOGY ENABLES US TO OFFER PRODUCTS IN ADDITION TO DIGITAL SHEET
MUSIC. An essential element of our growth strategy is to continue to use our
proprietary technology to broaden the range of products we offer to customers.
Sunhawk Audio files. The Sunhawk format incorporates encryption and
e-commerce technology that enables us to compress recorded music files utilizing
MP3 technology, encrypt these files and deliver them to customers in our Sunhawk
Audio format. These Sunhawk Audio files can be downloaded from our web site and
stored on the customer's PC. When Sunhawk Audio files are delivered and
downloaded, they can only be played using our Solero Viewer and, by virtue of
our encryption technology, can be accessed only by the purchasing customer. In
addition, as with digital sheet music, our e-commerce technology facilitates the
purchase of the music, limits any unauthorized redistribution of this digital
music and tracks royalty payments owed to publishers and others.
Enhanced CDs. We also can enhance CDs by including our Solero Viewer on an
audio CD. By including our Solero Viewer on the CD, a record company can include
digital liner notes, graphics, text or any other information on the enhanced CD.
At the same time, the record company can include on the CD a digital sheet music
version of one of the songs featured on the CD as well as links to our web site
where the customer can download other digital sheet music versions of the songs
included on the audio CD. To date, EMIC has distributed approximately 85,000
enhanced CDs containing our Solero Viewer.
SALES AND MARKETING
We employ several concurrent Internet and traditional marketing strategies
in an effort to drive traffic to our web site, increase customer interest in our
products and generate sales. As part of this multi-prong marketing approach, we
are expanding our program of establishing inbound links to our web site from
other third-party sites, such as portals, search engines, musical instrument
sites and related web sites. In addition, we have launched a related associates
program in which web site owners receive sales-based referral fees when they
link customers to us from their web sites. We also intend to augment our online
advertising efforts on industry-specific sites, such as music e-commerce,
publisher, artist and special interest music sites. Finally, we intend to
increase our use of one-to-one customer relationship marketing by continuing our
efforts of sending periodic informational and promotional emails to our current
Solero registrants and expanding the number of individuals in our target market
who receive such online materials.
In addition to driving traffic to our web site through the use of Internet
advertising, we intend to strengthen our brand name and increase customer appeal
through the use of traditional marketing methods. Moreover, we intend to utilize
numerous forms of advertising to promote the Sunhawk and Solero names and
products, including advertising in industry-specific publications, direct
mailing efforts to our target market, distributing CD-ROMs and enhanced audio
CDs containing our Solero Viewer, and participation in
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trade show events. These techniques will enable us to target existing and
prospective customers in a cost-efficient manner.
We believe that many traditional retail music stores prefer to carry very
little sheet music in order to avoid the expense of maintaining inventory. We
intend to structure alliances with retail music stores that will allow the music
store to access our web site directly at the store location. We believe this
on-site capability will both generate sales and increase our exposure to our
target market. In addition, we see an opportunity for reciprocal advertising
efforts between our web site and traditional retailers whereby these retailers
agree to promote our web site to their customers in exchange for free or
low-cost advertising of their stores on our web site. We also intend to
penetrate the music education market by establishing relationships with private
and public schools and music institutions, thereby increasing our target
customer base and expanding our distribution channels.
OPERATIONS
Our operations are designed to capitalize on the shift in the way people
buy and use music and on the growth of the Internet as a medium for distributing
goods and services. There are currently four distinct aspects of our business
operations:
- digital production;
- digital distribution;
- digital retailing; and
- digital publishing.
Digital production
Producing a digital score in the Solero format is a six-step process.
First, the printed sheet music is registered into our database. Second, the
printed sheet music is scanned using conventional scanning technology. Third,
the scanned image is loaded into our Solero OCR system, which converts the
scanned image of sheet music into the digital Solero file format. Fourth, the
digital Solero file is sent to either our Philippine or Russian subcontractor
for visual and audio editing with the Solero Editor software. Fifth, the Solero
digital score is returned to our Seattle, Washington headquarters, where it is
checked for quality. Sixth, the score is uploaded to our web site at
www.sunhawk.com, and made
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available for online download, preview and purchase in the encrypted Solero
format. A depiction of the digital production process is set forth below:
[GRAPHIC]
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Philippine production. Under our contract with International Music
Engraving Company, a Philippine subcontractor, we receive 500 to 1,500 pages of
publish-ready sheet music per month at a cost to us of $15.00 per page. This
contract was entered into on April 1, 1998 and extends indefinitely; however,
either party may terminate this contract by providing two months notice to the
other party.
Russian production. We currently receive for review approximately 4,100
pages of digital sheet music per month from Avtograf, a Russian joint stock
company, at a cost to us of $7.00 per page. Subsequent to the closing of this
offering, we will enter into an agreement with a new independent Russian
production company which will provide production services for digital sheet
music to us at a rate of a minimum of 2,250 pages per month and a total of
270,000 pages over the next ten years.
We believe our foreign subcontractors are able to manage an increase in
production should we require it. In addition, U.S. third-party production
capabilities are available, although we believe that such domestic service
providers may be more costly than our foreign service providers.
Digital distribution
Using our technology, we are providing an opportunity to change the
distribution and retailing of sheet music from a paper-based retail store model
to a digital download, preview, purchase and print-on-demand model. Our
proprietary technologies and Internet distribution capabilities offer publishers
a direct, low-cost retail channel for the secure and efficient distribution of
digital sheet music. Our distribution model significantly reduces distribution
costs by removing those costs traditionally associated with the distribution of
sheet music -- printing, warehousing and transportation and retail store
overhead costs. We believe that our digital distribution model can provide
publishers with the ease of use and distribution of digital material, the
security of limiting the distribution of digital music files, and the means to
better ensure that appropriate royalties will be calculated and paid for their
use. By the deployment of our proprietary technologies, we believe we will be
able to secure relationships with additional publishers to provide us with the
distribution rights to their sheet music. This, in turn, will enable us to offer
customers a wider selection of sheet music.
Digital retailing
Our web site, www.sunhawk.com, was launched in February 1997. In addition,
the Warner and EMIC online music stores promote Solero sheet music. Purchase
transactions are directed to our web site where we operate the transaction
processing functions for each purchase.
We believe that by providing digital sheet music over the Internet we enjoy
structural economic advantages relative to traditional retailers, including:
- lower costs and essentially unlimited shelf space, allowing us to offer a
broad selection of music titles that would be economically or physically
impractical to stock in a traditional music retail store;
- the ability to serve a worldwide customer base from a single domestic
location;
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- through the global reach of the Internet, the ability to deliver a broad
selection of titles to customers in international, rural or other
locations that would not otherwise support a larger-scale physical retail
store;
- flexible advertising opportunities;
- lower personnel requirements and costs;
- scaleable technology and systems that can serve a growing customer base
and demand; and
- ability to maintain "out-of-print" sheet music in our retail digital
catalog.
Digital publishing
We have the ability to publish the music of composers and artists,
including professional and amateur musicians, who wish to have their music
directly distributed digitally over the Internet. Our proprietary technologies
enable us to publish digital sheet music for lesser known composers and artists
and serve as a secure platform from which any artist can reach large audiences
in a short period of time.
As we continue to produce, distribute and sell increasing amounts of
digital sheet music, we believe that decisions to publish music will no longer
be driven by concerns about the costs of engraving, printing, warehousing and
distribution. By providing digital sheet music over the Internet, the cost of
paper and ink printing is borne directly by the consumer, and warehousing and
distribution costs simply consist of maintaining servers, storing digital sheet
music on these servers and sustaining relationships with Internet service
providers. Thus, only the production of a digital sheet music file for
"engraving" remains as our principal cost.
Digital publishing enables publishers to more easily distribute their
copyrighted music. Further, by delivering sheet music with our e-commerce
technology, publishers can limit the unauthorized distribution of their digital
sheet music and monitor the sales volume to make certain that appropriate
royalties are paid upon purchase.
INTELLECTUAL PROPERTY
Our success will depend in large part on our ability to protect our
proprietary software and other intellectual property. To protect our proprietary
rights, we rely generally on patent, copyright, trademark and trade secret laws
and require our employees, consultants, vendors and corporate business partners
to execute confidentiality agreements. Despite these protections, a third party
could, without authorization, copy or otherwise obtain and use our products or
technology to develop similar technology. Moreover, our agreements with
employees, consultants and others who participate in product and service
development activities may be breached, we may not have adequate remedies for
any breach, and our trade secrets may become known or independently developed by
competitors.
Patents. We have been issued two patents and have two patent applications
and one continuation application pending in the United States relating to our
product architecture and technology. Specifically, we have been issued a patent
relating to our relational database storage of music information, "Method and
Apparatus for Nonsequential Storage of and Access to Digital Musical Score and
Performance Information," Patent Number 5,773,741, as well as a patent relating
to our e-commerce technology, "Encryption System
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with Transaction Coded Decryption Key," Patent Number 5,889,860, for which a
continuation has been filed to pursue the broader applications of this
invention. Two other patents relating to music notation and music notation
input, respectively, are pending.
Despite these efforts, our pending or future patent applications may not be
granted and our existing or future patents may be challenged, invalidated or
circumvented. Many of our current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has been issued or is
issued in the future, we would need either to obtain a license or to design
around the patent. We may not be able to obtain a required license on acceptable
terms, if at all, or to design around the patent.
We attempt to avoid infringing known proprietary rights of third parties in
our product and service development efforts. We have not, however, conducted and
do not conduct comprehensive patent searches to determine whether the technology
used in our products infringes patents held by third parties. In addition, it is
difficult to proceed with certainty in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that our products violate third-party proprietary rights, we
may not be able to obtain licenses on commercially reasonable terms to continue
offering these products, and efforts to re-engineer these products may not be
successful. Any subsequent litigation could involve substantial expense and
possible damages awards.
Trademarks. We have registered our "Solero" and "Sunhawk" marks in the
United States. We intend to continue to pursue the registration of these and our
other trademarks in the United States and in other countries. However, we cannot
assure you that we can prevent all third-party use of our trademarks.
Copyrights and other proprietary rights. The underlying music we distribute
in digital and print form is protected by copyright law, unless the music has
become part of the public domain. Even if the underlying music has become part
of the public domain, we take steps to add copyrightable and other proprietary
elements in creating our Solero editions. There is no assurance that the steps
we take will be adequate to protect these rights or that we will be successful
in preventing the illegal duplication, distribution or other use of our
products. Our failure to adequately limit the unauthorized redistribution of our
music products could result in litigation or liability, which could harm our
business.
We generally procure licenses for the music distributed in digital and
print form from third-party licensors, including music publishers and composers,
on a non-exclusive basis. Some of our competitors offer, or could offer, the
same sheet music song titles that we have licensed from these music publishers.
In some cases we own the copyrights in the underlying music. The underlying
music may be owned by a single copyright owner or have multiple copyright
owners. We have different licensing arrangements with these parties depending on
what rights we acquire. These arrangements range from formal contracts to
informal agreements based on the nature of the subject matter. We often rely on
our positive working relationships with copyright owners to obtain licenses on
favorable terms. Any changes in the nature or terms of these arrangements,
including any requirement that we pay significant fees for the use of the
content, or if such arrangements are found to be unenforceable, could have a
negative impact on the availability of content and could harm our business.
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The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
jurisdictions.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
products and services, to perform key functions. Third-party technology licenses
may not continue to be available to us on commercially reasonable terms. The
loss of any of these technologies could harm our business. Moreover, although we
are generally indemnified against claims that our third-party technology
infringes the proprietary rights of others, this indemnification may be
unavailable or inadequate for all types of intellectual property rights. These
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential product service
redevelopment costs and delays, all of which could harm our business.
COMPETITION
As a retailer of digital and printed sheet music over the Internet, we
currently or potentially compete with a variety of companies. With respect to
digital sheet music, we do not believe any of our competitors have converted
substantial portions of sheet music into an interactive digital format that can
be stored, encrypted, previewed, played and printed on a PC. However, companies
that are currently in similar or potentially competing businesses include:
- Sheet Music Direct. SMD has developed an Internet-based,
purchase-on-demand delivery system for digital sheet music, but their
music is non-interactive and does not allow the user to play the music,
choose instruments or select tempo. The web site is affiliated with sheet
music distributors Hal Leonard Corporation and Music Sales Corporation.
- Infomusique S.A. Infomusique operates a web site that permits online
printing of non-interactive sheet music purchased from the web site as
well as the purchase of pre-printed sheet music by mail order.
- Coda Music Technology. Coda has announced that it has developed an alpha
version of a product that would allow online transmission and viewing of
musical scores.
If we expand the Sunhawk Audio portion of our business, we will face
significantly increased competition and different competitive challenges from
other Internet audio providers than we currently experience.
We believe that we have established certain barriers to entry to discourage
others from entering into the business of online sale and distribution of
digital music over the Internet, including the following:
- We have developed proven technologies for encrypting and managing the
rights to content.
- This technology enables us to provide publishers with the comfort and
security that the digital music files will be used as authorized and that
they will receive the royalties for the purchase of the copyrighted
material.
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<PAGE> 38
- We have built a production process designed to create what we believe is
one of the largest digital sheet music catalogs available.
- We have developed and deployed a proven method of digital distribution
which has been adopted by Warner and EMIC, two important music
publishers.
- We have secured two patents to certain aspects of our technology and have
developed significant other proprietary software for the conversion and
distribution of digital content.
Despite these potential barriers to entry, many of our current and
potential competitors are well-established companies that have greater
financial, marketing, distribution, brand recognition and other resources than
we have, and there can be no assurance that we will be able to compete
effectively against these companies.
RESEARCH AND DEVELOPMENT
Since our inception, all of the time and financial resources dedicated to
research and development activities to develop our technology and digital sheet
music catalog have been expensed. Accordingly, we have not capitalized any
research and development expenditures. However, we estimate that we spent
approximately $220,000 in research and development activities during the last
two fiscal years. We cannot assure you that we will successfully develop new
technology or that competitors will not develop products, services or other
technology that are superior to ours.
FACILITIES
We lease approximately 20,000 square feet of office space in Seattle,
Washington at an annual rent of $326,808. The remaining lease term expires on
September 1, 2001. These facilities currently house our employees, and we
conduct general corporate and administrative matters, software development,
cataloging, scanning, quality control, music editing, web site development,
server operations and data warehousing from this location. We believe that our
current leasehold facilities are adequate for our intended use for the
foreseeable future.
LEGAL PROCEEDINGS
From time to time we are subject to legal proceedings that arise in the
ordinary course of business. We do not believe that these actions, when finally
concluded, will have a material adverse effect on our business.
EMPLOYEES
As of June 30, 1999, we had 37 full-time and 4 part-time employees. None of
our employees is represented by a labor union, and we believe that our employee
relations are good.
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<PAGE> 39
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information about our directors, executive
officers and certain key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Marlin Eller 46 Chairman of the Board, Chief Executive
Officer and President
Tricia Parks-Holbrook 43 Chief Financial Officer
Jill Ohara 43 Vice President of Operations
Theodore Grabowski, Jr. 43 Vice President of Legal and Business
Affairs
Gary Martin 46 Vice President of Publishing
Mary E. McConney, Ph.D 44 Treasurer
Fred Anton 52 Director
Luis F. Talavera 34 Director
Patricia Tangora 45 Director
</TABLE>
Marlin Eller is a co-founder of Sunhawk.com and is currently our Chairman
of the Board, Chief Executive Officer and President, positions he has held from
time to time since our inception in 1992. From 1982 to 1995, Mr. Eller held the
position of Manager, Software Development, at Microsoft Corporation. At
Microsoft, Mr. Eller was the development lead for GDI, the graphics subsystem of
Windows 1.0; development lead for Pen Windows; and the designer of handwriting
recognition software. While at Microsoft, he was named as the inventor on six
patents. He also led groups involved in video and data compression and
encryption and started the Microsoft online services. He received his Bachelor
of Arts, Phi Beta Kappa and magna cum laude, in Mathematics/Physics from Whitman
College in 1974 and his Master of Science in Mathematics from the University of
Washington in 1979. Mr. Eller also co-authored the book, Barbarians Led by Bill
Gates, published by Henry Holt, Inc. in 1998, and co-authored the article,
Multiple-Scattering Calculations of X-Ray Absorption Spectra, published by The
American Physical Society in 1995. He was a visiting instructor in Computer
Sciences at Williams College for two years prior to joining Microsoft. Mr. Eller
is married to Ms. McConney, our Treasurer.
Tricia Parks-Holbrook joined Sunhawk.com in June 1999 as our Chief
Financial Officer. From 1989 to 1998, Ms. Parks-Holbrook was with KPMG Peat
Marwick, LLP as Senior Manager and was responsible for supervising the planning
and performance of attest engagements with clients in a variety of industries.
From 1988 to 1989, she was with CP National Corporation in their external
reporting department. From 1979 to 1988, Ms. Parks-Holbrook worked with PGL
Corporation, a subsidiary of F.H. Tompkins, PLC, a public company in the United
Kingdom, serving the last three years in the capacity of controller. Ms.
Parks-Holbrook received her Bachelor of Science, cum laude, in Business
Administration with an Accounting Option from California State University at
Hayward, California in 1988. While there she received the San Francisco
Financial Executive Institutes Medallion Award. She is licensed and certified as
a public accountant in California (1991) and Washington (1998), and is a member
of the American Institute of Certified Public Accountants and the Washington
Society of Certified Public Accountants. She also serves as treasurer on the
board of Resolve of Washington State, a non-profit organization.
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<PAGE> 40
Jill Ohara joined Sunhawk.com in February 1998 as Music Production Manager,
was promoted to Vice President of Production in April 1998 and has served as
Vice President of Operations since June 1999. From 1981 to 1997, Ms. Ohara
served with the U.S. National Academy of Sciences and was assigned to the
Radiation Effects Research Foundation, a multicultural research foundation in
Japan, where she served as Chief of the Information Technology Department. Ms.
Ohara received outstanding service awards from NAS in 1995 and 1996. In other
management and research roles at RERF, she engaged in hardware/software support,
statistical programming, data analysis and support of a dosimetry system used in
the setting of worldwide radiation protection standards. From 1979 to 1981, she
served as Statistician in the Jonsson Comprehensive Cancer Center at the
University of California at Los Angeles, performing extensive programming for
database management and statistical analysis. Ms. Ohara received her Bachelor of
Arts, magna cum laude, in Mathematics from UCLA in 1977 and her Master of
Science in Biostatistics from UCLA in 1979. She has published articles in
Biometrics, Radiation Research and the American Journal of Roentgenology.
Theodore Grabowski, Jr. joined Sunhawk.com as our General Counsel in July
1998 and assumed the position of Vice President of Legal and Business Affairs in
June 1999. From 1989 to 1997, Mr. Grabowski worked for Mindscape, Inc., a
developer of entertainment and educational software, and held the position of
Vice President and Associate General Counsel when he left the company. Prior to
that, he was in private practice with an emphasis on intellectual property and
licensing law. Mr. Grabowski received a Bachelor of Arts degree, magna cum
laude, in Psychology and in Philosophy, from California State University at
Northridge in 1979, and a Juris Doctorate from Loyola Marymount University of
Los Angeles in 1984.
Gary Martin joined Sunhawk.com in January 1995 as our Program Manager and
has served as our Vice President of Publishing since June 1999. Mr. Martin
developed our digital music production operations and set up the initial Russia
music production facility. He also created the engraving specifications for our
Solero Music Editor and the proprietary graphical font used in our Solero music
scores. Mr. Martin currently oversees the quality of music production, promotes
and maintains new contracts with music publishers and coordinates the
development of our marketing team. From 1993 to 1994, while serving as Vice
President of MacArthur Publishers, Inc., a desktop publishing company, Mr.
Martin worked with the Ancient Biblical Manuscript Center in California and
typeset The Dead Sea Scrolls Catalog (Scholars Press, 1994), one of the most
comprehensive database compilations on this topic to date. Mr. Martin earned a
Bachelor of Arts, cum laude, in Physics-Astronomy from Whitman College in 1975.
Mary E. McConney, Ph.D is a co-founder of Sunhawk.com and is currently our
Treasurer. From 1992 until June 1999, Ms. McConney served as our Chief Financial
Officer, Secretary and Treasurer and as a director. In addition, from 1988 to
the present, Ms. McConney has served as the President of HiroSoft International
Corporation, a corporation she founded that writes statistical programs for
modeling different kinds of risk functions. From 1985 to 1988, Ms. McConney was
employed in the fields of applied statistics and database design and
implementation by NAS. From 1977 to 1985, she was employed in the fields of
applied statistics, database design and policy analysis by the University of
Washington and the University of Pennsylvania. Ms. McConney received her
Bachelor of Arts in Physics and Environmental Studies from Whitman College in
1976. While at the University of Pennsylvania, she received two Master degrees,
one in economics in 1979 and one in Urban Planning in 1980, and a Ph.D in
spatial economics in
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<PAGE> 41
1983. Ms. McConney's duties at HiroSoft do not interfere with her duties at
Sunhawk.com since she devotes substantially all of her time to her duties at
Sunhawk.com. She has published articles in the Annals of the New York Academy of
Sciences, Urban Studies, Circulation and the Journal of the American College of
Cardiology.
Fred Anton has been a director of Sunhawk.com since July 1998. Since March
1998, Mr. Anton has served as the President/Chief Operating Officer of Warner
Bros. Publications, where he also served as the Chief Financial Officer/Chief
Operating Officer from September 1996 to March 1998. From 1994 to September
1996, Mr. Anton served as Vice President of Finance for the Warner Music Group
and subsequently was made Executive Vice President/Chief Operating Officer for
Warner Vision Entertainment. From July 1990 to 1994, he served as the Vice
President International Finance and Administration at Time Warner, Inc. Mr.
Anton has a Bachelor of Arts degree in Economics from Clark University in
Worcester, Massachusetts and a Master of Business Administration degree from
Washington University in St. Louis, Missouri. He is a member of the American
Institute of Certified Public Accountants and the New York State Society of
Certified Public Accountants. He is also on the board of directors of the Music
Publisher's Association.
Luis F. Talavera has been a director of Sunhawk.com since June 1999. Since
1998, Mr. Talavera has overseen seed-capital funding by N.S.L., an international
venture capital fund specializing in computer and communications ventures. Mr.
Talavera also currently serves as a board member for various technology
companies, including Global Product Channel, a Norwegian e-commerce solutions
company, and Poseidon, a French developer of swimming pool safety technology.
From 1988 to 1997, Mr. Talavera was employed by Microsoft Corporation, most
recently as a Director of Research and Development. At Microsoft, Mr. Talavera
was one of the first members of the Pen Windows computing team and the co-author
of Microsoft's first handwriting recognition software. As a Director of Research
and Development for Softimage, a subsidiary of Microsoft, from 1995 to 1997, Mr.
Talavera was responsible for the development and launch of Softimage IDS, the
first non-linear professional post-production system. Mr. Talavera received a
Bachelor of Science degree in Computer Engineering from the University of
California at San Diego in 1987. He also holds two patents that have been issued
and three patents that are pending.
Patricia Tangora has been a director of Sunhawk.com since June 1999. Ms.
Tangora is currently a member of Dethman & Tangora, LLC, an environmental
consulting firm. From 1989 to 1998, Ms. Tangora was a senior project manager at
R.W. Beck, Inc., a national consulting and engineering firm. She was made an
owner in that firm in 1997. At R.W. Beck, her work included conducting due
diligence reviews for project financing, negotiating long-term, multi-million
dollar service contracts and advising clients on development and environmental
compliance strategies for major projects. She was also responsible for
approximately $1 million in annual sales and participated in strategic planning
and marketing efforts within her area of practice. Ms. Tangora received her
Bachelor of Arts degree in English from Whitman College in 1976 and a Bachelor
of Science degree in Civil/Environmental Engineering from the University of
Washington in 1979.
We currently have authorized five directors; however, one board seat
currently remains vacant. We are in the process of identifying a fifth director.
Both Ms. Tangora and Mr. Talavera are independent directors. We intend to
maintain at least two independent directors in the future. Directors are elected
by the shareholders at each annual meeting of
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<PAGE> 42
shareholders to serve until the next annual meeting of shareholders or until
their successors are duly elected and qualified.
AUDIT COMMITTEE AND COMPENSATION COMMITTEE
Our board of directors has established an audit committee and a
compensation committee. The audit committee, which currently consists of
Patricia Tangora and Luis Talavera, is responsible for reviewing our internal
accounting procedures and consulting with and reviewing the services provided by
our independent auditors. The compensation committee, which currently consists
of Fred Anton and Patricia Tangora, is responsible for reviewing and
recommending to our board of directors the compensation and benefits of all
officers of Sunhawk.com and establishing and reviewing general policies relating
to the compensation and benefits of our employees.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Directors' compensation. Effective as of the date of the completion of this
offering, as an inducement to joining our board of directors, each of our
non-employee directors has been granted, at the initial public offering price,
an immediately exercisable option under our 1996 Stock Option Plan to purchase
2,500 shares of common stock. In addition, we pay each non-employee director
$2,500 per board meeting attended. All directors are entitled to reimbursement
for expenses incurred in traveling to and from meetings of our board of
directors.
Executive officers' compensation. During the fiscal year ended September
30, 1998, and prior to the closing this offering, Mr. Eller was not paid a
salary. Brent Mills, our former Chief Executive Officer, received a salary of
$55,000 during the fiscal year ended September 30, 1998, and a salary of $23,163
during the fiscal year ended September 30, 1999 prior to the termination of his
employment with us in March 1999. None of our other executive officers received
total annual salary and bonus during the fiscal year ended September 30, 1998 in
excess of $100,000. To date, we have not granted Mr. Eller any stock options or
other equity-based compensation. After completion of this offering, Mr. Eller
will enter into an employment agreement with us with an initial three-year term.
This employment agreement will entitle Mr. Eller to an annual salary of $95,000
for the first year, which will be increased by 10% during each of the two
subsequent years. Mr. Eller will also be entitled to receive options under our
1996 Stock Option Plan to purchase 30,000 shares of our common stock vesting
over five years at an exercise price equal to the initial public offering price
and an annual bonus to be determined by our compensation committee on a yearly
basis.
KEY MAN INSURANCE
We have obtained a $1,000,000 key man life insurance policy on the life of
Mr. Eller.
STOCK OPTION PLAN
Our board of directors adopted our 1996 Stock Option Plan in June 1996, and
our shareholders approved it in June 1996. There are currently 26,214 options to
purchase common stock outstanding as of June 30, 1999. We have reserved a total
of 303,526 shares of common stock for issuance under the plan, of which 225,939
shares were available for issuance as of June 30, 1999. The plan provides for
the granting to employees, including
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<PAGE> 43
officers and directors, of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and for the granting to
employees, consultants and nonemployee directors, of nonstatutory stock options.
Unless terminated earlier, the plan will terminate in June 2006. Generally,
options granted under the plan vest over five years and have a term of ten years
and are nontransferable.
After this offering, the plan will be administered by our compensation
committee, known as the "administrator." The administrator determines the terms
of options granted under the plan, including the number of shares subject to an
option, the vesting terms, the exercise price, and the term and exercisability
of options. The exercise price of all incentive stock options granted under the
plan generally must be at least equal to the fair market value of our common
stock on the date of grant, and the exercise price of non-statutory options
granted under the plan must be at least equal to 85% of the fair market value of
our common stock on the date of grant. Payment of the purchase price of options
may be made in cash or other consideration as determined by the administrator.
If an optionee would have the right in any calendar year to exercise for the
first time incentive stock options for shares having an aggregate fair market
value in excess of $100,000, determined for each share as of the date the option
to purchase the shares was granted, any such excess options shall be treated as
nonstatutory stock options.
In the event that we are acquired by another company, we expect that awards
outstanding under the plan will be assumed or equivalent awards substituted by
our acquiror. If an acquiror did not agree to assume or substitute awards, the
vesting of outstanding options will accelerate prior to consummation of the
transaction.
The board of directors has the authority to amend or terminate the plan as
long as such action does not materially and adversely affect any outstanding
options and provided that shareholder approval for any amendments to the plan
shall be obtained to the extent required by applicable law.
CERTAIN TRANSACTIONS
On March 31, 1999, the Eller and McConney 1995 Family Living Trust
converted $3,568,406 of debt owed to it by Sunhawk.com into 374,257 shares of
our common stock at a price per share of $9.53. On this same date, the Eller and
McConney 1995 Family Living Trust forgave $1,000,000 of long-term debt owed to
it by Sunhawk.com and purchased an additional 157,345 shares of our common stock
for $1,500,000, at a price per share of $9.53.
We currently receive for review approximately 4,100 pages of digital sheet
music per month from Avtograf, a Russian joint stock company in which Eller
McConney LLC holds a 94% ownership interest, pursuant to a five-year agreement,
and accrue and expect to pay to Eller McConney LLC $7.00 per page upon
acceptance. Mr. Eller and Ms. McConney are the sole members of Eller McConney
LLC. This sheet music is sold to us pursuant to an agreement between us and
Eller McConney LLC, which has an agreement with Avtograf to receive production
services for digital sheet music. Upon the closing of this offering, we will
enter into an assignment and assumption agreement with Avtograf, Eller McConney
LLC and a newly formed independent Russian production company which will require
that Eller McConney LLC assign to us all of its rights to receive pages of
digital sheet music from Avtograf in exchange for a one-time payment from us to
Eller McConney LLC subsequent to the closing of this offering of $600,000 in
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<PAGE> 44
cash. In addition, Avtograf will transfer to the new Russian production company
its obligation to provide production services for digital sheet music.
Thereafter, the new independent Russian production company will be obligated to
provide production services for digital sheet music to us at a rate of a minimum
of 2,250 pages per month and a total of 270,000 pages over the next ten years at
no additional cost to us. The one-time payment of $600,000 to Eller McConney LLC
will be accounted for as a prepayment for digital sheet music production
services from the new independent Russian production company over the next ten
years with recourse to Eller McConney LLC in the event of non-performance.
Neither Eller McConney LLC, Mr. Eller, Ms. McConney nor Sunhawk.com will have an
interest in the new Russian production company.
On May 18, 1998, we entered into a distribution agreement with Warner. As
part of the consideration paid by us for the rights granted to us under the
distribution agreement, we agreed to issue 138,371 shares of our common stock to
Warner, contingent upon the occurrence of certain events. Consequently, on March
31, 1999, as a result of the sale of shares of our common stock to the Eller
McConney 1995 Family Living Trust, we issued Warner 138,371 shares of our common
stock. Further, under the terms of the Warner distribution agreement, Mr. Eller
and Brent Mills, one of our former directors, officers and employees, agreed to
vote any shares of our common stock held or controlled by them for the election
of an individual to be designated by Warner to our board of directors. This
right will continue for so long as Warner owns shares representing at least 2%
of our outstanding common stock. Warner has currently designated Fred Anton to
serve as its representative on our board of directors. A breach by either party
may be cured within thirty days, or ten days if the breach relates to the
payment of money or the rendition of accounting, of notice from the other party.
Each of the above transactions was entered into on terms that were as
favorable to us and our affiliates as those that were generally available from
unaffiliated parties. At the time these transactions were entered into, our
board lacked sufficient independent directors to ratify them. We currently have
two independent directors. There are no affiliated transactions presently
planned or contemplated. Should there be any future material affiliated
transactions or loans, these transactions will be made or entered into on terms
that are no less favorable to us than those that can be obtained from
unaffiliated third parties. In addition, all affiliated transactions and any
forgiveness of loans 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 independent legal counsel.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of the date of this prospectus, including
options that are immediately exercisable or exercisable within 60 days of the
date of this prospectus under our stock option plan, and as adjusted to reflect
this offering, by:
- each person or group that we know owns 5% or more of our common stock;
- each of the named executive officers and each of our directors; and
- our executive officers and directors as a group.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED SHARES
-------------------------------------
PRIOR TO OFFERING AFTER OFFERING
------------------- --------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
------------------------------------ --------- ------- --------------
<S> <C> <C> <C>
Eller and McConney 1995 Family Living Trust........ 1,430,565 73.6% 45.5%
c/o Sunhawk.com Corporation
223 Taylor Avenue North, Suite 200
Seattle, Washington 98109
Marlin Eller(1).................................... 1,430,565 73.6% 45.5%
Mary E. McConney, Ph.D(1).......................... 1,430,565 73.6% 45.5%
Brent R. Mills(2).................................. 372,426 19.2% 11.8%
7720 39th Avenue N.E.
Seattle, Washington 98105
Judy E. McOstrich(3)............................... 372,426 19.2% 11.8%
7720 39th Avenue N.E.
Seattle, Washington 98105
Warner Bros. Publications U.S., Inc. .............. 138,371 7.1% 4.4%
15800 N.W. 48th Avenue
P.O. Box 4340
Miami, Florida 33014
Fred Anton(4)...................................... 138,371 7.1% 4.4%
Gary Martin(5)..................................... 2,497 * *
Patricia Tangora................................... -- -- --
Luis F. Talavera................................... -- -- --
Jill Ohara......................................... -- -- --
Theodore Grabowski, Jr. ........................... -- -- --
All directors and executive officers as a group (8
persons)......................................... 1,571,433 80.8% 50.0%
</TABLE>
- -------------------------
* Less than 1%
(1) Mr. Eller, our Chairman of the Board, Chief Executive Officer and President,
and Ms. McConney, our Treasurer, are the trustees of the Eller and McConney
Family 1995 Living Trust and, as such, retain voting and investment power
with respect to these shares.
(2) Includes 51,368 shares of common stock held by Mr. Mills' spouse, Judy E.
McOstrich.
(3) Includes 321,058 shares of common stock held by Ms. McOstrich's spouse,
Brent R. Mills.
(4) Includes 138,371 shares of our common stock owned by Warner, of which Mr.
Anton is President/Chief Operating Officer. Mr. Anton disclaims beneficial
ownership of these shares.
(5) Represents options to purchase shares of common stock issued under our stock
option plan that are immediately exercisable.
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<PAGE> 46
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is not intended to
be complete and is subject to and qualified in its entirety by reference to our
Amended and Restated Articles of Incorporation and our Amended and Restated
Bylaws, copies of each of which are filed as exhibits to the registration
statement of which this prospectus forms a part.
On March 30, 1999 our board of directors approved a transaction to issue
one share for every 6.007 shares of our common stock then outstanding, giving
effect to a 1-for-6.007 reverse stock split effective March 31, 1999. The
information provided in this prospectus gives effect to the stock split.
GENERAL
Immediately prior to the date of this prospectus, we had authorized capital
stock consisting of 10,000,000 shares of common stock, no par value, of which
1,954,442 shares were issued and outstanding. Immediately prior to the date of
this prospectus, there were six holders of record of our common stock.
We have reserved 303,526 shares of common stock for issuance under our 1996
Stock Option Plan, of which 225,939 shares were available for issuance as of
June 30, 1999.
COMMON STOCK
Holders of outstanding shares of our common stock are entitled to one vote
per share on all matters submitted to a vote of our shareholders. Except as may
be required by applicable law, holders of outstanding shares of our common stock
vote together as a single class. Holders of a majority of the outstanding shares
of our common stock constitute a quorum at any meeting of our shareholders, and
the vote by the holders of a majority of our common stock is required to effect
certain fundamental corporate changes, including liquidation, merger or sale of
substantially all of our assets.
Holders of our common stock are entitled to receive dividends if and when
declared by our board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities. Holders of our common stock have no preemptive rights or
other rights to subscribe for unissued or treasury shares or securities
convertible into or exercisable or exchangeable for shares of our common stock.
The outstanding shares of common stock are, and the shares of common stock being
offered in this prospectus when issued will be, duly authorized and validly
issued and, upon payment therefor, fully paid and nonassessable.
REGISTRATION RIGHTS
Under the terms of our distribution agreement with Warner, Warner is
entitled to have its shares registered by us under the Securities Act.
Specifically, following the expiration of the "lock-up" period to be agreed to
by existing shareholders, Warner may request that we register all or a part of
its shares. Warner may make this request no more than twice. Pursuant to the
terms of Warner's agreement, we will bear all registration expenses other than
underwriting discounts and commissions in connection with any such registration.
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ANTI-TAKEOVER LAW
Washington law contains provisions which could make our acquisition by a
third party more difficult. These provisions, summarized below, are expected to
discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Sunhawk.com to negotiate with us
first.
Chapter 19 of the Washington Business Corporation Act generally prohibits a
"target corporation," from engaging in a "significant business transaction" with
an "acquiring person," which is defined as a person or group of persons that
beneficially owns or acquires 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
"significant business transaction" or the acquisition of shares is approved by a
majority of the members of the target corporation's board of directors prior to
the time of acquisition. Prohibited "significant business transactions" include,
among other things:
- a merger or consolidation with, disposition of assets to or issuance or
redemption of stock to or from the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur, as
long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Our Amended and Restated Articles of Incorporation currently limit the
liability of directors to the fullest extent permitted by the Washington
Business Corporation Act. Consequently, subject to the Washington Business
Corporation Act, no director will be personally liable to us or our shareholders
for monetary damages resulting from his or her conduct as a director of
Sunhawk.com, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our Amended and Restated Bylaws provide for indemnification of our directors,
officers, employees and agents to the maximum extent permitted by Washington
law. Our directors and officers also may be indemnified against liability they
may incur for serving in those capacities pursuant to our liability insurance
policy maintained for such purpose.
To the extent the provisions of our corporate governance documents provide
for indemnification of directors or officers for liabilities arising under the
Securities Act those provisions are, in the opinion or the Securities and
Exchange Commission, against public policy as expressed in the Securities Act
and are therefore unenforceable.
46
<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Sales of a substantial amount of common stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the common stock prevailing from time to time in the public market and
could impair our ability to raise additional capital through the sale of our
equity securities in the future.
Upon completion of this offering, there will be 3,154,442 shares of our
common stock outstanding, 3,334,442 shares if the underwriters' over-allotment
option is exercised in full, consisting of 1,200,000 shares of common stock
being offered in this prospectus 1,380,000 shares if the underwriters'
over-allotment option is exercised in full and 1,940,851 restricted shares of
common stock. In addition, we have reserved 303,526 shares of common stock for
issuance under our 1996 Stock Option Plan, of which 26,214 shares were subject
to outstanding options and 225,939 shares were available for future issuance as
of June 30, 1999.
The shares of common stock currently being offered will be freely tradable
without restriction or further registration under the Securities Act by persons
other than our affiliates. The restricted shares will be freely tradable if
subsequently registered under the Securities Act or to the extent permitted by
Rules 144 or 701 or some other exemption from registration under the Securities
Act, subject to the "lock-up" provisions to be agreed to by existing
shareholders.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of restricted shares from Sunhawk.com or an
affiliate of Sunhawk.com, the holder is entitled to sell, in the public market,
within any three-month period, that number of shares of common stock which does
not exceed the greater of 1% of the total number of then outstanding shares of
common stock or the average weekly trading volume of shares of common stock
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and
availability of current public information about Sunhawk.com. If two years have
elapsed, a holder, other than an affiliate of Sunhawk.com, is entitled to sell
restricted shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale requirements, public information requirements
or notice requirements.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell such shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
Of the restricted shares, 12,331 shares of common stock will be eligible
for sale under Rule 144 under the Securities Act 90 days after the date of this
prospectus, subject to the lock-up provisions described below.
Pursuant to the underwriting agreement between us and the underwriters of
this offering, shareholders who hold shares of our common stock issued prior to
the date of the closing of this offering or have been granted options to
purchase shares of our common stock prior to such date will not be able to,
directly or indirectly, offer, sell, announce an
47
<PAGE> 49
intention to sell, contract to sell, pledge, hypothecate, grant any option to
purchase or otherwise dispose of any shares of our common stock or any
securities convertible into or exchangeable or exercisable for shares of our
common stock for a period of 24 months following the closing of this offering
without the prior written consent of the Representative. The shares of common
stock currently being offered will not be subject to this "lock-up" provision
and will be freely tradable. We have also agreed not to file with the Securities
and Exchange Commission a registration statement under the Securities Act
relating to any of these shares during this 24-month "lock-up" period.
48
<PAGE> 50
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among us and the underwriters named below, each of the underwriters has
severally agreed to purchase from us, and we have agreed to sell to the
underwriters, the number of shares of common stock set forth below opposite each
underwriter's name, at the initial public offering price per share less the
underwriting discounts and commissions set forth on the cover page of this
prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Coleman and Company Securities, Inc. .......................
Nolan Securities Corporation................................
Win Capital Corp. ..........................................
---------
Total............................................. 1,200,000
=========
</TABLE>
The underwriting agreement sets forth that the obligations of the several
underwriters to pay for and accept delivery of the shares and provides that the
several underwriters will purchase all of the shares, if any of the shares are
purchased.
The representative has advised us that the underwriters initially propose
to offer the shares of common stock directly to the public at the initial public
offering price per share set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The underwriters may allow, and these dealers may reallow, a concession
not in excess of $ per share to other dealers. After this offering, the
public offering price, concession and re-allowance may be changed.
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to an aggregate
of 180,000 additional shares of common stock at the initial public offering
price per share less the underwriting discounts and commissions set forth on the
cover page of this prospectus. The underwriters may exercise this option only to
cover over-allotments, if any, made in connection with the sale of the shares of
common stock offered hereby. To the extent that the underwriters exercise this
option, each underwriter will be obligated, subject to certain conditions, to
purchase the number of additional shares of common stock proportionate to the
underwriters' initial commitment reflected in the preceding table.
We have agreed to pay the representative a non-accountable expense
allowance equal to 2% of the gross proceeds of this offering, of which $35,000
has already been paid, to cover the underwriting costs and due diligence
expenses relating to this offering.
We have agreed to permit the representative to have an observer attend
meetings of our board of directors for a period of three years from the
effective date of the registration statement of which this prospectus forms a
part. The representative's observer will be reimbursed for all out-of-pocket
expenses incurred in connection with the observer's attendance at meetings of
our board of directors and will receive cash compensation equal to the cash
compensation payable by us to our outside directors for attendance at meetings
of our board of directors, provided, however, that the per meeting fees payable
to the representative's observer shall not be less than $1,500 and that there
shall be a minimum of four meetings per year. The representative shall also
receive the same coverage under our directors and officers insurance policy that
is extended to our officers and directors. Additionally, the representative has
been retained as our investment banking advisor for a
49
<PAGE> 51
12-month period commencing upon the closing of this offering, and, for such
services, we have agreed to pay the representative a one-time fee of $36,000 at
the closing of this offering.
We and the underwriters have agreed to indemnify each other against, or to
contribute to losses arising out of, untrue statements or omissions of material
facts contained in this prospectus and the registration statement of which it is
a part in connection with this offering. We and the underwriters are each aware
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase shares so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the representative, on behalf of the
underwriters, to reclaim a selling concession from a syndicate member when the
shares originally sold by the syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. Such over-allotment,
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq SmallCap(R) Market or otherwise and, if commenced, may be discontinued at
any time.
Application has been made for quotation of the common stock on the Nasdaq
SmallCap(R) Market under the symbol "SNHK," and listing on the Pacific Stock
Exchange under the symbol "SNH."
Prior to this offering, there has been no public trading market for our
common stock. The public offering price of the shares of common stock offered
hereby will be determined by negotiation between us and the representative.
Factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, include the history of and prospects
for the industry in which we operate, an assessment of our management, our
prospects, our capital structure and such other factors as are deemed relevant.
In connection with this offering, we have agreed to sell the
representative's warrants to the representative for a nominal price. The
representative's warrants entitle the representative to purchase shares in an
amount equal to 10% of the total number of shares sold in this offering
(excluding shares subject to the underwriters' over-allotment option). The
shares issuable upon exercise of the representative's warrants will be in all
respects identical to the shares offered to you. The representative's warrants
will be limited to a term of five years from the date of this prospectus and
will be exercisable for a three-year period commencing 24 months after the date
of this prospectus, at a per share exercise price equal to 134% of the initial
public offering price per share set forth on the cover page of this prospectus.
The representative's warrants may not be sold, assigned, transferred, pledged or
hypothecated except to the underwriters' officers, directors and employees.
Pursuant to the terms of the underwriting agreement, we are registering the
shares issuable upon exercise of the representative's warrants under the
registration statement of which
50
<PAGE> 52
this prospectus forms a part, and we have agreed to use our best efforts to
permit the public sale of the shares issued or issuable upon exercise of the
representative's warrants and to include all or part of the shares underlying
the representative's warrants in future registration statements at our expense.
For the term of the representative's warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of the common stock, which
may result in a dilution of the interest of other shareholders. As a result, we
may find it more difficult to raise additional equity capital if it should be
needed for our business while the representative's warrants are outstanding. The
holders of the representative's warrants might be expected to exercise them at a
time when we would, in all likelihood, be able to obtain additional equity
capital on terms more favorable to us than those provided by the
representative's warrants. Any profit realized on the sale of the shares
issuable upon the exercise of the representative's warrants may be deemed
additional underwriting compensation.
The preceding description includes a summary of the principal terms of the
underwriting agreement and the representative's warrant agreement and does not
purport to be complete. The underwriting agreement and the representative's
warrant agreement are filed as exhibits to the registration statement of which
this prospectus forms a part and should be referenced for the complete contents
of these documents. Each statement is qualified in all respects by reference to
these documents.
On June 25, 1999, the National Association of Securities Dealers
Regulation, Inc. issued a decision finding that on November 27, 1995, while
under different ownership, the representative unjustifiably terminated a firm
commitment underwriting. Pursuant to the decision, the representative was fined
$200,000 and was suspended for a period of three months from acting as an
underwriter and an additional nine months from acting as lead managing
underwriter. The decision was to become effective 45 days after June 25, 1999,
however, because the representative is appealing the decision, it will not
become effective until such appeal is finally adjudicated. Accordingly, the
representative does not believe that the NASD decision will adversely affect
this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer and Trust Company.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed on
for us by The Otto Law Group, PLLC of Seattle, Washington. Effective upon the
closing of this offering, The Otto Law Group has been granted options under our
1996 Stock Option Plan to purchase 7,500 shares of our common stock vesting over
five years at an exercise price equal to the initial public offering price per
share of the shares offered in this prospectus.
Certain legal matters related to this offering will be passed on for the
underwriters by Kelley Drye & Warren LLP of New York, New York.
51
<PAGE> 53
EXPERTS
The financial statements of Sunhawk.com at September 30, 1997 and 1998, and
for the years then ended, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere in this prospectus, and are
included in reliance given on such report given on the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the common stock
being offered. This prospectus, filed as a part of such registration statement,
does not contain all the information set forth in the registration statement,
portions of which have been omitted in accordance with the rules and regulations
of the Securities and Exchange Commission. For further information with respect
to us and our common stock we are offering, reference is made to the
registration statement. Statements made in this prospectus as to the contents of
any contract or document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement and each such statement is qualified in
its entirety by such reference. The registration statement, including the
exhibits and schedules thereto, may be inspected without charge at the Public
Reference Room of the Securities and Exchange Commission, Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington D.C. 20549, and the regional
offices of the Securities and Exchange Commission at Seven World Trade Center,
Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained at prescribed rates from the Public Reference Room of the Securities
and Exchange Commission at Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W. Washington D.C. 20549. You may obtain information regarding the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains a web site that
contains registration statements, reports, proxy statements and other
information regarding registrants (including Sunhawk.com) that file
electronically with the Securities and Exchange Commission. The address of the
Securities and Exchange Commission's web site is www.sec.gov.
As a result of this offering, we will be subject to the informational
requirements of the Exchange Act. So long as we are subject to the informational
reporting requirements of the Exchange Act, we will provide our shareholders
with annual reports containing audited financial statements and interim
quarterly reports containing unaudited financial information.
52
<PAGE> 54
SUNHAWK.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Financial Statements
Balance Sheets as of September 30, 1997 and 1998, and June
30, 1999
(Unaudited)............................................... F-3
Statements of Operations for the Years Ended September 30,
1997 and 1998, and the Nine Months Ended June 30, 1998 and
1999 (Unaudited).......................................... F-4
Statements of Shareholders' Equity (Deficit) for the Years
Ended September 30, 1997 and 1998, and the Nine Months
Ended June 30, 1999 (Unaudited)........................... F-5
Statements of Cash Flows for the Years Ended September 30,
1997 and 1998, and the Nine Months Ended June 30, 1998 and
1999 (Unaudited).......................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Sunhawk.com Corporation
We have audited the accompanying balance sheets of Sunhawk.com Corporation
as of September 30, 1997 and 1998, and the related statements of operations,
shareholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of Sunhawk.com Corporation
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Sunhawk.com Corporation as
of September 30, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Seattle, Washington
April 9, 1999, except for Note 13
as to which the date is June 10, 1999
F-2
<PAGE> 56
SUNHAWK.COM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 23,628 $ 59,093 $ 705,320
CD-ROMs and printed sheet music......... 18,822 16,507 17,090
Prepaid rent............................ -- 27,234 47,234
----------- ----------- -----------
Total current assets............ 42,450 102,834 769,644
Property and equipment, net............... 126,610 195,880 225,029
Other assets:
Digital sheet music masters (net of
accumulated amortization of $1,804,
$10,151, and $33,698 in 1997, 1998,
and 1999, respectively).............. 17,385 69,868 333,113
Patent and trademarks, at cost (net of
accumulated amortization of $1,091,
$3,926, and $10,088 in 1997, 1998,
and 1999, respectively).............. 26,386 77,240 84,179
Music catalog distribution rights (net
of accumulated amortization of
$37,689 in 1999)..................... -- -- 1,281,429
Deferred offering costs................. -- -- 498,124
Deposits................................ -- 62,694 62,694
----------- ----------- -----------
Total other assets.............. 43,771 209,802 2,259,539
----------- ----------- -----------
Total assets.................... $ 212,831 $ 508,516 $ 3,254,212
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses... $ 44,202 $ 92,162 $ 345,561
Payable to Eller McConney LLC........... -- 10,850 115,546
Notes payable to shareholder............ 1,513,465 2,927,367 --
Accrued interest to shareholder......... 87,487 286,039 113,928
----------- ----------- -----------
Total current liabilities....... 1,645,154 3,316,418 575,035
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares -- 1,000,000
Outstanding shares -- none........... -- -- --
Common stock, no par value:
Authorized shares -- 20,000,000
Outstanding shares -- 1,232,863,
1,245,194, and 1,953,693 in 1997,
1998, and 1999, respectively....... 97,221 197,221 3,344,994
Accumulated deficit..................... (1,529,544) (3,005,123) (665,817)
----------- ----------- -----------
Total shareholders' equity
(deficit)..................... (1,432,323) (2,807,902) 2,679,177
----------- ----------- -----------
Total liabilities and
shareholders' equity
(deficit)..................... $ 212,831 $ 508,516 $ 3,254,212
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
SUNHAWK.COM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------ ---------------------------
1997 1998 1998 1999
--------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales...................... $ 15,066 $ 27,263 $ 18,810 $ 75,941
Cost of goods sold:
Royalties, materials,
shipping, and credit
card processing
fees.................. 3,210 14,170 4,916 46,285
Amortization of digital
sheet music and music
catalog distribution
rights................ 1,804 8,347 5,602 61,235
--------- ----------- --------- -----------
5,014 22,517 10,518 107,520
--------- ----------- --------- -----------
Gross profit (loss)........ 10,052 4,746 8,292 (31,579)
Selling, general and
administrative........... 854,458 1,353,871 911,096 1,765,527
--------- ----------- --------- -----------
Loss from operations....... (844,406) (1,349,125) (902,804) (1,797,106)
Interest income............ -- -- -- 10,589
Interest expense on notes
payable to
shareholders............. (66,577) (126,454) (91,749) (113,928)
--------- ----------- --------- -----------
Net loss................... $(910,983) $(1,475,579) $(994,553) $(1,900,445)
========= =========== ========= ===========
Net loss per share:
Basic and diluted........ $ (0.78) $ (1.19) $ (0.80) $ (1.33)
========= =========== ========= ===========
Weighted average common
shares for net loss per
share computations:
Basic and diluted..... 1,173,402 1,239,790 1,236,681 1,433,274
========= =========== ========= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
SUNHAWK.COM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK SHAREHOLDERS'
----------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, October 1, 1996....... 898,963 $ 901 $ (618,561) $ (617,660)
Exercise of common stock
options................... 12,842 -- -- --
Sale of common stock......... 321,058 4 -- 4
Compensation related to sale
of common stock........... -- 96,316 -- 96,316
Net loss..................... -- -- (910,983) (910,983)
--------- ---------- ----------- -----------
Balance, September 30, 1997.... 1,232,863 97,221 (1,529,544) (1,432,323)
Sale of common stock......... 12,331 100,000 -- 100,000
Net loss..................... -- -- (1,475,579) (1,475,579)
--------- ---------- ----------- -----------
Balance, September 30, 1998.... 1,245,194 197,221 (3,005,123) (2,807,902)
Exercise of common stock
options (unaudited)....... 38,526 -- -- --
Issuance of common stock to
acquire music catalog
distribution rights
(unaudited)............... 138,371 1,319,118 -- 1,319,118
Sale of common stock
(unaudited)............... 157,345 1,500,000 -- 1,500,000
Conversion of notes payable
to shareholders, including
notes payable forgiveness
of $1,000,000
(unaudited)............... 374,257 4,568,406 -- 4,568,406
Recapitalization of
accumulated deficit due to
termination of "S"
corporation status
effective April 1, 1999
(unaudited)............... -- (4,239,751) 4,239,751 --
Net loss (unaudited)......... -- -- (1,900,445) (1,900,445)
--------- ---------- ----------- -----------
Balance, June 30, 1999
(unaudited).................. 1,953,693 $3,344,994 $ (665,815) $ 2,679,177
========= ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
SUNHAWK.COM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------ --------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................... $(910,983) $(1,475,579) $(994,553) $(1,900,445)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ 42,944 79,683 33,062 77,098
Amortization............................ 2,895 11,182 6,815 67,398
Stock compensation...................... 96,316 -- -- --
Loss on disposal of property and
equipment............................ 16,270 4,061 2,756 --
Changes in operating assets and
liabilities:
Decrease (increase) in CD-ROMs and
printed sheet music................ (2,424) 2,315 (4,466) (583)
Increase in prepaid.................. -- (27,234) -- (20,000)
Increase in deposits................. -- (62,694) (3,728) --
Increase in accounts payable and
accrued expenses................... 33,940 47,960 24,538 253,399
Increase in payable to Eller McConney
LLC................................ -- 10,850 6,490 104,696
Accrued interest on notes payable to
shareholder........................ 66,577 198,552 91,749 113,928
--------- ----------- --------- -----------
Net cash used in operating activities....... (654,465) (1,210,904) (837,337) (1,304,509)
INVESTING ACTIVITIES
Purchases of property and equipment......... (97,216) (153,014) (83,971) (106,247)
Purchase of digital sheet music masters..... (19,189) (60,830) (50,471) (286,792)
Investment in patents and trademarks........ (27,301) (53,689) (24,236) (13,101)
--------- ----------- --------- -----------
Net cash used in investing activities....... (143,706) (267,533) (158,678) (406,140)
FINANCING ACTIVITIES
Proceeds from sale of common stock to
existing shareholders..................... 4 100,000 100,000 1,500,000
Proceeds from notes payable issued to
shareholders.............................. 794,377 1,413,902 926,000 1,355,000
Increase in deferred offering costs......... -- -- -- (498,124)
--------- ----------- --------- -----------
Net cash provided by financing activities... 794,381 1,513,902 1,026,000 2,356,876
--------- ----------- --------- -----------
Net increase (decrease) in cash............. (3,790) 35,465 29,985 646,227
Cash at beginning of period................. 27,418 23,628 23,628 59,093
--------- ----------- --------- -----------
Cash at end of period....................... $ 23,628 $ 59,093 $ 53,613 $ 705,320
========= =========== ========= ===========
NONCASH SUPPLEMENTARY DISCLOSURE
Issuance of common stock in conjunction with
the acquisition of music catalog
distribution rights....................... $ -- $ -- $ -- $ 1,319,118
Conversion of notes payable and accrued
interest to shareholders to common
stock..................................... -- -- -- (3,568,406)
Forgiveness of notes payable to
shareholder............................... -- -- -- (1,000,000)
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND LIQUIDITY
BUSINESS AND ORGANIZATION
Sunhawk.com Corporation (Sunhawk.com) was incorporated in the state of
Washington on August 20, 1992. Sunhawk.com sells interactive digital sheet music
in its proprietary format, traditional printed sheet music and CD-ROMs on their
internet retail site at www.sunhawk.com. Sunhawk.com's internally developed
proprietary technology allows customers to view, play, print and store the
encrypted digital sheet music files.
LIQUIDITY
At September 30, 1998, Sunhawk.com had cash of $59,093 available to fund
operations. For the year ended September 30, 1998, Sunhawk.com recorded a net
loss of $1,475,579, and at September 30, 1998, Sunhawk.com had an accumulated
deficit of $3,005,123 and a shareholders' deficit of $2,807,902.
On March 30, 1999, the Board of Directors of Sunhawk.com approved the sale
of 531,602 shares of common stock to the Eller and McConney 1995 Family Living
Trust in exchange for cash of $335,000, a note receivable of $1,165,000, and the
exchange of outstanding notes payable to a shareholder of $3,568,406 outstanding
at March 31, 1999. ($2,213,406 of notes payable to shareholder, including
accrued interest, as of September 30, 1998 plus additional borrowings provided
to Sunhawk.com during the six months ended March 31, 1999 of $1,355,000). The
note receivable bore interest at an annual rate of 8% and was paid in cash on
April 8, 1999. In addition, on March 31, 1999, The Eller and McConney Family
Living Trust contributed capital of $1,000,000 by forgiving the remaining notes
payable to shareholder outstanding at that date. Without these transactions,
Sunhawk.com would have had a shareholders' deficit of $3,389,229 at June 30,
1999, which includes the loss of $1,900,445 for the period then ended and the
issuance of common stock to acquire music catalog distribution rights of
$1,319,118. However, as a result of this transaction Sunhawk.com is in a
positive equity position of $2,679,177 at June 30, 1999.
Sunhawk.com has financed its operations and capital expenditures through
borrowings from the Eller and McConney 1995 Family Living Trust. Sunhawk.com's
business will require additional equity or debt financing to operate and as such
is dependent on the continued cooperation of the Eller and McConney 1995 Family
Living Trust to provide financing. The loss of such financing could be difficult
or impossible to replace. If funds are not raised from new investors (see Note
13 -- Subsequent Events, Initial Public Offering), the Eller and McConney 1995
Family Living Trust has agreed to continue to finance Sunhawk.com albeit at a
reduced level. As compared to the current level of operating and capital
expenditures, this would require Sunhawk.com to reduce its expenditures. In such
case, Sunhawk.com's expenditures would be lower than what would be planned if
the same or a higher level of funding was available.
F-7
<PAGE> 61
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that impact amounts reported in the financial statements and
accompanying notes. Actual results could differ from those amounts reported and
disclosed herein.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 1999 and for the nine months ended
June 30, 1998 and 1999 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that Sunhawk.com considers necessary for a
fair presentation of the financial position at such dates and the operations and
cash flows for the periods then ended. Operating results for the nine months
ended June 30, 1999 are not necessarily indicative of results that may be
expected for the entire year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets, which range from three to seven years.
DIGITAL SHEET MUSIC MASTERS
Digital sheet music masters are valued at cost less accumulated
amortization. Digital sheet music masters are amortized over the shorter of (1)
the estimated useful life of the music category, or (2) the estimated useful
life of the related electronic medium, or (3) the remaining term of the
underlying music licensing agreement (for licensed music), which generally
ranges from five to fifteen years. As of September 30, 1998, the estimated
useful life of digital music masters ranged from five to fifteen years.
Amortization expense is included in the cost of goods sold.
PATENTS AND TRADEMARKS
Patents and trademarks are stated at cost less accumulated amortization.
Amortization is calculated on a straight-line basis over fifteen years.
Amortization expense amounted to $1,091 and $2,835 during the years ended
September 30, 1997 and 1998, respectively. Sunhawk.com periodically evaluates
these intangible assets for impairment.
REVENUE RECOGNITION
Revenue from product sales is recorded when products are purchased and
downloaded by customers via Sunhawk.com's web site or shipped via regular mail
or overnight courier. Shipping charges are separately charged to the customers
and are included in sales.
F-8
<PAGE> 62
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ROYALTIES
In conjunction with the various distribution agreements, Sunhawk.com is
required to pay royalties ranging from 10% to 70% on gross receipts less credit
card processing fees to the respective music publishers on each digital music
title sold. Total royalty expense incurred during the years ended September 30,
1997 and 1998 amounted to $0 and $4,183, respectively, and is recorded in cost
of goods sold.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense totaled
$21,557 and $36,005 during the years ended September 30, 1997 and 1998,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in
the accompanying financial statements in selling, general and administrative.
Research and development expenses totaled $126,017 and $93,529 during the years
ended September 30, 1997 and 1998, respectively.
INCOME TAXES
The shareholders of Sunhawk.com changed their election from an "S"
corporation to a "C" corporation effective April 1, 1999. As an "S" corporation,
any tax liability or benefit passed directly through to the shareholders.
Accordingly, Sunhawk.com did not realize any tax provision or benefit prior to
April 1, 1999.
Subsequent to March 31, 1999, Sunhawk.com accounts for income taxes under
the liability method. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to be
recovered. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized.
STOCK-BASED COMPENSATION
Sunhawk.com accounts for stock-based compensation using the intrinsic value
method and provides pro forma footnote disclosure of the impact of the fair
value method.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed based on the
weighted-average number of common shares outstanding during each period.
F-9
<PAGE> 63
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- JUNE 30,
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment..................... $192,205 $ 302,574 $ 369,367
Furniture................................... 9,219 39,295 50,012
Other....................................... 8,961 17,469 21,729
-------- --------- ---------
210,385 359,338 441,108
Less accumulated depreciation............... (83,775) (163,458) (216,079)
-------- --------- ---------
$126,610 $ 195,880 $ 225,029
======== ========= =========
</TABLE>
4. DISTRIBUTION AGREEMENTS
In May and June 1998, Sunhawk.com entered into distribution agreements with
Warner Bros. Publications U.S. Inc. (Warner) and EMI Christian Music Publishing
(EMIC), respectively. These agreements provide Sunhawk.com with nonexclusive
rights to distribute selected digital sheet music from the respective music
catalogs maintained by Warner and EMIC. The terms of the agreements are
approximately ten and five years, respectively.
The Warner agreement provides Sunhawk.com with nonexclusive right to
distribute selected digital sheet music from the Warner music catalog. As a
nonforfeitable part of the consideration and as inducement to enter into the
agreement, Sunhawk.com agreed to issue 138,371 shares of its common stock to
Warner, contingent upon either the closing of a firmly underwritten public
offering or the private sale or other disposition of 15% or more of
Sunhawk.com's common stock then authorized and outstanding. Upon the contingency
being removed, the shares become fully vested and nonforfeitable.
As a result of the sale of common stock to certain founders on March 31,
1999, the contingency was removed and the shares were issued to Warner. The
value of the shares of common stock issued to Warner were measured at the fair
value of common stock on issuance date and capitalized as a long-term asset,
which will be amortized over the remaining life of the distribution agreement.
5. NOTES PAYABLE TO SHAREHOLDER
Sunhawk.com has entered into two demand note payable agreements with a
shareholder dated September 30, 1998. If no demand for payment is received, then
they are due two years after the execution date of the note. The notes are
updated annually, with the current year borrowings and accrued interest being
added to the total amount outstanding. The ultimate due dates are accordingly
reset to two years from the updated execution date. Unless demand is made, the
notes are due on September 30, 2000. The
F-10
<PAGE> 64
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. NOTES PAYABLE TO SHAREHOLDER (CONTINUED)
notes carry interest at the federal applicable short-term rate, or approximately
6%. To date, no payments (principal or interest) have been made on the notes.
On March 31, 1999, the shareholder exchanged these notes, including
interest accrued through September 30, 1998 for 374,257 shares of common stock.
Interest accrued during the six-month period ended March 31, 1999 of $113,928
was not converted to shares of common stock and is included in accrued interest
on notes payable to shareholder. The accrued interest to shareholder is expected
to be paid on September 29, 1999.
6. SHAREHOLDERS EQUITY
In October 1996, in conjunction with the sale of 321,058 shares of common
stock to an employee for past services for $4.00, Sunhawk.com recorded
compensation expense of $96,316. The compensation expense represented the
difference between the value of consideration paid for the common stock and the
fair market value at the date of issuance.
7. STOCK OPTIONS
STOCK OPTION PLAN
Under the terms of Sunhawk.com's 1996 Stock Option Plan, the Board of
Directors was authorized to issue 513,374 shares of common stock through
incentive and nonqualified stock options to any former, current, or future
employees, officers, directors, agents or consultants, including members of
technical advisory boards, and any independent contractors of Sunhawk.com. On
March 30, 1999, the Board of Directors amended the 1996 Stock Option Plan to
reduce the authorized shares to issue to 303,526. Generally, stock compensation,
if any, is measured as the difference between the exercise price of a stock
option and the fair market value of Sunhawk.com's stock at the date of grant,
which is then amortized over the related service period. Options are granted
with exercise prices equal to the fair market value of the common stock on the
date of the grant, as determined by Sunhawk.com's Board of Directors. Options
vest over a five-year period and expire ten years from the date of grant.
Sunhawk.com applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock options issued to employees
in the accompanying financial statements because the fair value of the
underlying common stock equals the exercise price of the stock options granted.
Had the stock compensation expense for Sunhawk.com's stock option plan been
determined based on the fair value at the grant dates for options granted in
1997 and 1998, consistent with the fair value method of Statement of Financial
Accounting Standards No. 123, Sunhawk.com's net loss for the
F-11
<PAGE> 65
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
7. STOCK OPTIONS (CONTINUED)
years ended September 30, 1997 and 1998 would have been increased to the
following pro forma amount:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Net loss:
As reported................................... $910,983 $1,475,579
Pro forma..................................... $911,609 $1,486,649
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Minimum Value Option Pricing model using the following weighted-average
assumptions: risk-free interest rate of 6.11% and 5.49% for 1997 and 1998,
respectively; expected life of five years; and dividend yield of 0%.
A summary of the status of Sunhawk.com's stock option plan as of September
30, 1998 and changes during the year then ended is presented below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------- -----------
<S> <C> <C>
Balance at October 1, 1996............................. 0 $--
Options granted, at estimated fair value............. 91,180 1.08
Options exercised.................................... (12,842) 0.0000096
-------
Balance at September 30, 1997.......................... 78,338 1.27
Options granted, at estimated fair value............. 18,146 12.65
Options canceled..................................... (11,487) 6.67
-------
Balance at September 30, 1998.......................... 84,997 2.97
Options exercised (unaudited)........................ (38,526) 0.0000096
Options canceled (unaudited)......................... (20,250) 2.55
-------
Balance at June 30, 1999 (unaudited)................... 26,214 7.64
=======
</TABLE>
At September 30, 1998, and June 30, 1999 (unaudited) options to acquire
415,535 and 225,939 shares, respectively, of common stock were available for
future grant.
F-12
<PAGE> 66
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
7. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING
NUMBER OF WEIGHTED-AVERAGE CONTRACTED LIFE
EXERCISE PRICE SHARES EXERCISE PRICE (YEARS)
----------------- --------- ---------------- --------------------
<S> <C> <C> <C>
$0.0000096 - $0.30 63,356 $ 0.07 8.02
$0.31 - $8.11 12,652 $ 8.11 9.20
$8.12 - $16.22 8,989 $16.22 9.79
------
84,997
======
</TABLE>
As of September 30, 1998 and June 30, 1999 (unaudited), in connection with
the stock option plan, 500,532 and 252,158 shares, respectively, of common stock
were available for future issuance. At September 30, 1998, 25,684 options were
exercisable at an exercise price of $0.0000096 per share.
8. COMMITMENTS
Sunhawk.com leases office space under an operating lease agreement expiring
in 2001. Future minimum lease payments under noncancelable operating leases at
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Year ending September 30:
1999....................................................... $ 372,390
2000....................................................... 326,808
2001....................................................... 326,808
----------
Total minimum lease payments............................... $1,026,006
==========
</TABLE>
Total rent expense paid during the years ended September 30, 1997 and 1998
amounted to $9,216 and $54,686, respectively.
9. FEDERAL INCOME TAXES
Sunhawk.com, with the consent of its shareholders, elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code from August
20, 1992 (date of inception) through March 31, 1999, when it became no longer
eligible to be taxed as such. Accordingly, through March 31, 1999, the
shareholders of Sunhawk.com were entitled to report on their personal income tax
returns their proportionate share of Sunhawk.com's operating losses. Effective
April 1, 1999, Sunhawk.com became subject to federal
F-13
<PAGE> 67
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
9. FEDERAL INCOME TAXES (CONTINUED)
corporate income taxes and therefore began to account for income taxes in
accordance with Statement of Financial Accounting Standard No. 109 "Accounting
for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Sunhawk.com's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
(UNAUDITED)
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 200,340
Accrued expense........................................... 18,663
---------
Total deferred tax assets................................... 219,003
Valuation allowance for deferred tax assets................. (175,357)
Net deferred tax assets..................................... 43,636
Deferred tax liabilities:
Depreciation and amortization............................. (27,586)
Prepaid................................................... (16,060)
---------
Total deferred tax liabilities.............................. (43,636)
---------
Net deferred tax assets..................................... $ 0
=========
</TABLE>
At June 30, 1999, Sunhawk.com had net operating loss carryforwards (NOLs)
of approximately $589,236, which, if not utilized, will begin expiring in the
year 2019. Utilization of NOLs may be limited in any given year by alternative
minimum tax (AMT) restrictions, depending upon each year's AMT calculation.
10. RELATED-PARTY TRANSACTIONS
Sunhawk.com pays to Eller McConney LLC, which is wholly owned by Marlin
Eller and Mary McConney, executive officers and trustees of a trust which owns a
majority of shares of Sunhawk.com, for certain services in connection with the
production of digital sheet music masters. These services are provided under an
informal agreement to Eller McConney LLC by Avtograf, a Russian joint stock
company in which Eller McConney LLC has a 94% interest. At September 30, 1998,
Sunhawk.com owed $10,850 to Eller McConney LLC for these services. The digital
sheet music masters for which production services were provided represented
approximately 16% of the digital music sheets acquired by Sunhawk.com during the
year ended September 30, 1998.
Marlin Eller, Chairman of the Board, Chief Executive Officer, and
President, and Mary McConney, Treasurer (Chief Financial Officer until June 10,
1999), of
F-14
<PAGE> 68
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
Sunhawk.com provided services to Sunhawk.com as officers of Sunhawk.com. They
have received no compensation for these services since the inception of
Sunhawk.com.
11. CONTINGENCIES
From time to time Sunhawk.com is subject to legal proceedings that arise in
the ordinary course of business that have not been fully adjudicated. In
management's opinion, these actions, when finally concluded and determined, will
not have a material adverse effect on the financial position or results of
operations of Sunhawk.com.
12. OTHER
REVERSE STOCK SPLIT
On March 30, 1999, Sunhawk.com's Board of Directors approved a transaction
to give one share for every 6.007 shares of common stock, thereby giving effect
to a 1-for-6.007 reverse stock split effective March 31, 1999. All outstanding
common and common equivalent shares and per-share amounts in the accompanying
financial statements and related notes to the financial statements have been
retroactively adjusted to give effect to the reverse stock split.
13. SUBSEQUENT EVENTS
NAME CHANGE
On June 10, 1999, Sunhawk.com's Articles of Incorporation were amended to
change the company's name to Sunhawk.com Corporation.
INITIAL PUBLIC OFFERING
On June 10, 1999, Sunhawk.com's Board of Directors authorized Sunhawk.com
to file a Registration Statement under the Securities Act of 1933, as amended,
to permit Sunhawk.com to proceed with an initial public offering of its common
stock.
RELATIONSHIP WITH ELLER MCCONNEY LLC
On June 10, 1999, Sunhawk.com's Board of Directors approved, subsequent to
the closing of the initial public offering, entering into a ten-year assignment
and assumption agreement with Avtograf, a Russian joint stock company in which
Eller McConney LLC holds a 94% ownership interest, Eller McConney LLC, and a new
independent Russian production company. The assumption and assignment agreement
will require that Eller McConney LLC assign to Sunhawk.com all of its rights to
receive from Avtograf its services for the production of digital sheet music in
exchange for a one-time payment to Eller McConney LLC of $600,000 in cash from
proceeds of Sunhawk.com's initial public offering. The one-time payment of
$600,000 in cash to Eller McConney LLC is expected to be accounted for as a
prepayment for services to be provided for the production of
F-15
<PAGE> 69
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
13. SUBSEQUENT EVENTS (CONTINUED)
digital sheet music from the new independent Russian production company with
recourse to Eller McConney LLC in the event of non-performance. In addition,
Avtograf will assign to the new independent Russian production company its
obligation to provide production services for digital sheet music. Thereafter,
the new independent Russian production company will be obligated to provide
production services for digital sheet music for Sunhawk.com at an anticipated
rate of a minimum of 2,250 pages per month, and a total of 270,000 over a period
of ten years at no additional cost to Sunhawk.com. Neither Eller McConney LLC,
Mr. Eller, Ms. McConney nor Sunhawk.com will have an interest in the new
independent Russian production company.
F-16
<PAGE> 70
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS,
"SUNHAWK.COM," "WE," "US" AND "OUR" REFER TO SUNHAWK.COM CORPORATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Forward-Looking Statements........... 13
Use of Proceeds...................... 14
Capitalization....................... 15
Dilution............................. 16
Dividend Policy...................... 16
Selected Financial Data.............. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 23
Management........................... 38
Certain Transactions................. 42
Principal Shareholders............... 44
Description of Securities............ 45
Shares Eligible for Future Sale...... 47
Underwriting......................... 49
Transfer Agent and Registrar......... 51
Legal Matters........................ 51
Experts.............................. 52
Where You Can Find More
Information........................ 52
Index to Financial Statements........ F-1
</TABLE>
UNTIL , 1999 ALL DEALERS THAT BUY, SELL OR TRADE SHARES OF OUR
COMMON STOCK, 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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,200,000 Shares
LOGO
SUNHAWK.COM CORPORATION
Common Stock
-----------------
PROSPECTUS
-----------------
COLEMAN AND COMPANY
SECURITIES, INC.
NOLAN SECURITIES
CORPORATION
WIN CAPITAL CORP.
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Amended and Restated Bylaws
(Exhibit 3.3 hereto) provides for indemnification of the registrant's directors,
officers, employees and agents to the maximum extent permitted by Washington
law. The directors and officers of the registrant also may be indemnified
against liability they may incur for serving in those capacities pursuant to a
liability insurance policy maintained by the registrant for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article VII of the registrant's Amended and Restated Articles of
Incorporation (Exhibit 3.1 hereto) contains provisions implementing, to the
fullest extent permitted by Washington law, such limitations on a director's
liability to the registrant and its shareholders.
The underwriting agreement (Exhibit 1.1 hereto) provides for reciprocal
indemnification between the underwriters and the registrant from and against
certain liabilities arising in connection with the offering which is the subject
of this registration statement.
II-1
<PAGE> 72
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the registrant in connection with the sale of
the securities being registered. All amounts are estimates except the Securities
and Exchange Commission registration fee, the NASD filing fee, the Nasdaq
SmallCap(R) listing fee and the Pacific Stock Exchange listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 3,391
NASD Filing Fee............................................. 1,604
Nasdaq SmallCap(R) Listing Fee.............................. 17,500
Pacific Stock Exchange Listing Fee.......................... 23,000
Printing Costs.............................................. 60,000
Legal Fees and Expenses..................................... 200,000
Accounting Fees and Expenses................................ 235,000
Blue Sky Fees and Expenses (including legal fees)........... 70,000
Transfer Agent and Registrar Fees........................... 25,000
Miscellaneous............................................... 38,505
--------
Total............................................. $674,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:
1. On October 9, 1996, the registrant sold 321,058 shares of the
registrant's common stock at a price of $0.0000112 per share for an
aggregate purchase price of $3.60 to one accredited investor in a private
transaction which was exempt from registration pursuant to Section 4(2) of
the Securities Act.
2. On December 4, 1996 and October 5, 1998, 12,842 and 25,684 shares
of the registrant's common stock, respectively, were issued to one
individual upon the exercise of stock options granted pursuant to the
registrant's 1996 Stock Option Plan at a per share exercise price of
$0.0000096 for total exercise prices of $0.12 and $0.25, respectively. Such
issuances were exempt from registration pursuant to Rule 701 under the
Securities Act.
3. On March 10, 1998, the registrant sold 12,331 shares of the
registrant's common stock at a price of $8.11 per share for an aggregate
purchase price of $100,004.41 to one accredited investor in a private
transaction which was exempt from registration pursuant to Section 4(2) of
the Securities Act.
4. On April 1, 1999, the registrant issued 138,371 shares of the
registrant's common stock pursuant to the distribution agreement by and
between the registrant and Warner Bros. Publications U.S. Inc. The
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act.
5. On March 31, 1999, the Eller and McConney 1995 Family Living Trust
converted $3,568,406 of debt owed to it by the registrant into 374,257
shares of the registrant's common stock at a price per share of $9.53. On
this same date, the Eller and McConney 1995 Family Living Trust forgave
$1,000,000 of long-term debt owed to it by the registrant and purchased an
additional 157,345 shares of the registrant's common stock for an aggregate
of $1,500,000, at a price per share of $9.53 per share.
II-2
<PAGE> 73
Such issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act.
6. On June 18, 1999, 12,842 shares of the registrant's common stock
were issued to one individual upon the exercise of stock options granted
pursuant to the registrant's 1996 Stock Option Plan at a per share exercise
price of $0.0000096 for a total exercise price of $0.12. Such issuance was
exempt from registration pursuant to Rule 701 under the Securities Act.
7. On July 6, 1999, 749 shares of the registrant's common stock were
issued to one individual upon the exercise of stock options granted
pursuant to the registrant's 1996 Stock Option Plan at a per share exercise
price of $0.30 for a total exercise price of $224.70. Such issuance was
exempt from registration pursuant to Rule 701 under the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
1.2++ Form of Representative's Warrant Agreement.
3.1# Amended and Restated Articles of Incorporation.
3.2** Certificate of Incorporation (Delaware).
3.3# Amended and Restated Bylaws.
3.4** Form of Bylaws (Delaware).
4.1+ Specimen Stock Certificate.
4.2 See Exhibits 3.1 and 3.3 for provisions defining the rights
of the holders of common stock.
5.1+ Opinion of The Otto Law Group, PLLC (including the consent
of such firm)regarding legality of the securities being
issued.
10.1# 1996 Stock Option Plan.
10.2*# Distribution Agreement dated May 18, 1998 by and between
Sunhawk.com Corporation and Warner Bros. Publications U.S.
Inc., as amended.
10.3*# Distribution Agreement dated as of June 12, 1998 by and
between EMI Christian Music Publishing and Sunhawk.com
Corporation.
10.4*# Music Conversion Agreement dated as of April 1, 1998 by and
between Sunhawk.com Corporation and International Music
Engraving Company, as amended.
10.5# Lease dated August 10, 1998 by and between 223 Taylor Corp.
and Sunhawk.com Corporation.
10.6+ Form of Employment Agreement between Sunhawk.com and Marlin
Eller.
23.1 Consent of Ernst & Young, LLP, Independent Auditors.
23.2 Consent of The Otto Law Group, PLLC (contained in Exhibit
5.1).
24.1 Power of Attorney (See Page II-5).
27.1# Financial Data Schedule.
</TABLE>
- -------------------------
* Confidential treatment requested.
+ To be filed by amendment.
++ Filed herewith.
** No longer applicable.
# Previously filed.
II-3
<PAGE> 74
ITEM 28. UNDERTAKINGS
The registrant will provide to the underwriters at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
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 Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of 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.
The registrant will:
For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of the registration statement as of
the time the Securities and Exchange Commission declared it effective.
For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial
bona fide offering of those securities.
II-4
<PAGE> 75
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 for filing on Form SB-2 and authorized this Amendment No. 2
to the registration statement to be signed on its behalf by the undersigned, in
the City of Seattle, State of Washington, on the 24th day of August, 1999.
SUNHAWK.COM CORPORATION
By: /s/ MARLIN ELLER
-----------------------------------
Marlin Eller,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the registration statement has been signed by the following
persons in the capacities indicated below on the 24th day of August, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MARLIN ELLER Chairman of the Board, Chief Executive
- ------------------------------------------------ Officer and President (Principal
Marlin Eller Executive Officer)
/*/ TRICIA PARKS-HOLBROOK Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting Officer)
Tricia Parks-Holbrook
/*/ FRED ANTON Director
- ------------------------------------------------
Fred Anton
/*/ PATRICIA TANGORA Director
- ------------------------------------------------
Patricia Tangora
/*/ LUIS F. TALAVERA Director
- ------------------------------------------------
Luis F. Talavera
*By /s/ THEODORE GRABOWSKI, JR.
-----------------------------------------------
As Attorney-In-Fact
</TABLE>
II-5
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
1.2++ Form of Representative's Warrant Agreement.
3.1# Amended and Restated Articles of Incorporation.
3.2** Certificate of Incorporation (Delaware).
3.3# Amended and Restated Bylaws.
3.4** Form of Bylaws (Delaware).
4.1+ Specimen Stock Certificate.
4.2 See Exhibits 3.1 and 3.3 for provisions defining the rights
of the holders of common stock.
5.1+ Opinion of The Otto Law Group, PLLC (including the consent
of such firm) regarding legality of the securities being
issued.
10.1# 1996 Stock Option Plan.
10.2*# Distribution Agreement dated May 18, 1998 by and between
Sunhawk.com Corporation and Warner Bros. Publications U.S.
Inc., as amended.
10.3*# Distribution Agreement dated as of June 12, 1998 by and
between EMI Christian Music Publishing and Sunhawk.com
Corporation.
10.4*# Music Conversion Agreement dated as of April 1, 1998 by and
between Sunhawk.com Corporation and International Music
Engraving Company, as amended.
10.5# Lease dated August 10, 1998 by and between 223 Taylor Corp.
and Sunhawk.com Corporation.
10.6+ Form of Employment Agreement between Sunhawk.com and Marlin
Eller.
23.1 Consent of Ernst & Young, LLP, Independent Auditors.
23.2 Consent of The Otto Law Group, PLLC (contained in Exhibit
5.1).
24.1 Power of Attorney (See Page II-5).
27.1# Financial Data Schedule.
</TABLE>
- -------------------------
* Confidential treatment requested.
+ To be filed by amendment.
++ Filed herewith.
** No longer applicable.
# Previously filed.
<PAGE> 1
EXHIBIT 1.1
1,200,000 SHARES OF COMMON STOCK
SUNHAWK.COM CORPORATION
UNDERWRITING AGREEMENT
New York, New York
August __, 1999
COLEMAN AND COMPANY SECURITIES, INC.
As Representative of the Several Underwriters
named in Schedule I hereto
575 Lexington Avenue, 14th Floor
New York, New York 10022
Ladies and Gentlemen:
Sunhawk.com Corporation, a Delaware corporation (the
"Company"), hereby confirms its agreement with Coleman and Company Securities,
Inc. ("Coleman"), and each of the underwriters named in Schedule I hereto
(collectively the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 11), for whom Coleman is acting
as the Representative (in such capacity Coleman shall hereinafter be referred to
as the "Representative"), with respect to the sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of the Company's common stock, $.0001 par value per
share ("Common Stock"), set forth in Schedule I hereto (the "Offering"). Such
shares are hereinafter referred to as the "Firm Securities." Upon your request,
as provided in Section 2(b) of this Agreement, the Company shall also issue and
sell to the Underwriters, acting severally and not jointly, up to an additional
180,000 shares of Common Stock for the purpose of covering over-allotments, if
any. Such additional shares of Common Stock are hereinafter referred to as the
"Option Securities." The Firm Securities and Option Securities, if purchased,
are hereinafter referred to as the "Underwritten Securities."
The Company also proposes to sell to the Representative for
nominal consideration, warrants (the "Warrants") pursuant to a warrant agreement
(the "Warrant Agreement") for the purchase, during a period commencing one year
after the date hereof and
<PAGE> 2
expiring on the fifth anniversary of the date hereof, of 120,000 shares of
Common Stock, subject to adjustment as provided in the Warrant Agreement (the
"Warrant Shares"), at an initial exercise price of $_______ per share, subject
to adjustment as provided in the Warrant Agreement. The Underwritten Securities,
the Warrants and the Warrant Shares (collectively, the "Securities") are more
fully described in the Registration Statement and the Prospectus referred to
below.
1. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters as of the date hereof, and
as of the Closing Date (as defined in Section 2(c) hereof) and the Option
Closing Date (as defined in Section 2(b) hereof), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (File No. 333-80849), including
the related preliminary prospectus dated June 17, 1999 and any subsequent
preliminary prospectus subject to completion ("Preliminary Prospectus"), for the
registration of the Securities, under the Securities Act of 1933, as amended
(the "Securities Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Securities Act, and the rules and regulations (the "Regulations") of the
Commission under the Securities Act. The Company has complied with the
conditions for the use of Form SB-2. The Company will promptly file a further
amendment to said registration statement in the form heretofore delivered to the
Underwriters and will not file any other amendment thereto to which the
Representative shall have objected in writing after having been furnished with a
copy thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial statements,
schedules, exhibits and all other documents filed as a part thereof and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the
"Prospectus." The Company may also file a related registration statement with
the Commission pursuant to Rule 462(b) of the Regulations for the purpose of
registering certain additional securities, which registration shall be effective
upon filing with the Commission. For purposes hereof, the "Rule 462 Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) of the Regulations including the Registration Statement and any
prospectus incorporated therein at the time such Registration Statement becomes
effective. For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor, to the Company's knowledge,
any state regulatory authority has issued any order preventing or suspending the
use of any Preliminary Prospectus, the Registration Statement or Prospectus or
any part of any thereof and no proceedings for a stop order suspending the
effectiveness of the Registration Statement has been instituted or are pending
or, to the best of the Company's knowledge, threatened. Each of any Preliminary
Prospectus, the Registration Statement and Prospectus at the time of filing
thereof contained all statements required to be stated therein and complied in
all material respects with
2
<PAGE> 3
the requirements of the Securities Act and the Rules and Regulations, and none
of any Preliminary Prospectus, the Registration Statement or Prospectus at the
time of filing thereof contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein and necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, provided, however, that this representation and warranty
does not apply to statements made or statements omitted in reliance upon and in
strict conformity with information furnished to the Company in writing by or on
behalf of any Underwriter expressly for use in any Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto (the "Underwriters' Information"). The Company acknowledges that the
Underwriters' Information shall include only such written information that is
contained under the caption "Underwriting."
(c) When the Registration Statement or any amendment thereto
becomes effective and through the last to occur of the Closing Date, Option
Closing Date, if any, or the last date the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus will contain all statements required
to be stated therein, and will comply in all material respects with the
requirements of the Securities Act and the Rules and Regulations. Neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
strict conformity with the Underwriters' Information.
(d) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with and
that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (ii) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Securities Act or the Commission has received payment
of such filing fee.
(e) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware. The Company has no subsidiaries. Except as set forth in the
Prospectus, the Company does not, directly or indirectly, own an interest in any
corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the conduct of its business requires such qualification or
licensing, except where the failure to be so qualified or licensed would not
have a material adverse effect on the condition, financial or otherwise,
earnings, stockholders' equity, value, operations, business, prospects or
results of operations of the Company (a "Material Adverse Effect.")
(f) The Company has all requisite corporate power and
authority and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits (collectively, the
"Approvals") of and from all governmental or regulatory officials
3
<PAGE> 4
and bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and conduct
its business as described in the Prospectus, except where the failure to have
such Approval would not have a Material Adverse Effect; the Company is and has
been doing business in compliance with all such Approvals and all federal, state
and local laws, rules and regulations, except where the failure to comply would
not have a Material Adverse Effect; and the Company has not received any notice
of proceedings relating to the revocation or modification of any Approval. The
disclosures in the Registration Statement concerning the effects of federal,
state and local laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(g) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus and will have the adjusted
capitalization set forth therein on the Closing Date and each Option Closing
Date, if any, based upon the assumptions set forth therein. The Company is not a
party to or bound by any instrument, agreement or other arrangement, including,
but not limited to, any voting trust agreement, stockholders' agreement or other
agreement or instrument, affecting the securities or rights or obligations of
securityholders of the Company or providing for any of them to issue, sell,
transfer or acquire any capital stock, rights, warrants, options or other
securities of the Company, except for this Agreement, the Warrant Agreement, the
Licensing and Distribution Agreement dated May 18, 1998, between the Company and
Warner Bros. Publications U.S. Inc., as amended, and as described in the
Registration Statement. The Securities and all other securities issued or
issuable pursuant to existing plans, agreements or arrangements relating to the
issuance of securities or currently outstanding options, warrants, rights or
other securities of the Company by the Company conform or, when issued and paid
for, will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been offered and sold by the Company
in compliance with or pursuant to an exemption from registration under the
Securities Act and applicable state securities law, have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any securityholders of the
Company or similar contractual rights granted by the Company. The Underwritten
Securities have been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof, will be validly issued, fully paid and
non-assessable. The Warrants have been duly authorized and when issued, paid for
and delivered in the manner contemplated by the Warrant Agreement, will be
validly issued and outstanding obligations of the Company entitled to the
benefits of the Warrant Agreement. The Warrant Shares issuable upon exercise of
the Warrants will, assuming payment therefore as set forth in the Warrant
Agreement, upon such issuance be duly authorized, validly issued, fully paid and
non-assessable, and the Company has duly authorized and reserved for issuance of
the Warrant Shares. The Securities are not and will not be subject to any
preemptive or other similar rights of any stockholder of the Company, all
corporate action required to be taken for the authorization, issue and sale of
the Securities and, in the case of Warrant Shares, reservation, has been duly
and validly taken; and the certificates representing the Securities will be in
due and proper form. Upon the issuance and delivery pursuant to the terms of
this Agreement of the Underwritten Securities to be sold by the Company
hereunder, the
4
<PAGE> 5
Underwriters will acquire good and marketable title to the Underwritten
Securities free and clear of any liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any kind
whatsoever (collectively, the "Liens"), except for Liens created or permitted to
exist by an Underwriter. Upon the issuance and delivery pursuant to the terms of
the Warrant Agreement, of the Warrants to be sold by the Company thereunder, the
Representative will acquire good and marketable title to the Warrants free and
clear of any Liens, except for Liens created or permitted to exist by the
Representative.
(h) The financial statements, including the related notes and
schedules of the Company, included in the Registration Statement, each
Preliminary Prospectus and the Prospectus fairly present in accordance with
generally accepted accounting principles the financial position, income, changes
in cash flow, changes in stockholder's equity and the results of operations of
the Company at the respective dates and for the respective periods to which they
apply and the as adjusted financial information included in the Registration
Statement, the Preliminary Prospectus and the Prospectus presents fairly on a
basis consistent with that of the audited financial statements included therein,
what the Company's as adjusted capitalization would have been for the respective
periods and as of the respective dates to which they apply after giving effect
to the adjustments described therein. Such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved.
Except as disclosed in the Prospectus, there has been no adverse change or
development involving an adverse change in the condition, financial or
otherwise, or in the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company taken as a whole,
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement, the Preliminary
Prospectus and the Prospectus, and the outstanding debt, the property, both
tangible and intangible, and the business of the Company conforms in all
material respects to the descriptions thereof contained in the Registration
Statement, the Preliminary Prospectus and the Prospectus. Financial information
set forth in the Preliminary Prospectus and Prospectus under the headings
"Summary Financial Information," "Selected Financial Data," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly presents, in all respects, on the basis stated in the
Preliminary Prospectus and Prospectus, the information set forth therein and has
been derived from or compiled on a basis consistent with that of the audited
financial statements included in the Preliminary Prospectus and Prospectus.
(i) The Company (i) has timely filed all federal, state, local
and foreign tax returns that it is required to file through the date hereof or
has timely requested extensions thereof, other than those filings being
contested in good faith, and has timely paid all federal, state, local and
foreign taxes shown to be due on such returns for which it is liable and has
timely furnished all information returns it is required to furnish; (ii) has
established adequate reserves for such taxes which are not due and payable or
which are being contested in good faith; and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
(j) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase from the Company of the
Underwritten Securities by the Underwriters, (iii) the purchase from the Company
of the Warrants by the Representative, (iv) the consummation by
5
<PAGE> 6
the Company of any of its obligations under this Agreement or the Warrant
Agreement or (v) resales of the Underwritten Securities in connection with the
distribution contemplated hereby.
(k) The Company maintains with insurers of recognized
financial responsibility insurance policies and surety bonds, including, but not
limited to, general liability and property insurance, which insures the Company
and its employees, against such losses and, to the best knowledge of the
Company, risks generally insured against by comparable businesses in amounts
which are prudent and customary in its business. The Company has not (i) failed
to give notice or present any insurance claim with respect to any matter,
including, but not limited to, the Company's business, property or employees,
under the insurance policy or surety bond in a due and timely manner; (ii) had
any disputes or claims against any underwriter of such insurance policies or
surety bonds or has failed to pay any premiums due and payable thereunder; or
(iii) failed to comply with all conditions contained in such insurance policies
and surety bonds wherein such failure or dispute would have a Material Adverse
Effect. To the best knowledge of the Company, there are no facts or
circumstances under any such insurance policy or surety bond which would relieve
any insurer of its obligation to satisfy in full any valid claim of the Company.
(l) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or, to the Company's best knowledge,
threatened against (or circumstances that may give rise to the same), or
involving the Company, its properties or its business which (i) questions the
validity of the capital stock of the Company, this Agreement, the Warrant
Agreement or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement or the Warrant Agreement; (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately and
completely summarized in all respects); or (iii) except as disclosed in the
Prospectus, might reasonably be expected to have a Material Adverse Effect.
(m) The Company has full legal right, corporate power and
authority to authorize, issue, deliver and sell the Securities, enter into this
Agreement and the Warrant Agreement and to consummate the transactions provided
for in such agreements. This Agreement has been duly and properly authorized,
executed and delivered by the Company. This Agreement constitutes, and when the
Company has duly executed and delivered the Warrant Agreement (assuming the due
execution and delivery thereof by the Representative), the Warrant Agreement
will constitute a legal, valid and binding agreement and obligation of the
Company enforceable against the Company in accordance with its respective terms,
except (i) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
affecting creditors' rights generally; (ii) as enforceability of any
indemnification or contribution provisions may be limited under applicable laws
or the public policies underlying such laws; and (iii) that the remedies of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceedings therefor may be brought. None of the Company's issue and sale of
the Securities, execution or delivery of this Agreement or the Warrant
Agreement, its performance hereunder and thereunder, its
6
<PAGE> 7
consummation of the transactions contemplated herein and therein, or the conduct
of its business as described in the Registration Statement, any Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any Lien upon any
property or assets (tangible or intangible) of the Company pursuant to the terms
of, (i) the certificate of incorporation or by-laws of the Company; (ii) any
material license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or is or may be bound or
to which its properties or assets (tangible or intangible) is or may be subject,
or any indebtedness; or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory body
or administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or any of
its activities or properties, in each case, except, in the case of clauses (ii)
and (iii) such conflicts, breaches, violations, defaults, creations or
impositions which do not and would not have a Material Adverse Effect.
(n) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for performance by the Company of this
Agreement and the Warrant Agreement and the transactions contemplated hereby and
thereby, except such as (i) have been obtained or (ii) may be required under
state securities or blue sky laws or the Rules of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the Underwriters'
purchase and distribution of the Underwritten Securities and the
Representative's purchase of the Warrants or with respect to listing of the
Underwritten Securities or Warrant Shares on the Nasdaq SmallCap Market and the
Pacific Stock Exchange.
(o) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which the
Company may be currently bound or to which the Company's assets, properties or
businesses may be subject are in full force and effect, have been executed and
delivered by the Company and constitute legal, valid and binding agreements of
the Company, enforceable against the Company in accordance with their respective
terms. The descriptions in the Registration Statement of agreements, contracts
and other documents are accurate and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Securities Act to be described in the
Registration Statement or filed as exhibits to the Registration Statement which
are not described or filed as required, and the exhibits which have been filed
are complete and correct copies of the documents of which they purport to be
copies.
(p) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; (ii) entered into any transaction other than in
the ordinary course of business; or (iii) declared or paid any dividend or made
any other distribution on or with respect to its capital stock of any class, and
there has not been any
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<PAGE> 8
change in the capital stock, or any change in the debt (long or short term) or
liabilities or material adverse change in or affecting the general affairs,
management, financial operations, prospects, stockholders' equity or results of
operations of the Company.
(q) The Company is not in violation of its certificate of
incorporation or its by-laws, and except as disclosed in the Prospectus, to the
Company's knowledge, no default exists, and no event has occurred which with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any material term, covenant or condition of any
license, contract, indenture, mortgage, installment sale agreement, lease, deed
of trust, voting trust agreement, stockholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other material agreement
or instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the Company
or any of its properties is or may be bound or which may affect the property
(tangible or intangible) of the Company.
(r) The Company is in compliance with all federal, state,
local and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company, by the U.S. Department of Labor or
any other governmental agency responsible for the enforcement of such federal,
state, local or foreign laws and regulations. There is no unfair labor practice
charge or complaint against either the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or, to the Company's knowledge, threatened against or involving the
Company or any predecessor entity, and none has ever occurred. To the Company's
knowledge, no representation question exists respecting the employees of the
Company, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. To the Company's knowledge, no
grievance or arbitration proceeding is pending or threatened under any expired
or existing collective bargaining agreements of the Company. No labor dispute
with the employees of the Company exists, or, is imminent.
(s) Except as described in the Prospectus, the Company does
not maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No "accumulated funding deficiency" (as defined in Section 302 of
ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than
events with respect to which the 30-day notice under Section 4043 of ERISA has
been waived) has occurred with respect to any employee benefit plan which could
reasonably be expected to have a Material Adverse Effect. No ERISA Plan (or any
trust created thereunder) has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code,
which could subject the Company to any tax penalty on prohibited transactions
and which has not adequately been corrected. Each ERISA Plan is in compliance
with all material reporting, disclosure and other requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
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<PAGE> 9
Code Section 401(a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
(t) Neither the Company nor any of its employees, directors,
stockholders, partners or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing, has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(u) The Company owns or has sufficient right to use, free and
clear of all Liens, all patents, trademarks, service marks, trade secrets, trade
names and copyrights, technology and licenses and rights used in the conduct of
its business as now conducted or proposed to be conducted without infringement
upon or otherwise acting adversely to the right or claimed right of any person,
corporation or other entity under or with respect to any of the foregoing and,
except as set forth in each of the Preliminary Prospectus and the Prospectus, is
not obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, trademark, service mark, trade name, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise.
(v) The Company has taken reasonable security measures to
protect the secrecy, confidentiality and value of all its intellectual property
in all material aspects.
(w) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in each Preliminary Prospectus and the Prospectus, as owned or leased by it free
and clear of all Liens, other than those referred to in each Preliminary
Prospectus and the Prospectus and Liens for taxes not yet due and payable.
(x) Ernst & Young LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants of the Company as required by the Securities Act and the
Rules and Regulations.
(y) The Company has caused to be duly executed and delivered
agreements, in such form as the Company and Underwriters have heretofore
mutually agreed (collectively, the "Lock-up Agreements"), pursuant to which each
of the Company's officers, directors, stockholders and persons holding options,
warrants, rights or other securities of the Company has agreed not to, directly
or indirectly, offer to sell, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of
Common Stock or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein for a period of 24 months following
date hereof without the prior written consent of the Representative.
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<PAGE> 10
(z) Except: (i) for payments in the aggregate amount of
$35,000 which have been made by the Company to Representative prior to the date
hereof in connection with investment banking advisory services rendered by the
Representative and (ii) as set forth in the Prospectus and herein, there are no
claims, payments, issuances, arrangements or understandings, whether oral or
written, for services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the Company, or
any of its officers, directors, stockholders, partners, employees or affiliates
that may affect the Underwriters' compensation. Except as contemplated hereby,
since the inception of the Company, no compensation has been paid to or on
behalf of any member of the NASD, or any affiliate or employee thereof, in
connection with any offering by the Company of the Company's securities.
(aa) The Underwritten Securities and Warrant Shares have been
approved for trading, subject to official notice of issuance, on the Nasdaq
SmallCap Market, and the Company has received no notice of any delisting
procedures.
(bb) Neither the Company, nor any of its respective officers,
employees, agents or any other person acting on behalf of the Company has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer or
supplier, or official or employee of any governmental agency (domestic or
foreign) or instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other person
who was, is, or may be in a position to help or hinder the business of the
Company (or assist the Company in connection with any actual or proposed
transaction) which (i) might subject the Company or any other such person to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign); (ii) if not given in the past, might have had
a Material Adverse Effect; or (c) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to enable the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(cc) Except as set forth in each Preliminary Prospectus and
the Prospectus, no officer, director, stockholder or partner of the Company, or
any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services; or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in each
Preliminary Prospectus and the Prospectus under "Certain Transactions," there
are no existing agreements, arrangements, understandings or transactions, or
proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director or stockholder of the Company, or
any partner, affiliate or associate of any of the foregoing persons or entities.
(dd) Any certificate signed by the President, any Vice
President or the Secretary of the Company, and delivered to the Representative
or Kelley Drye & Warren LLP (to
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<PAGE> 11
the "Underwriters' Counsel") shall be deemed a representation and warranty by
the Company to the Underwriters as to the matters covered thereby.
(ee) The minute books of the Company have been made available
to the Representative and the Underwriters' Counsel, contain a complete summary
of all meetings and actions of the directors and stockholders of the Company
since the time of its incorporation, and reflect all transactions referred to in
such minutes accurately in all respects.
(ff) Except and to the extent described in each Preliminary
Prospectus and the Prospectus, no holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the Company
or to require the Company to file a registration statement under the Securities
Act and no person or entity holds any anti-dilution rights with respect to any
securities of the Company.
(gg) Except as described in the Prospectus, the Company is not
aware of any bankruptcy, labor disturbance or other event affecting any of its
trademark licensees, principal suppliers or customers which is reasonably likely
to have a Material Adverse Effect.
(hh) The Company has not been notified nor is otherwise aware
that it is potentially liable, or is considered potentially liable, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law ("Environmental Laws"). To the Company's knowledge,
the Company is in compliance with all applicable existing Environmental Laws,
except for such instances of non-compliance which would not have a Material
Adverse Effect. The term "Hazardous Material" means (i) any "hazardous
substance" as defined by the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended; (ii) any "hazardous waste" as defined by
the Resource Conservation and Recovery Act, as amended; (iii) any petroleum or
petroleum product; (iv) any polychlorinated biphenyl; and (v) any pollutant or
contaminant or hazardous, dangerous or toxic chemical, material, waste or
substance regulation under or within the meaning of any other Environmental
Laws. To the Company's knowledge, no disposal, release or discharge of Hazardous
Material has occurred on, in, at or about any of the facilities or properties of
the Company, except for those instances which are in compliance with
Environmental Laws or in the aggregate would not have a Material Adverse Effect.
Except as described in the Prospectus, to the Company's knowledge: (i) there has
been no storage, disposal, generation, transportation, handling or treatment of
Hazardous Material by the Company (or to the knowledge of the Company, any of
its predecessors in interest) at, upon or from any of the property now or
previously owned or leased by the Company in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action which has not been taken, under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for such
violations and failures to take remedial action which would not result in,
singularly or in the aggregate, a Material Adverse Effect; and (ii) there has
been no material spill, discharge, leak, emission, injection, escape, dumping or
release of any kind onto such property or into the environment surrounding such
property by the Company of any Hazardous Materials, except for such spills,
discharges, leaks, emissions, injections, escapes,
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<PAGE> 12
dumping or releases which are in compliance with Environmental Laws or would not
result in, singularly or in the aggregate, a Material Adverse Effect.
(ii) The Company is not an "investment company," a company
controlled by an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
(jj) None of the proceeds of the sale of the Underwritten
Securities or Warrants will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
margin security or for any other purpose which might cause any of the
Underwritten Securities or Warrants to be considered a "purpose credit" within
the meanings of Regulation G, T, U or X of the Board of Governors of the Federal
Reserve Board.
(kk) The Company has complied and will comply with all the
provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida
Statutes, and all regulations promulgated thereunder relating to issuers doing
business with Cuba.
2. Purchase by the Underwriters; Delivery and Payment.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, and subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to each Underwriter, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
a price of $_________ per share, that proportion of the number of Firm
Securities set forth in Schedule I opposite the name of such Underwriter bears
to the total number of Firm Securities, subject to such adjustment as to
eliminate any sales or purchases of fractional shares, plus any additional
number of Firm Securities which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 11 of this Agreement.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements herein contained, and subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 180,000 shares of Common Stock at a price of $______ per share. The
option granted hereby will expire 30 days after (i) the date the Registration
Statement becomes effective, if the Company has elected not to rely on Rule 430A
under the Rules and Regulations, or (ii) the date of this Agreement if the
Company has elected to rely upon Rule 430A under the Rules and Regulations (or
if such 30th day shall be a Saturday, Sunday or holiday, on the next business
day thereafter when the Nasdaq SmallCap Market is open for trading), and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice in writing or by telephone
(confirmed in writing) by the Representative to the Company setting forth the
number of Option Securities as to which the Underwriters are then exercising the
option and the time and date of payment and delivery for any such Option
Securities. Upon exercise of the option as provided herein, the Company shall
become obligated to sell to each of the Underwriters and subject to the terms
and conditions herein set forth, each of the Underwriters (severally and not
jointly) shall become obligated to
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<PAGE> 13
purchase from the Company that proportion of the total number of Option
Securities then being purchased which the number of Firm Securities set forth in
Schedule I hereto opposite the name of such Underwriter bears to the total
number of Firm Securities, subject in each case to such adjustments as the to
eliminate any sales or purchases of fractional shares. Any such time and date of
delivery (an "Option Closing Date") shall be determined by the Representative,
but shall not be earlier than two nor later than five full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representative and the
Company. The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. No Option Securities
shall be delivered unless the Firm Securities shall be simultaneously delivered
or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Securities shall be made at the offices of the
Representative, 575 Lexington Avenue, New York, New York, or at such other place
as shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on August __, 1999 or
at such other time and date as shall be agreed upon by the Representative and
the Company (such time and date of payment and delivery being herein called the
"Closing Date"). In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase price for,
and delivery of certificates for, such Option Securities shall be made at the
above mentioned office of the Representative or at such other place as shall be
agreed upon by the Representative and the Company on each Option Closing Date as
specified in the notice from the Representative to the Company. Delivery of the
certificates for the Firm Securities and Option Securities, if any, shall be
made to the Representative against payment by or on behalf of the Underwriters,
severally and not jointly, of the purchase price for the Firm Securities and the
Option Securities, if any, by wire transfer, certified or official bank check or
checks drawn upon or by a New York Clearing House Bank and payable in same-day
funds to the order of the Company, such payment to be net of all amounts owed to
the Underwriters and Representative under the terms of this Agreement upon such
date of payment including the underwriting discount, net non-accountable
expenses and additional amounts owed under Section 5 of this Agreement and such
other amounts as the Company and Underwriters may agree. Certificates for the
Underwritten Securities shall be in definitive, fully registered form, shall
bear no restrictive legends and shall be in such denominations and registered in
such names as the Representative may request in writing at least 48 hours prior
to Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Underwritten Securities shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging at least 24 hours prior to
Closing Date or the relevant Option Closing Date, as the case may be.
Notwithstanding the foregoing, the Underwritten Securities may be delivered via
electronic transfer by the Depository Trust Company or an affiliate thereof.
(d) On the Closing Date, the Company shall issue and sell to
the Representative, and at the direction of the Representative, to any
co-managing underwriter or to bona fide officers of the Representative or member
of the underwriting group with respect to the Offering, Warrants to purchase an
aggregate of 120,000 shares of Common Stock at a purchase price of $.001 per
warrant. The Warrants shall be exercisable for a period of three years
commencing two year from the date hereof at a price equal to 134% of the initial
public offering
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<PAGE> 14
price of the Underwritten Securities. The Warrant Agreement and form of Warrant
shall be substantially in the form filed as Exhibit 1.2 to the Registration
Statement. Payment for the Warrants shall be made by the Representative to or
upon the order of the Company on the Closing Date.
3. Public Offering of the Underwritten Securities. As soon after
the effective time of the Registration Statement as the Representative deems
advisable, the Underwriters shall make a public offering of the Underwritten
Securities (other than to residents of any jurisdiction in which the
qualification of the Underwritten Securities is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representative may from time to time increase or decrease the public
offering price after the distribution of the Underwritten Securities has been
completed to such extent as the Representative in its sole discretion deems
advisable. The Representative may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants
and agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto, if not effective at the time
of execution of this Agreement, to become effective as promptly as practicable
and will not at any time, whether before or after the effective date of the
Registration Statement, file any amendment to the Registration Statement or
supplement to the Prospectus or file any document under the Securities Act or
Exchange Act during any time that a prospectus relating to the securities is
required to be delivered under the Securities Act of which the Representative
and Underwriters' Counsel shall not previously have been advised and furnished
with a copy a reasonable period of time prior to the proposed filing, or to
which the Representative shall have reasonably objected or which is not in
compliance with the Securities Act, the Exchange Act or the Rules and
Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective and,
if the provisions of Rule 430A promulgated under the Securities Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement becomes
effective; (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding, suspending the effectiveness
of the Registration Statement or any order preventing or suspending the use of
the Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose; (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose; (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. The Company will use its best efforts to prevent the
issuance of any stop or suspension order and if the Commission or any state
securities commission authority shall enter a stop order or suspend such
qualification at any time, the
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<PAGE> 15
Company will make every effort to obtain promptly the lifting or withdrawal of
such order or suspension.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) or transmit the Prospectus by a
means reasonably calculated to result in filing with the Commission pursuant to
Rule 424(b)(1) (or, if applicable and if consented to by the Representative,
pursuant to Rule 424(b)(4)) on or before the date it is required to be filed
under the Securities Act and the Rules and Regulations.
(d) The Company shall, in cooperation with the Representative,
at or prior to the time the Registration Statement becomes effective, arrange
for the qualification of the Securities for offering and sale under the
securities or Blue Sky laws of such jurisdictions as the Representative may
designate to permit the continuance of sales and dealings therein for as long as
may be reasonably necessary to complete the distribution contemplated hereby and
shall make such applications, file such documents and furnish such information
as may be required for such purpose; provided, however, the Company shall not be
required to qualify as a foreign corporation, subject itself to taxation or file
a general consent to service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the Company will,
unless the Representative agrees that such action is not at the time necessary
or advisable, use all reasonable efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(e) During the time when a Prospectus is required to be
delivered under the Securities Act, the Company shall comply with all
requirements imposed upon it by the Securities Act and the Exchange Act, as now
and hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Securities Act, any
event shall have occurred as a result of which, in the opinion of counsel for
the Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Securities Act or the Rules and Regulations, the Company will
notify the Representative promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the
Securities Act that corrects such statement or omission or effects such
compliance, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to, or at the direction of,
the Representative copies of such amendment or supplement as soon as available
and in such quantities as the Representative may request.
(f) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the first day after the
end of the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year) the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of
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the Rules and Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Securities Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the
Securities Act.
(g) During the three-year period commencing on the date
hereof, the Company will furnish to its stockholders (i) as soon as practicable,
but in any event not later than 120 days after the last day of each annual
fiscal period, its audited statements of income, stockholders' equity and cash
flows for such period and its audited balance sheet as of the end of such period
as to which the Company's independent accountants have rendered an opinion; and
(ii) as soon as practicable, but in any event not later than 45 days after each
of the first three quarterly fiscal periods, its unaudited statements of income,
stockholders' equity and cash flows, for such period and its unaudited balance
sheet as of the end of such period. In addition, during the three-year period
commencing on the date hereof, the Company will deliver to the Representative:
i. concurrently with furnishing such quarterly
reports to its stockholders, summary financial information of the
Company, together with a letter from the Company's President or Chief
Executive Officer, for each quarter in the form furnished to the
Company's stockholders and certified by the Company's principal
financial or accounting officer;
ii. concurrently with furnishing such annual reports
to its stockholders, a balance sheet of the Company at the end of the
preceding fiscal year, together with statements of income,
stockholders' equity and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of the Company's
independent certified public accountants;
iii. as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
iv. as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, the NASD or any securities exchange;
v. within a reasonable amount of time prior to its
release, every press release and every material news item or article of
interest to the financial community with respect to the Company or its
affairs which was released or prepared by or on behalf of the Company;
and
vi. any additional information of a public nature
concerning the Company (and any future subsidiaries) or its businesses
which the Representative may reasonably request.
During such three-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the
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<PAGE> 17
Company and its subsidiaries are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
(j) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of the
Lock-up Agreements duly executed and delivered by each of the Company's
officers, directors, stockholders and persons holding warrants, options, rights
or other securities of the Company. For a period of 24 months following the
effective date of the Registration Statement, without the prior written consent
of the Representative, the Company shall not, directly or indirectly, issue,
offer to sell, sell, grant any option for the purchase or sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any securities
of the Company, including shares of capital stock of the Company, or securities
or other rights convertible into, exercisable or exchangeable for or evidencing
any right to purchase or subscribe for any shares of capital stock of the
Company (either pursuant to Rule 144 of the Rules and Regulations or otherwise)
or dispose of any beneficial interest therein except for (i) shares of Common
Stock issued pursuant to this Agreement, (ii) the Warrants and (iii) the Warrant
Shares, provided, however, that the grant of options during the lock-up period
shall be conditioned upon receipt from the person to whom such options have been
granted of a duly executed Lock-up Agreement. For a period of three years after
the effective date of the Registration Statement, the Company shall give Coleman
written notice at least five business days, or as soon as practicable, prior to
any sales of the Company's securities to take place pursuant to Rule 144 of the
Rules and Regulations. Notwithstanding anything to the contrary in this
Agreement, for a period of 24 months following the effective date of the
Registration Statement, the Company will not file any Registration Statement
relating to any securities of the Company, without the prior consent of the
Representative.
(k) Neither the Company, nor any of its officers, directors,
nor any of their respective affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(l) The Company shall apply the net proceeds from the sale of
the Shares in substantially the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will
be used, directly or indirectly, to acquire any securities issued by the
Company. In addition, pending ultimate application, the Company shall
17
<PAGE> 18
invest all unused proceeds in short and medium term interest-bearing securities
guaranteed by the U.S. Government or its agencies.
(m) The Company shall timely file all such reports, forms or
other documents as may be required from time to time, under the Securities Act,
the Exchange Act and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Securities Act, the Exchange Act, and the Rules and
Regulations.
(n) The Company shall furnish to the Representative as early
as practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than 30 days prior
to the date of the Registration Statement) which have been read by the Company's
independent public accountants, as stated in their letters to be furnished
pursuant to Section 6(j) hereof.
(o) The Company shall use its best efforts to cause the Common
Stock to be traded on the Nasdaq SmallCap Market and for a period of five years
from the date hereof, use its best efforts to maintain the Nasdaq SmallCap
Market listing of the Common Stock to the extent outstanding.
(p) For a period of two years from the Closing Date, the
Company shall cause to be furnished to the Representative directly from the
Company's transfer agent, at the Company's sole expense, daily consolidated
transfer sheets relating to the Common Stock.
(q) Within 30 days from the effective date of the Registration
Statement, take all necessary and appropriate actions to be included in Standard
and Poor's Corporation descriptions and to continue such inclusion for a period
of not less than five years from the effective date of the Registration
Statement.
(r) Except as contemplated by the Warrant Agreement, the
Company hereby agrees that it will not for a period of 24 months from the
effective date of the Registration Statement, adopt, propose to adopt or
otherwise permit to exist any employee, officer, director, consultant or
compensation plan or arrangement permitting (i) the grant, issue, sale or entry
into any agreement to grant, issue or sell any option, warrant or other contract
right at an exercise price that is less than the greater of the initial public
offering price of the Shares set forth herein and the fair market value on the
date of grant or sale except for 80,000 shares of Common Stock issuable upon
exercise of stock options granted pursuant to the Company's 1996 Stock Option
Plan as of the effective date of the Registration Statement which have an
exercise price below the initial public offering price; (ii) the maximum number
of shares of Common Stock or other securities of the Company purchasable at any
time pursuant to options or warrants issued by the Company to exceed 303,526
shares; (iii) the payment for such securities with any form of consideration
other than cash; or (iv) the existence of stock appreciation rights, phantom
options or similar arrangements.
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<PAGE> 19
(s) Until the completion of the distribution of the
Underwritten Securities, if any, the Company shall not without the prior written
consent of the Representative and Underwriters' Counsel, issue, directly or
indirectly, any press release or other communication or hold any press
conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations.
(t) For a period equal to the lesser of (i) seven years from
the date hereof, and (ii) the sale to the public of the Warrant Shares, the
Company will not take any action or actions which may prevent or disqualify the
use by the Company of Form S-1, Form SB-2 or Form S-3 (or other appropriate
form) for the registration under the Securities Act of the Warrant Shares.
(u) For a period of three years following the Closing Date,
the Company will permit a designee of Coleman (which Coleman hereby currently
designates as Stanley L. Bartels) to observe meetings of the Company's board of
directors and shall provide to such designee, at the same time provided to the
members of the Company's board of directors, all notices, minutes, documents,
information and other materials generally provided to the members of the
Company's board of directors. The Company will reimburse the designee directly
for reasonable out-of-pocket expenses incurred in attending board meetings,
including, but not limited to, expenses for food, transportation and lodging,
and shall pay that designee the greater of (i) $1,500 per meeting attended or
(ii) the same cash attendance fee the Company pays to its outside directors.
During such three-year period, the Company will hold no less than four formal
and "in person" meetings of its board of directors each year.
(v) Prior to the 90th day after the Closing Date, the Company
will provide the Representative and its designees with five sets of bound
volumes of the transaction documents relating to the Offering, in form and
substance reasonably satisfactory to the Representative.
(w) For a period of 12 months subsequent to the Closing Date,
the Company will retain the Representative in an investment banking advisory
capacity and the Company will pay the Representative as consideration for such
advisory services a one-time fee of $36,000 due at the Closing Date.
(x) Prior to the Closing Date, the Company will deliver to the
Representative a reasonably detailed budget covering the period from the Closing
Date to the end of the Company's first fiscal year following the Closing Date.
In addition, during each of the next two succeeding fiscal years, the Company
will provide to the Representative, not more than 45 days after the beginning of
such fiscal year, a reasonably detailed budget covering such fiscal year. For
each budget period, the Company will also provide to the Representative
financial statements prepared in sufficient detail so as to allow comparison to
the budgets.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing
Date and the Option Closing Date (to the extent not paid at the Closing Date)
all expenses and fees (other than fees of Underwriters' Counsel, except as
provided in clause (iv) below) incident to the performance of the obligations of
the Company under this Agreement and the Warrant
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<PAGE> 20
Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company; (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, (including mailing and
handling charges) filing, delivery and mailing (including the payment of postage
with respect thereto) of the Registration Statement, each Preliminary
Prospectus, the Prospectus and any amendments and supplements thereto, and the
printing, mailing (including the payment of postage with respect thereto) and
delivery of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreements, the Underwriters' Powers of Attorney and related documents,
including the cost of all copies thereof and of the Preliminary Prospectuses and
of the Prospectus and any amendments thereof or supplements thereto supplied to
the Representative and such dealers as the Representative may request; (iii) the
printing, engraving, issuance and delivery of the Securities, including, but not
limited to, (A) the purchase from the Company of the Underwritten Securities by
the Underwriters, (B) the purchase from the Company of the Warrants by the
Representative, (C) the consummation by the Company of any of its obligations
under this Agreement and the Warrant Agreement and (D) the resale of the
Underwritten Securities by the Underwriters in connection with the distribution
contemplated hereby; (iv) the qualification of the Securities under state or
foreign securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum" and the "Supplemental Blue Sky
Memorandum," and fees and disbursements of counsel incurred in connection
therewith, which fees of counsel shall not exceed $30,000; (v) advertising costs
and expenses, including, but not limited to, costs and expenses in connection
with the "road show," information meetings and presentations (including travel
and hotel expenses of the Representative), up to six copies of bound volumes,
prospectus memorabilia and expenses relating to "tomb-stone" advertisements
which expenses shall not exceed $12,000; (vi) costs and expenses in connection
with due diligence investigations, including, but not limited to, the reasonable
fees of any independent counsel or consultant retained; (vii) fees and expenses
of the transfer agent and registrar; (viii) the fees payable to the Commission
and the NASD; and (x) the fees and expenses incurred in connection with the
inclusion of the Underwritten Securities and Warrant Shares on the Nasdaq
SmallCap Market, any other over-the-counter market or any exchange.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) or Section 12, the Company shall
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of Underwriters' Counsel, less
any amounts already paid pursuant to Section 5(c) hereof, provided, however,
that the maximum reimbursement for which the Company shall be liable pursuant to
this Section 5(b) shall not exceed $120,000, and provided, further, that if the
Agreement is terminated in accordance to Section 10(a)(v) due to the outbreak of
hostilities between the United States and any foreign power (or in the case of
any ongoing hostilities, a material escalation thereof) or an outbreak of any
other insurrection or armed conflict involving the United States, the Company
shall reimburse and indemnify the Representative for an amount equal to 50% of
the Representative's actual out-of-pocket expenses subject to the maximum
reimbursement of $120,000.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to Section 5(a), it will pay to the Representative on
the Closing Date by certified or bank cashier's check or, at the
Representative's election, by deduction from the proceeds of the
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<PAGE> 21
Offering, a non-accountable expense allowance equal to 2% of the gross proceeds
received by the Company from the sale of the Firm Securities, $35,000 of which
has been paid to date. In the event the Underwriters elect to exercise the
over-allotment option described in Section 2(b) hereof, the Company further
agrees to pay to the Representative, on each Option Closing Date, by certified
or bank cashier's check or, at the Representative's election, by deduction from
the proceeds of the Offering, a non-accountable expense allowance equal to 2% of
the gross proceeds received by the Company from the sale of the Option
Securities on such Option Closing Date.
(d) The Company warrants, represents and agrees that all
payments and reimbursements due pursuant to this Section 5 will be promptly and
fully made. If the Company shall fail to promptly and fully pay all amounts due
pursuant to this Section 5, the Company shall be liable to the Representative
for all attorneys' fees and costs incurred in connection with the collection of
such amounts.
6. Conditions of the Underwriters' Obligations. The obligations
of the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York time, on the date hereof or such later date and
time as shall be approved in writing by the Representative, and, at the Closing
Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Representative of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representative's opinion, is material, or omits
to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is
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<PAGE> 22
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. No order suspending the sale of the
Securities in any jurisdiction shall have been issued on either the Closing Date
or the relevant Option Closing Date, if any, and no proceedings for that purpose
shall have been instituted or shall, to the knowledge of the Representative, be
threatened.
(c) On or prior to the Closing Date, the Representative shall
have received from Underwriters' Counsel, such opinion or opinions with respect
to the organization of the Company, the validity of the Underwritten Securities,
Warrants, Warrant Shares, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Representative shall have received
the opinion of The Otto Law Group, PLLC, counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i. the Company (A) has been duly organized and is
validly existing as a corporation in good standing under the laws of
the State of Delaware; (B) is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its
operations requires such qualification or licensing; and (C) has all
requisite corporate power and authority, and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having
jurisdiction over environmental or similar matters), to own or lease
its properties and conduct its business as described in the Prospectus,
except where the failure to hold such authorizations, approvals,
orders, licenses, certificates, franchises and permits would not cause
a Material Adverse Effect; the Company is and has been doing business
in material compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state
and local laws, rules and regulations; the Company has not received any
notice of proceedings relating to the revocation or modification of any
such authorization, approval, order, license, certificate, franchise or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely
affect the business, operations, condition, financial or otherwise, or
the earnings, business affairs, position, prospects, value, operation,
properties, business or results of operations of the Company;
ii. the Company does not have any subsidiaries and
does not own any interest in any corporation, partnership, joint
venture, trust or other business entity;
iii. the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under the caption "Capitalization,"
and the Company is not a party to or bound by any instrument, agreement
or other arrangement providing for it to issue any capital stock,
rights, warrants, options or other securities, except for this
Agreement and the Warrant Agreement and as described in the Prospectus.
The Securities and all other securities
22
<PAGE> 23
issued or issuable by the Company conform, or when issued and paid for,
will conform in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued
and outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company. The Securities to be sold
by the Company hereunder and under the Warrant Agreement are not and
will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof and thereof, will be
validly issued, fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the holders thereof
will not be subject to any liability solely by reason of being such
holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities are in
due and proper form. The Warrants have been duly authorized and when
validly issued, delivered and paid for in the manner contemplated by
the Warrant Agreement will constitute valid and binding obligations of
the Company entitled to the benefits of the Warrant Agreement. The
Warrant Shares will, upon exercise and payment therefor in accordance
with the Warrant Agreement, be duly authorized, validly issued, fully
paid and non-assessable, the Company has duly authorized and reserved
the Warrant Shares for issuance upon exercise of the Warrants. Upon the
issuance and delivery pursuant to this Agreement and the Warrant
Agreement of the Underwritten Securities and Warrants, and assuming
that the Underwriters are acquiring the Underwritten Securities and the
Representative is acquiring the Warrants in good faith without notice
of any adverse claim (within the meaning of the Uniform Commercial Code
as in effect in the State of New York), the Underwriters, will acquire
good and marketable title to the Underwritten Securities and the
Representative will acquire good and marketable title to the Warrants,
each free and clear of any pledge, lien, charge, claim, encumbrance,
pledge, security interest or other restriction or equity of any kind
whatsoever. No transfer tax is payable by or on behalf of the
Underwriters or the Representative in connection with (A) the issuance
by the Company of the Underwritten Securities, (B) the purchase from
the Company of the Underwritten Securities by the Underwriters, (C) the
purchase from the Company of the Warrants by the Representative, (D)
the consummation by the Company of any of its obligations under this
Agreement or the Warrant Agreement or (E) the resales of the
Underwritten Securities in connection with the distribution
contemplated hereby;
iv. the Registration Statement is effective under the
Securities Act, and, if applicable, filing of all pricing information
has been timely made in the appropriate form under Rule 430A, and no
stop order suspending the use of the Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or, to the best of such counsel's knowledge after due inquiry,
threatened or contemplated under the Securities Act;
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<PAGE> 24
v. each of any Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments or
supplements thereto (other than the financial statements and other
financial and statistical data included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
vi. to the best of such counsel's knowledge, (A)
there are no agreements, contracts or other documents required by the
Securities Act to be described in the Registration Statement and the
Prospectus and filed as exhibits to the Registration Statement other
than those described in the Registration Statement and the Prospectus
and filed as exhibits thereto, and the exhibits which have been filed
are correct copies of the documents of which they purport to be copies;
(B) the descriptions in the Registration Statement and the Prospectus
and any supplement or amendment thereto of contracts and other
documents to which the Company is a party or by which it is bound,
including any document to which the Company is a party or by which it
is bound, incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate in all material respects
and fairly represent the information required to be shown by Form SB-2;
(C) there is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give
rise to the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in
all respects), (y) questions the validity of the capital stock of the
Company or this Agreement and the Warrant Agreement or of any action
taken or to be taken by the Company pursuant to or in connection with
any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus that
is not described as required; and (E) except as disclosed in the
Prospectus, there is no action, suit or proceeding pending, or
threatened, against or affecting the Company before any court or
arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which there is a reasonable
possibility of an adverse decision which may result in a material
adverse change in the condition, financial or otherwise, earnings,
prospects, stockholders' equity, value, operations, properties,
business or results of operations of the Company;
vii. the Company has all necessary, corporate power
and authority to enter into each of this Agreement and the Warrant
Agreement and to consummate the transactions provided for herein and
therein; and each of this Agreement and the Warrant Agreement has been
duly authorized, executed and delivered by the Company. Each of this
Agreement and the Warrant Agreement, constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and
except as to those provisions relating to indemnity or contribution for
liabilities arising under the Act, as to which no opinion need be
expressed; and none of the Company's execution or delivery of this
Agreement and the Warrant Agreement, its
24
<PAGE> 25
performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its
businesses as described in the Registration Statement, the Prospectus,
and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company, except as disclosed in
the Prospectus, pursuant to the terms of, (A) the certificate of
incorporation or by-laws of the Company; (B) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which it
is or may be currently bound or to which any of its properties or
assets (tangible or intangible) is or may be subject, or any
indebtedness; or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency
or body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its respective activities or
properties except with respect to clauses (B) or (C) for conflicts,
breaches, violations, defaults, creations or impositions which do not
and would not have a material adverse effect on the condition,
financial or otherwise, prospects, stockholders' equity, value,
operations, properties, business or results of operation of the
Company;
viii. no consent, approval, authorization or order,
and no filing with, any court, regulatory body, government agency or
other body (other than such as may be required under Blue Sky laws or
Rules of the NASD, as to which no opinion need be rendered) is required
in connection with the issuance of the Underwritten Securities, the
issuance of the Warrants and the Warrant Shares, and the Registration
Statement, the performance of this Agreement and the Warrant Agreement,
and the transactions contemplated hereby and thereby (except consents,
approvals, authorizations or orders, and filings which have been
properly made or obtained);
ix. the properties and business of the Company
conform in all material respects to the description thereof contained
in the Registration Statement and the Prospectus; and the Company has
good and marketable title to (in all material respects), or valid and
enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, in each
case free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities
of any kind whatsoever, other than those referred to in the Prospectus
and liens for taxes not yet due and payable;
x. the Company is not in breach of, or in default
under, any term or provision of any material license, contract,
indenture, mortgage, installment sale agreement, deed of trust, lease,
voting trust agreement, stockholders' agreement, partnership agreement,
note, loan or credit agreement or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other
material agreement or instrument to which the Company is a party or by
which the Company may
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<PAGE> 26
be bound or to which the property or assets (tangible or intangible) of
the Company is subject or affected, the effect of which could
materially and adversely affect the condition, financial or otherwise,
earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operation of the Company; the
Company is not in violation of any term or provision of its certificate
of incorporation, or by-laws or in violation of any franchise, license,
permit, judgment, decree, order, statute, rule or regulation;
xi. the statements in the Prospectus under
"Business," "Management," "Certain Transactions," "Principal
Shareholders" and "Description of Securities," have been reviewed by
such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or legal
conclusions, are correct in all material respects;
xii. the Underwritten Securities and Warrant Shares
have been accepted for quotation, subject to official notice of
issuance, on the Nasdaq SmallCap Market;
xiii. to the best of such counsel's knowledge after
due inquiry, the persons listed under the caption "Principal
Shareholders" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in Regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
xiv. to the best of such counsel's knowledge after
due inquiry, except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
xv. neither the execution and delivery by the Company
of, nor the performance of its obligations under this Agreement and the
Warrant Agreement nor the sale, issuance, execution or delivery by the
Company of the Underwritten Securities or Warrants will violate
Regulation G, T, U or X of the Federal Reserve Board; and
xvi. the Company is not an "investment company," a
company controlled by, under common control with, or controlling an
"investment company" or a "promoter" or "principal underwriter" for an
"investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted and to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of
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<PAGE> 27
officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and that the Underwriters and they are justified in relying thereon.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, and
representatives of the independent public accountants for the Company, at which
conferences the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus and related matters were discussed and, although such
counsel is not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement, on the basis of the foregoing, no facts have come to the
attention of such counsel which has lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Prospectus or amendment or
supplement thereto as of the date of such opinion contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial, statistical and
accounting data included in the Registration Statement or Prospectus or excluded
therefrom).
At each Option Closing Date, if any, the Representative shall have
received the favorable opinion of The Otto Law Group, PLLC, counsel to the
Company, dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of Option
Closing Date the statements made by The Otto Law Group, PLLC, in its opinion
delivered on the Closing Date.
(e) At Closing Date, the Representative shall have received
the opinion of _______________________, patent and trademark counsel to the
Company, dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
i. any patents, trademarks, and patent or trademark searches
conducted with respect to any patent and/or trademark applications of the
Company are identified in such opinion;
ii. the descriptions in the Registration Statement with
respect to the status of such patents, trademarks and patent or trademark
applications are accurate;
iii. the Company owns the entire right, title and interest in
and to such patents, trademarks and patent or trademark applications as
described in the Prospectus and has not received any notice of conflict with the
asserted rights of others in respect thereof; and
iv. the statements in the Prospectus under the captions
"Prospectus Summary," "Risk Factors - We depend upon our intellectual property
rights, which are subject to infringement by others," "Risk Factors -- Our
rights to our domain names are subject to regulatory change," "Risk Factors --
We may face intellectual property infringement and other claims in connection
with the use of our technology," "Risk Factors -- Asserting our intellectual
property rights may subject us to litigation" and
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"Business - Intellectual Property" relating to such patents, trademarks and
patent or trademark applications, are true and correct.
At each Option Closing Date, if any, the Representative shall have
received the favorable opinion of _______________________, patent and trademark
counsel to the Company, dated the Option Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel
confirming as of Option Closing Date the statements made by
________________________ in its opinion delivered on the Closing Date.
(f) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriters' Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require and have
requested reasonably in advance for the purpose of enabling them to review or
pass upon the matters referred to in Section 6(c), or in order to evidence the
accuracy, completeness or satisfaction of any of the representations, warranties
or conditions of the Company, or herein contained.
(g) On and as of the Closing Date and each Option Closing
Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective material adverse change in the condition,
financial or otherwise, prospects, stockholders' equity or the business
activities of the Company, whether or not in the ordinary course of business,
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which is materially
adverse to the Company; (iii) the Company shall not be in default under any
provision of any instrument relating to any material outstanding indebtedness of
the Company; (iv) the Company shall not have issued any securities (other than
the Underwritten Securities and Warrants) or declared or paid any dividend or
made any distribution with respect to its capital stock of any class and there
has not been any change in the capital stock or any change in the debt (long or
short term), except in the ordinary course of business, or liabilities or
obligations of the Company (contingent or otherwise); (v) no material amount of
the assets of the Company shall have been pledged or mortgaged, except as set
forth in the Registration Statement and Prospectus; (vi) no action, suit or
proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the condition,
financial or otherwise, results of operations, business or prospects of the
Company, except as set forth in the Registration Statement and Prospectus; and
(vii) no stop order shall have been issued under the Securities Act and no
proceedings therefor shall have been initiated, threatened or contemplated by
the Commission or any state regulatory authority.
(h) At each of the Closing Date and each Option Closing Date,
if any, the Representative shall have received a certificate of the Company
signed by the principal executive officer and by the chief financial or chief
accounting officer of the Company, dated the Closing Date or Option Closing
Date, as the case may be, to the effect that each of such person has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
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i. The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied with all agreements and covenants and satisfied
all conditions contained in this Agreement on its part to be performed
or satisfied at or prior to such Closing Date or Option Closing Date,
as the case may be;
ii. No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or, to
the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Securities Act;
iii. The Registration Statement and the Prospectus
and, if any, each amendment and each supplement thereto, contain all
statements and information required to be included therein, and none of
the Registration Statement, nor any amendment or supplement thereto
includes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Prospectus or any
amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
iv. Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
through the Closing Date or the Option Closing Date, as the case may
be: (a) the Company has not incurred other than in the ordinary course
of its business, any material liabilities or obligations, direct or
contingent, except as disclosed in the Prospectus; (b) the Company has
not paid or declared any dividends or other distributions on its
capital stock, except as disclosed in the Prospectus; (c) the Company
has not entered into any transactions not in the ordinary course of
business, except as disclosed in the Prospectus; (d) there has not been
any change in the capital stock or long-term debt or any increase in
the short-term borrowings (other than any increase in the short-term
borrowings in the ordinary course of business) of the Company; (e) the
Company has not sustained any loss or damage to its property or assets,
whether or not insured; (f) there is no litigation which is pending or
threatened (or circumstances giving rise to same) against the Company
or any affiliated party of any of the foregoing which is required to be
set forth in an amended or supplemented Prospectus which has not been
set forth; and (g) there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(h) are to such documents as amended and supplemented at the date of such
certificate.
(i) On or prior to the date hereof, the Representative shall
have received clearance from the NASD as to the amount of compensation allowable
or payable to the Underwriters, as described in the Registration Statement.
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<PAGE> 30
(j) At the time this Agreement is executed, the Representative
shall have received a letter, dated such date, addressed to the Underwriters in
form and substance satisfactory (including the nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Representative and Underwriters' Counsel, from Ernst & Young LLP:
i. confirming that they are independent certified
public accountants with respect to the Company within the meaning of
the Securities Act and the applicable Rules and Regulations;
ii. stating that it is their opinion that the
financial statements and supporting schedules of the Company included
in the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act and the Rules and Regulations thereunder and that the Underwriters
may rely upon the opinion of Ernst & Young LLP with respect to the
financial statements and supporting schedules included in the
Registration Statement;
iii. stating that, on the basis of procedures which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the
latest available minutes of meetings and actions of the stockholders,
the board of directors and the Audit Committee of the board of
directors of the Company, consultations with officers and other
employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A) the
financial information contained in the Registration Statement and
Prospectus does not comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the Rules
and Regulations or is not fairly presented in conformity with generally
accepted accounting principles applied on a basis consistent with that
of the audited financial statements of the Company; or (B) at a
specified date not more than five days prior to the date of delivery of
such letter, there has been any change in the capital stock or
long-term debt of the Company, or any decrease in the shareholders'
equity or net current assets or net assets of the Company as compared
with amounts shown in the January 31, 1999 balance sheet included in
the Registration Statement, other than as set forth in or contemplated
by the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during the
period from September 30, 1998 to a specified date not more than five
days prior to the date of delivery of such letter, there was any
decrease in gross revenue, gross profit, operating income, net income
or net income per share of the Company, in each case as compared with
the corresponding period beginning October 1, 1997 other than as set
forth in or contemplated by the Registration Statement, or, if there
was any such decrease, setting forth the amount of such decrease;
iv. setting forth, at a date not later than five days
prior to the date of delivery of such letter, the amount of liabilities
of the Company (including a break-down of commercial paper and notes
payable to banks);
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<PAGE> 31
v. stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company
set forth (in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be
derived from the general accounting records, including work sheets, of
the Company and excluding any questions requiring an interpretation by
legal counsel), with the results obtained from the application of
specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and
found them to be in agreement;
vi. stating that they have never brought to the
attention of any of the Company's management any "weakness," as defined
in Statement of Auditing Standard No. 60 "Communication of Internal
Control Structure Related Matters Noted in an Audit," in any of the
Company's internal controls; and
vii. statements as to such other matters incident to
the transaction contemplated hereby as the Representative may request.
(k) At Closing Date and each Option Closing Date, if any, the
Representative shall have received from Ernst & Young LLP, a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm that statements made in the letter furnished pursuant to
Section 6(i) hereof, except that the specified date referred to shall be a date
not more than five days prior to Closing Date or the Option Closing Date, as the
case may be, and, if the Company has elected to rely on Rule 430A of the Rules
and Regulations, to the further effect that they have carried out procedures as
specified in clause (v) of Section 6(i) with respect to certain amounts,
percentages and financial information as specified by the Representative and
deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and
have found such amounts, percentages and financial information to be in
agreement with the records specified in such clause (v).
(l) On each of the Closing Date and Option Closing Date, if
any, there shall have been duly tendered to, or at the direction of, the
Representative the appropriate number of Underwritten Securities.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative shall have been issued on either
the Closing Date or the Option Closing Date, if any, and no proceedings for that
purpose shall have been instituted or shall be contemplated.
(n) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Warrant Agreement
substantially in the form filed as Exhibit 1.2 to the Registration Statement in
final form and substance satisfactory to the Representative, and (ii) the
Warrants in such denominations and to such designees as shall have been provided
by the Representative to the Company.
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(o) On or before Closing Date, the Underwritten Securities and
Warrant Shares shall have been duly approved for quotation on the Nasdaq Small
Cap Market, subject to official notice of issuance.
(p) On or before Closing Date, there shall have been delivered
to the Representative, Lock-up Agreements from each of the Company's directors,
officers, stockholders, and persons holding warrants, options, rights or other
securities of the Company, in form and substance satisfactory to Underwriters'
Counsel.
(q) Trading in the Common Stock shall not have been suspended
by the Nasdaq SmallCap Market at any time after the date hereof.
(r) Prior to the Closing Date, the Representative shall have
received from the Company a reasonably detailed budget covering the period from
the Closing Date to the end of the Company's first fiscal year following the
Closing Date together with financial statements of the Company prepared in
sufficient detail so as to allow comparison to the budget.
(s) All relevant terms, conditions and circumstances relating
to the Offering shall be reasonably satisfactory to the Representative.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to the Representative.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of
the Underwriters (for purposes of this Section 7, "Underwriters" shall include
the officers, directors, partners and employees of each of the Underwriters,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, from and against any and
all losses, claims, damages, expenses or liabilities, joint or several (and
actions, proceedings, suits and litigation with respect thereto), whatsoever
(including, but not limited to, any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any action, suit,
proceeding or litigation, commenced or threatened, or any claim whatsoever), as
such are incurred, to which any Underwriter or any such controlling person may
become subject under the Securities Act, the Exchange Act or any other statute
or at common law or otherwise, insofar as such losses, claims, damages, expenses
or liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained (i) in any Preliminary Prospectus,
the Registration Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and
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prospectus in which is included securities of the Company issued or issuable
upon exercise of the Securities; or (iii) in any application or other document
or written communication (in this Section 7 collectively called "application")
executed by the Company or based upon written information furnished by the
Company in any jurisdiction in order to qualify the Securities under the
securities laws thereof or filed with the Commission, any state securities
commission or agency, Nasdaq or any other securities exchange; or arise out of
or are based upon the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (in the case of the Preliminary Prospectus and Prospectus, in the
light of the circumstances under which they were made), unless such statement or
omission was made in reliance upon and in conformity with the Underwriters'
Information and provided, further, that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any Preliminary
Prospectus or the Prospectus, the indemnification provided for herein shall not
apply to any loss, liability, claim, damage or expense to the extent the same
results from the sale of Securities to a person to whom there was not sent or
given, at or prior to the written confirmation of such sale, a copy of the
Prospectus, or in the case of an untrue statement or omission or alleged untrue
statement or omission in the Prospectus, a copy of the amended Prospectus or
supplement thereto, if the Company has previously furnished sufficient copies
thereof, based upon the number of copies requested by the Underwriters, to the
Underwriters a reasonable time in advance and the claim, damage or expense of
such person results from an untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in a Preliminary
Prospectus or Prospectus that was corrected in the Prospectus or amendment or
supplement thereto.
The indemnity agreement in this Section 7(a) shall be in
addition to any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the Registration Statement and each other person,
if any, who controls the Company within the meaning of the Securities Act, to
the same extent as the foregoing indemnity from the Company to the Underwriters
but only with respect to statements or omissions, if any, made in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any application made in reliance
upon, and in strict conformity with the Underwriters' Information.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim with respect thereto is to be made against
one or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from: (i)
any liability which it may have under this Section 7(a) or (b) hereof unless and
to the extent that it has been prejudiced in any material respect by such
failure or from the forfeiture of substantial rights and defenses or (ii) any
liability which it may have otherwise). In case any such action, suit or
proceeding is brought against any indemnified party, and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party,
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to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case; or (ii) contribution under the Securities Act may be required on the part
of any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or liabilities
(or actions, suits, proceedings or litigation with respect thereto) (A) in such
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties, on the one hand, and the party to be indemnified on
the other hand, from the offering of the Securities; or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by of the Company on
the one hand, and the Underwriters, on the other, shall be deemed to be in the
same proportion as the total net proceeds from the offering of the Securities
(before deducting expenses) bear to the total underwriting discounts received by
the Underwriters hereunder, in each case as set forth in the table on the cover
page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages,
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<PAGE> 35
expenses or liabilities (or actions, suits, proceedings or litigation with
respect thereto) referred to above in this Section 7(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action, claim,
suit, proceeding or litigation. Notwithstanding the provisions of this Section
7(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the Underwriter
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 7, each person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who has signed the
Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to this Section
7(d). Any party entitled to contribution will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party with
respect to which a claim for contribution may be made against another party or
parties under this Section 7(d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
Section 7(d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company, as the case may be, and the respective
indemnity agreements contained in Section 7 hereof, shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any Underwriter, the Company, any controlling person of any Underwriter or the
Company, and shall survive termination of this Agreement or the issuance and
delivery of the Underwritten Securities to the Underwriters and Warrants to the
Representative.
9. Effective Date. This Agreement shall become effective at
10:00 a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Representative, in its discretion, shall release the
Underwritten Securities for the sale to the public; provided, however, that the
provisions of this Section 9 and Sections 5, 7 and 10 of this Agreement shall at
all times be effective. For purposes of this Section 9, the Securities to be
purchased hereunder shall be deemed to have been so released upon the earlier of
dispatch by the Representative of telegrams to securities dealers releasing such
shares for offering or the release by the Underwriters for publication of the
first newspaper advertisement which is subsequently published relating to the
Underwritten Securities.
10. Termination.
(a) This agreement may be terminated with respect to the Firm
Securities or Option Securities, if any, in the sole discretion of the
Representative by notice to the Company
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given prior to the Closing Date or the relevant Option Closing Date,
respectively, in the event that all obligations set forth in Section 6 have not
been performed or satisfied or the Company shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or if at or prior to the
Closing Date or such Option Closing Date, respectively:
i. the Company sustains a loss by reason of
explosion, fire, flood, accident or other calamity, which, in the
reasonable opinion of the Representative, substantially affects the
value of the properties of the Company or which materially interferes
with the operation of the business of the Company regardless of whether
such loss shall have been insured; there shall have been a Material
Adverse Effect, or any development involving a prospective Material
Adverse Effect (including, without limitation, a change in management
or control of the Company), in the business, operations, condition,
financial or otherwise, earnings, prospects, stockholders' equity,
value, operations, properties, business or results of operations of the
Company, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto); or Mr.
Marlin Eller shall have suffered any injury or disability of a nature
that could materially adversely affect his ability to function as
President and Chief Executive Officer of the Company for more than six
months;
ii. any material action, suit or proceeding shall be
threatened, instituted or pending, at law or in equity, against the
Company or any of its directors or executive officers, by any person or
by any federal, state or other governmental or regulatory commission,
board or agency;
iii. trading in the Common Stock shall have been
suspended by the Commission or the NASD or trading in securities
generally on the New York Stock Exchange, American Stock Exchange or
the over-the-counter market shall have been suspended or minimum or
maximum prices shall have been established on either such exchange or
quotation system;
iv. a moratorium on banking activities shall have
been declared by New York or United States authorities; or
v. there shall have been (A) an outbreak of
hostilities between the United States and any foreign power (or, in the
case of any ongoing hostilities, a material escalation thereof); (B) an
outbreak of any other insurrection or armed conflict involving the
United States; or (C) any other calamity or crisis or material change
in financial, political or economic conditions, having an effect on the
financial markets that, in any case referred to in this clause (v), any
of which of the above events or aberrational market-related events, in
the sole judgment of the Representative, makes it impracticable or
inadvisable to proceed with the Offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended,
as of the date hereof.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) or Section 12, or if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Representative, by reason of
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any failure on the part of the Company to perform any undertaking or satisfy any
condition of this Agreement by it to be performed or satisfied (including,
without limitation, pursuant to Section 6, Section 10(a) or Section 12), the
Company shall promptly reimburse and indemnify the Representative for all of its
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel (less amounts previously paid pursuant to Section 5(c) above). In
addition, the Company shall remain liable for all Blue Sky counsel fees and
expenses and Blue Sky filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6, 10, 11 and 12
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
Section 12 hereof) to purchase the Underwritten Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within 48 hours
thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representative shall not have completed
such arrangements within such 48-hour period, then:
i. if the number of Defaulted Securities does not
exceed 10% of the total number of Firm Securities to be
purchased on such date, the non-defaulting Underwriters shall
be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
ii. if the number of Defaulted Securities exceeds 10%
of the total number of Firm Securities, this Agreement shall
terminate without liability on the part of any non-defaulting
Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability with respect to any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the
Closing Date or any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Securities to be purchased on an Option Closing Date, the
Representative may at their option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any
non-defaulting party other than pursuant to Section 5,
37
<PAGE> 38
Section 7 and Section 10 hereof. No action taken pursuant to this Section 12
shall relieve the Company from liability, if any, with respect to such default.
13. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to them at
Coleman and Company Securities, Inc., 575 Lexington Avenue, 14th Floor, New
York, New York 10022, Attention: Stanley L. Bartels, with a copy to Kelley Drye
& Warren LLP, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut
06901, Attention: M. Ridgway Barker, Esq. Notices to the Company shall be
directed to the Company at 223 Taylor Avenue North, Suite 200, Seattle,
Washington 98109-5017, Attention: Chief Executive Officer, with a copy to The
Otto Law Group, PLLC, 4553 52nd Avenue N.E., Seattle, Washington 98105,
Attention: David M. Otto, Esq.
14. Parties. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or with respect to or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to be
a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the Warrant
Agreement constitute the entire agreement of the parties hereto and supersede
all prior written or oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may not be amended except
in a writing, signed by the Representative and the Company.
38
<PAGE> 39
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
SUNHAWK.COM CORPORATION
By:_____________________________________
Name:
Title:
Confirmed and accepted as of
the date first above written.
COLEMAN AND COMPANY SECURITIES, INC.
As Representative of the Several Underwriters
named in Schedule I hereto
By:____________________________________________
Name: Stanley L. Bartels
Title: Executive Vice President
39
<PAGE> 40
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
Securities to
Name of Underwriters be Purchased
- -------------------- --------------
<S> <C>
Coleman and Company Securities, Inc.
Nolan Securities Corporation
Win Capital Corp.
TOTAL ............................................. 1,200,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 1.2
================================================================================
SUNHAWK.COM CORPORATION
AND
COLEMAN AND COMPANY SECURITIES, INC.
-------------
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of August [__], 1999
================================================================================
<PAGE> 2
This REPRESENTATIVE'S WARRANT AGREEMENT has been made and
entered into as of August [__], 1999, by and between SUNHAWK.COM CORPORATION, a
Delaware corporation (the "Company"), and COLEMAN AND COMPANY SECURITIES, INC.,
a Delaware corporation (the "Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative,
or at the direction of the Representative, to any co-managing underwriter,
warrants (the "Warrants") to purchase up to an aggregate of 120,000 shares of
common stock, $.0001 par value per share, of the Company (the "Common Stock");
WHEREAS, the Representative has agreed pursuant to the
Underwriting Agreement (the "Underwriting Agreement") dated as of August [__],
1999, by and between the Company and the Representative, to act as the
Representative of the underwriters named in Schedule I thereto (the
"Underwriters") in connection with the Company's proposed public offering (the
"Offering") of 1,200,000 shares of Common Stock at an initial public offering
price of $[_______] per share of Common Stock; and
WHEREAS, the Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative, or its designees, in
consideration for, and as part of the Representative's compensation in
connection with, the Representative acting as such pursuant to the terms of the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises hereof, the
payment by the Representative to the Company of an aggregate of $120, the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. Grant. The Representative and, at the direction of
the Representative, any co-managing underwriter of the Offering, are hereby
granted the right to purchase, at any time from [___________], 2001, until 5:30
P.M., New York time, on [___________], 2004 (the "Expiration Date"), up to an
aggregate of 120,000 shares of Common Stock (the "Shares" or "Warrant
Securities") (subject to adjustment as provided in Section 8 hereof) at the
initial Exercise Price (as hereinafter defined) (subject to the terms and
conditions of this Agreement). Except as set forth herein, the Shares issuable
upon exercise of the Warrants will be in all respects identical to the shares of
Common Stock being purchased by the Representative for resale to the public
pursuant to the terms and provisions of the Underwriting Agreement. Any Warrant
that is not exercised on or prior to the Expiration Date shall be void and all
rights hereunder shall cease.
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as required or permitted by this Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise. The Warrants are exercisable at
the Exercise Price payable by certified or official bank check in New York
Clearing House funds. Upon surrender of a Warrant Certificate with a duly
executed Election to Purchase (in the form of Annex A to the Warrant
Certificate), together with payment at the Company's principal offices
(presently located at 223 Taylor Avenue North, Suite 200, Seattle, Washington
98109) of the aggregate Exercise Price of the Warrants being exercised, the
registered holder of a Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the shares of Common Stock
so purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock underlying the Warrants). In the case
of the purchase of less than all the shares of Common Stock purchasable under
any Warrant Certificate, the Company shall cancel said Warrant Certificate upon
the surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrants exercisable thereunder.
-1-
<PAGE> 3
3.2 Exercise by Surrender of Warrants. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, Holders shall have the right, at any time, and from time to
time, to exercise the Warrants in full or in part by surrendering Warrant
Certificates representing a certain number of additional Warrants as payment of
the aggregate Exercise Price for the shares of Common Stock being acquired upon
exercise of the Warrants. The Warrants are exercisable pursuant to this Section
3.2 by surrender of the Warrant Certificate with a duly executed Election to
Purchase (in the form of Annex B to the Warrant Certificate) and surrender of a
certain number of Warrants in addition to those being exercised. The number of
additional Warrants to be surrendered in payment of the aggregate Exercise Price
for the Warrants being exercised shall be determined by multiplying the number
of Warrants to be exercised by the Exercise Price, and then dividing the product
thereof by an amount equal to the Market Price (as defined below). Solely for
the purposes of this Section 3.2, Market Price shall be calculated either (i) on
the date which the Election to Purchase (in the form of Annex B to the Warrant
Certificate) is deemed to have been sent to the Company pursuant to Section 13
hereof ("Notice Date") or (ii) as the average of the Market Prices for each of
the five trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
3.3 Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be the last reported sale
price, or, in case no such reported sale takes place on such day, the average of
the last reported bid prices for the last three trading days, in either case as
officially reported by the Nasdaq SmallCap Market or the principal securities
exchange on which the Common Stock is listed or admitted to trading or by the
Nasdaq National Market (collectively, "NASDAQ"), or, if the Common Stock is not
quoted by the Nasdaq SmallCap Market listed or admitted to trading on any
national securities exchange or quoted by NASDAQ, the average closing bid price
as furnished by the NASD or similar organization, or if the Common Stock is not
quoted on the Nasdaq SmallCap Market, as determined in good faith by resolution
of the Board of Directors of the Company, based on the best information
available to it.
4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for the total number of whole shares of
Common Stock for which such Warrants were exercised shall be made promptly (and
in any event within five business days thereafter) without charge to the Holder
thereof including, without limitation, any stock transfer or similar tax which
may be payable with respect to the issuance thereof, and such certificates shall
(subject to the provisions of Sections 5 and 7 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable with
respect to any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder, and the Company shall not
be required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares underlying the Warrants shall be executed on behalf of the Company by the
manual or facsimile signature of the then present Chairman of the Board of
Directors or President of the Company under its corporate seal reproduced
thereon and by the then present Treasurer or Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer. Certificates
representing the shares of Common Stock issuable upon exercise of the Warrants
shall be dated the date on which the Company receives the Election to Purchase,
Warrant Certificate and payment of the Exercise Price.
5. Restriction on Transfer of Warrants. The Warrants may
not be sold, transferred, assigned, hypothecated or otherwise disposed of, in
whole or in part, except that the Warrants may be (i) assigned in whole or part
to any officer or partner of the Representative or any member of the
underwriting group and (ii) transferred by operation of law as a result of the
death or divorce of any transferee to whom the Warrants may have been
transferred. Any assignment shall be effected by a duly executed assignment in
the form of Annex C to the Warrant Certificate.
-2-
<PAGE> 4
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. The initial
exercise price of each Warrant shall be $[________] per share of Common Stock.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein
shall mean the initial exercise price or the adjusted exercise price, as the
case may be.
7. Registration Rights.
7.1 Piggyback Registration. If, at any time commencing
after [___________], 2001 and expiring five years thereafter, the Company
proposes to register any of its securities under the Securities Act of 1933, as
amended (the "Securities Act") (other than pursuant to a Form S-4, Form S-8 or
any other successor form of limited purpose), it will give written notice by
registered mail at least 30 days prior to the filing of each such registration
statement, to the Representative and to all other Holders of Warrants and
Warrant Securities of its intention to do so. If the Representative or other
Holders of Warrants and Warrant Securities notify the Company within 20 business
days after receipt of any such notice of its or their desire to include any of
their respective Warrant Securities in such proposed registration statement, the
Company shall afford the Representative and such Holders of Warrants and Warrant
Securities the opportunity to have any such Warrant Securities registered under
such registration statement, provided, however, that if the managing underwriter
advises the Company in writing that the inclusion of all Warrant Securities that
Holders have proposed be included in such registration statement would interfere
with the successful marketing of the securities proposed to be registered by the
Company, then the securities to be included in such registration statement shall
be included in the following order:
(a) first, the securities proposed to be included in
such registration by the Company or, if such registration is
for securities of specified security holders of the Company,
by such holders;
(b) second, the Warrant Securities held by the
Holders requested to be included in such registration; and
(c) third, all other holders of Common Stock entitled
to be included in such registration statement (pro rata among
the holders requesting such registration based upon the number
of shares of Common Stock requested by each such holder to be
registered).
Notwithstanding the provisions of this Section 7.1, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.1 (irrespective of whether a written request
for inclusion of any such Warrant Securities shall have been made) to elect not
to file any such proposed registration statement or to withdraw the same after
the filing but prior to the effective date thereof.
7.2 Demand Registration.
(a) At any time commencing on [___________], 2001 and
expiring three years thereafter (which date is the fifth anniversary of the
effective date of the Registration Statement on Form SB-2 (File No. 333-80849))
(or such earlier time as the Warrant Securities are eligible for sale under Rule
144(k), the Holders of the Warrants and/or Warrant Securities representing at
least 26% of such securities (assuming the exercise of all of the Warrants)
shall have the right (which right is in addition to the registration rights
under Section 7.1 hereof), exercisable by written notice to the Company, on one
occasion only to request to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), a registration statement
and such other documents, including a prospectus, as may be necessary in the
opinion of counsel for the Company and, if either the Representative or a
majority of the Holders electing to participate in the registration requested
pursuant to this Section 7.2(a) have retained counsel in connection with such
registration, counsel for each of the Representative and a majority of the
Holders electing to participate in such registration, in order to comply with
the provisions of the
-3-
<PAGE> 5
Securities Act, so as to permit a public offering and sale of their respective
Warrant Securities for nine consecutive months by such Holders and any other
Holders of the Warrants and/or Warrant Securities who notify the Company of
their decision to join within 15 days after receiving notice from the Company
pursuant to Section 7.2(b).
(b) The Company covenants and agrees to give written
notice of any registration request under this Section 7.2 by any Holder or
Holders to all other registered Holders of Warrants and Warrant Securities
within ten days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section
7.1 and Section 7.2(a), at any time commencing after [_______________], 2001 and
expiring five years thereafter (or such earlier time as the Warrant Securities
are eligible for sale under Rule 144(k)), any Holder(s) of Warrants and/or
Warrant Securities shall have the right, exercisable by written request to the
Company, to require the Company to prepare and file, with the Commission a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of counsel for the Company and, if either the
Representative or a majority of the Holders electing to participate in the
registration requested pursuant to this Section 7.2(c) have retained counsel in
connection with such registration, counsel for each of the Representative and
the majority of the Holders electing to participate in such registration, so as
to permit a public offering and sale for nine consecutive months by any such
Holder(s) of their respective Warrant Securities, provided, however, that (i) a
minimum of 26% of the Warrant Securities issuable upon exercise of the Warrants
issued on the date hereof must be registered under such registration statement,
and (ii) the provisions of Section 7.3(b) hereof shall not apply to any such
registration request and all reasonable costs, fees and expenses in connection
therewith, including, without limitation, registration fees, legal and
accounting fees, printing fees, blue sky fees and expenses, that have been
approved in advance by a majority of the Holders participating in such
registration, shall be at the expense of the Holder or Holders making such
request.
(d) Notwithstanding the provisions of Sections 7.2(a)
and 7.2(c), if the Company shall not have filed a registration statement
relating to the Warrant Securities within the time period specified in Section
7.3(a) hereof, the Company shall have the obligation, upon the written notice of
election of at least 26% of the Holders of the Warrants and/or Warrant
Securities, to repurchase (i) any and all Warrant Securities held by such
persons at the higher of the Market Price per share of Common Stock on (x) the
date of the notice sent pursuant to Section 7.2(a) or (y) the expiration of the
period specified in Section 7.3(a) and (ii) any and all Warrants at such Market
Price less the Exercise Price of such Warrant. Such repurchase shall be in
immediately available funds and shall close within two days after the later of
(i) the expiration of the period specified in Section 7.3(a) or (ii) the
delivery of the written notice of election specified in this Section 7.2(d).
(e) Notwithstanding the provisions of Sections 7.2(a)
and (c), if at any time during which the Company is obligated to maintain the
effectiveness of a registration statement pursuant to such Sections 7.2(a) and
(c), the Company's Board of Directors, after the consultation with counsel to
the Company (which counsel shall be experienced in securities matters) has
determined in good faith that the filing of such registration statement or the
compliance by the Company with its disclosure obligations thereunder would
require the disclosure of material information which the Company has a bona fide
business purpose for preserving as confidential, then the Company may delay the
filing or the effectiveness of such registration statement (if not then filed or
effective, as appropriate) and shall not be required to maintain the
effectiveness thereof for a period expiring upon the earlier to occur of (i) the
date on which such information is disclosed to the public or ceases to be
material or the Company is so able to comply with its disclosure obligations or
(ii) 30 days after the Company's Board of Directors makes such good faith
determination. There shall not be more than one such delay period with respect
to any registration pursuant to Section 7.2(a) or (c). Notice of any such delay
period and of the termination thereof will be promptly delivered by the Company
to each Holder and shall be maintained in confidence by each such Holder.
7.3 Covenants of the Company with Respect to
Registration. In connection with any registration under Section 7.1 or 7.2
hereof, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement, as soon as practicable, but in any event within 60 days
of receipt of any demand therefor, shall use its best efforts to have any
registration statement declared effective at the earliest possible time and
shall furnish each Holder desiring to sell
-4-
<PAGE> 6
Warrant Securities such number of prospectuses as shall reasonably be requested;
provided, however, that the Company shall not be obligated to effect such
registration under the Securities Act except in accordance with the following
provisions:
(i) the Company shall not be obligated to use its
best efforts to file and cause to become effective any
registration statement for a period of up to 90 days if at the
time of such request any other registration statement pursuant
to which shares of Common Stock of the Company are to be or
were sold has been filed with the Commission and not withdrawn
or has been declared effective within the prior 60 days; and
(ii) the Company may delay the filing or
effectiveness of the registration statement for a period of up
to 90 days after the date of a request for registration if at
the time of such request the Company is engaged in a firm
commitment underwritten public offering of Common Stock in
which the Holders may include their Warrant Securities
pursuant to Section 7.1 hereof.
(b) The Company shall pay all costs, fees and expenses
in connection with all registration statements filed pursuant to Sections 7.1
and 7.2(a) hereof (excluding fees and expenses of the Representative's and
Holders' counsel and accountants and any underwriting or selling commissions)
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) whose Warrant Securities are
the subject of a Registration Statement filed pursuant to Section 7.2(c) will
pay all reasonable costs, fees and expenses in connection therewith, including,
without limitation, registration fees, legal and accounting fees, printing fees,
blue sky fees and expenses that have been approved in advance by a majority of
the Holders participating in such registration. If the Company shall fail to
comply with the provisions of Section 7.3(a) hereof, the Company shall, in
addition to any other equitable or other relief available to such Holders,
extend the Expiration Date by such number of days as shall equal the delay
caused by the Company's failure and be liable for any or all incidental, special
and consequential damages sustained by such Holders.
(c) The Company will take all necessary action which may
be required in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided,
that, the Company shall not be obligated to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process or to taxation in any
jurisdiction where it is not then so subject.
(d) The Company shall furnish without charge to each
Holder of Warrant Securities, promptly after filing thereof with the Commission,
at least one copy of the registration statement filed pursuant to Section 7.1 or
7.2 (a "Registration Statement") and each amendment thereto or each amendment or
supplement to the prospectus included therein (the "Prospectus") including all
financial statements and schedules, documents incorporated by reference therein
and if the Holder so requests in writing, all exhibits thereto.
(e) The Company shall take such action as may be
reasonably necessary so that (i) the Registration Statement and any amendment
thereto and any Prospectus forming a part thereof and any supplement or
amendment thereto complies in all material respects with the Securities Act and
the rules and regulations thereunder, (ii) the Registration Statement and any
amendment thereto (in either case, other than with respect to written
information furnished to the Company by or on behalf of any Holder specifically
for inclusion therein) does not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make any statement therein not misleading and (iii) the Prospectus and any
supplement thereto (in either case, other than with respect to such information
from Holders), does not include an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(f) The Company shall promptly advise the Holders of
Warrant Securities registered under the Registration Statement (which advice
pursuant to clauses (ii) - (iv) shall be accompanied by an instruction to
suspend the use of the Prospectus until the requisite changes have been made)
and, if requested by such persons, shall confirm such advice in writing:
-5-
<PAGE> 7
(i) when the Registration Statement and any amendment
thereto has been filed with the Commission and when the
Registration Statement or any post-effective amendment thereto
has become effective;
(ii) of any request by the Commission for amendments
to the Registration Statement or amendments or supplements to
the Prospectus or for additional information relating thereto;
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or of the suspension by any state securities
commission of the qualification of the Warrant Securities for
offering or sale in any jurisdiction, or the initiation of any
proceeding for any of the preceding purposes; and
(iv) of the happening of any event that requires the
making of any changes in the Prospectus so that, as of such
date, the Prospectus does not contain an untrue statement of a
material fact and does not omit to state a material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
(g) If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the Warrant
Securities under state securities or Blue Sky laws, the Company shall use its
reasonable best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(h) The Company shall, during the period the Company is
obligated to maintain the effectiveness of a Registration Statement under
Section 7.2 hereof, deliver to each Holder of Warrant Securities included under
the Registration Statement, without charge, such reasonable number of copies of
the Prospectus (including each preliminary prospectus) included in the
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request to facilitate the public sale or other disposition of the
Warrant Securities by the selling Holder.
(i) The Company shall cooperate with the Holders and the
underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Warrant Securities to be sold under the Registration
Statement, free of any restrictive legends and in such denominations and
registered in such names as the Holders or the underwriter(s), if any, may
reasonably request in connection with the sales of Warrant Securities pursuant
to the Registration Statement.
(j) Upon the occurrence of any event contemplated by
Section 7.3(f)(ii) - (iv) hereof or any request by the Commission for any
amendments to the Registration Statement or for additional information relating
thereto or the happening of any event that requires the making of any changes in
the Registration Statement, the Company shall file (and use its reasonable best
efforts to have declared effective as soon as possible) a post-effective
amendment to the Registration Statement or an amendment or supplement to the
Prospectus or file any other required document so that, as thereafter delivered
to the purchasers of Warrant Securities registered under the Registration
Statement, the Prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
in light of the circumstances under which they were made not misleading. Each
Holder of Warrant Securities registered under the Registration Statement agrees
by acquisition of such Warrant Securities that, upon receipt of any notice from
the Company of the existence of any fact of the kind described in Section
7.3(f)(ii) - (iv) hereof, such Holder will forthwith discontinue disposition of
Warrant Securities pursuant to the Registration Statement until such Holder
receives copies of the supplemented or amended Prospectus contemplated by this
Section 7.3(j), or until such Holder is advised in writing by the Company that
the use of the Prospectus may be resumed, and such Holder has received copies of
any additional or supplemental filings which are incorporated by reference in
the Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Warrant
Securities current at the time of receipt of such notice.
-6-
<PAGE> 8
(k) Nothing contained in this Agreement shall be
construed as requiring the Holders to exercise their Warrants prior to the
initial filing of any registration statement or the effectiveness thereof.
(l) The Company shall not permit the inclusion of any
securities other than Warrant Securities to be included in any Registration
Statement filed pursuant to Section 7.2(a) or 7.2(c) hereof without the prior
written consent of the Holders representing a majority of the Holders then
requesting registration under such Section 7.2(a) or Section 7.2(c),
respectively.
(m) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such Registration Statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) if and
to the extent permitted by Statement of Auditing Standards No. 72, a "cold
comfort" letter dated the effective date of such Registration Statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such Registration Statement, in each case covering
substantially the same matters with respect to such Registration Statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(n) The Company shall as soon as practicable after the
effective date of the Registration Statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Securities Act) an earnings statement (which need
not be audited) complying with Section 11(a) of the Securities Act and covering
a period of at least 12 consecutive months beginning after the effective date of
the Registration Statement.
(o) The Company shall deliver promptly to each Holder
participating in the offering upon request, and to the managing underwriters, if
any, copies of all correspondence between the Commission and the Company, its
counsel or accountants and all memoranda relating to discussions with the
Commission or its staff with respect to the Registration Statement and shall
permit each Holder and such underwriters to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the Registration Statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent accountants, all to
such reasonable extent and at such reasonable times and as often as any Holder
or underwriter shall reasonably request.
(p) With respect to the registration of Warrant
Securities pursuant to Section 7.2 to be sold to an underwriter for reoffering
to the public, the Company shall negotiate in good faith with respect to
entering into an underwriting agreement with the managing underwriters selected
for such underwriting by Holders holding a majority of the Warrant Securities
requested to be included in such underwriting, which may include the
Representative. Such agreement shall be satisfactory in form and substance to
the Company, each Holder and such managing underwriter and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Warrant Securities and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company except as they
may relate to such Holders and their intended methods of distribution and shall
not be requested by the Company to provide indemnification except as provided in
Section 7.3(s) hereof.
(q) In addition to Warrant Securities, and except as
otherwise provided in Section 7.3(l) hereof, upon the written request therefor
by any Holders, the Company shall include in the Registration Statement
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any other securities of the Company held by such Holders as of the date of
filing of such Registration Statement, including, without limitation, restricted
shares of Common Stock, options, warrants or securities convertible into shares
of Common Stock and shall not be requested by the Company to provide
indemnification except as provided in Section 7.3(s) hereof.
(r) For purposes of this Agreement, wherever a specified
percent of Holders is required to take action, such percentage shall be
calculated: (i) assuming the immediate exercise of all of the outstanding
Warrants for Common Stock and (ii) excluding the shares of Common Stock then
issued or issuable pursuant to Warrants that (x) are held by the Company, an
affiliate or officer thereof or any of their respective affiliates, members of
their family or persons acting as their nominees or in conjunction therewith or
(y) have been resold to the public pursuant to a Registration Statement filed
with the Commission under the Securities Act.
(s) Indemnification and Contribution.
(1) The Company agrees to indemnify and hold harmless
each Holder (for purposes of this Section 7.3(s), "Holder" shall include the
officers, directors, partners, employees and agents, and each person, if any,
who controls any Holder ("controlling person") within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, from and against any
and all losses, claims, damages, expenses or liabilities, joint or several (and
actions, proceedings, suits and litigation in respect thereof), whatsoever, as
the same are incurred, to which such Holder or any such controlling person may
become subject, under the Securities Act, the Exchange Act or any other statute
or at common law or otherwise insofar as such losses, claims, damages, expenses
or liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, or
any preliminary Prospectus or Prospectus (as from time to time amended and
supplemented) or arise out of or are based upon the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein (with respect to any preliminary Prospectus or
Prospectus, in the light of the circumstances under which they were made), not
misleading; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, expense or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, or any
preliminary Prospectus or Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Holder specifically for inclusion therein and
provided, further, that the Company shall not be liable to any such Holder under
the indemnity agreement in this subsection (1): (i) with respect to any
preliminary Prospectus or Prospectus (if such Prospectus has then been amended
or supplemented) to the extent that any such loss, liability, claim, damage or
expense of such Holder arises out of a sale of Warrant Securities by such Holder
to a person to whom (a) there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus (or of the Prospectus as
then amended or supplemented) if the Company has previously furnished copies
thereof to such Holder a reasonable time in advance or (b) prior to written
confirmation of such sale, such Holder received notice from the Company pursuant
to Section 7.3(j) to discontinue disposition pursuant to such Prospectus and, in
either case, the loss, liability, claim, damage or expense of such Holder
results from an untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in the preliminary Prospectus (or
the Prospectus) which was corrected in the Prospectus (or the Prospectus as
amended or supplemented) or (ii) to the extent that any such loss, claim,
damage, expense or liability arises out of or is based upon any action or
failure to act by such Holder that is found in a final judicial determination
(or a settlement tantamount thereto) to constitute bad faith, willful misconduct
or gross negligence on the part of such Holder. The indemnity agreement in this
subsection (1) shall be in addition to any liability which the Company may have
at common law or otherwise, to the extent not inconsistent therewith.
The Company also agrees to indemnify or contribute to losses
of any underwriters of Warrant Securities registered under the Registration
Statement, their officers and directors and each person, if any, who controls
any such underwriter (within the meaning of the Securities Act) on substantially
the same basis as that of the indemnification of the Holders provided in this
Section 7.3(s)(1) and shall, if requested by Holders holding a majority of the
Warrant Securities sought to be registered pursuant to Section 7.2 hereof, enter
into an underwriting agreement reflecting such agreement, as provided in Section
7.3(p) hereof.
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<PAGE> 10
(2) Each Holder agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers and each other person,
if any, who controls the Company within the meaning of the Securities Act, to
the same extent as the foregoing indemnity from the Company to the Holders, but
only with respect to (i) statements or omissions, if any, made in conformity
with information relating to such Holder furnished in writing by such Holder
specifically for use in the Registration Statement, or any preliminary
Prospectus or the Prospectus or any amendment thereof or supplement thereto, and
(ii) any breach of such Holder's representations, covenants or agreements set
forth herein; provided, however, that the obligation to indemnify will be
individual to each Holder and will be limited to the amount of net proceeds
received by such Holder from the sale of Warrant Securities pursuant to the
Registration Statement.
(3) Promptly after receipt by an indemnified party under
this Section 7.3(s) of notice of the commencement of any action, suit or
proceeding, such indemnified party shall, if a claim in respect thereof is to be
made against one or more indemnifying parties under this Section 7.3(s), notify
each party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure to notify an indemnifying party shall not
relieve it from any liability which it may have under Sections 7.3(s)(1) or (2)
unless and to the extent that it has been prejudiced in a material respect by
such failure or from the forfeiture of substantial rights and defenses). In case
any such action, suit or proceeding is brought against any indemnified party,
and it notifies an indemnifying party or parties of the commencement thereof,
the indemnifying party or parties will be entitled to participate therein, and
to the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party, which may be the same counsel as counsel to the indemnifying
party. Notwithstanding the foregoing, the indemnified party or parties shall
have the right to employ its or their own counsel in any such case but the fees
and expenses of such counsel shall be at the expense of such indemnified party
or parties unless (i) the employment of such counsel shall have been authorized
in writing by the indemnifying parties in connection with the defense of such
action at the expense of the indemnifying party, (ii) the indemnifying parties
shall not have employed counsel reasonably satisfactory to such indemnified
party to take charge of the defense of such action within a reasonable time
after notice of commencement of the action or (iii) such indemnified party or
parties shall have reasonably concluded, after consultation with counsel to such
indemnified party or parties, that a conflict of interest exists which makes
representation by counsel chosen by the indemnifying party not advisable (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one additional counsel shall be borne by
the indemnifying parties. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7.3(s) to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent.
(4) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes claim for
indemnification pursuant to this Section 7.3(s), but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 7.3(s) provide for
indemnification in such case, or (ii) contribution under the Securities Act may
be required, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions, suits, proceedings
or litigation in respect thereof) in such proportion as is appropriate to
reflect the relative fault of each of the contributing parties, on the one hand,
and the party to be indemnified, on the other hand, in connection with the
statements or omissions that resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by a Holder, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions, suits, proceedings
or litigation in respect thereof) referred to above in this subsection (4) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating,
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<PAGE> 11
preparing or defending any such action, claim, suit, proceeding or litigation.
Notwithstanding the provisions of this subsection (4), no Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the Warrant Securities sold by such indemnifying party and
distributed to the public were offered to the public exceeds the amount of any
damages that such indemnifying party has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 12(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 7.3(s), each person, if any, who controls the Company within the
meaning of the Securities Act, each executive officer of the Company and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to this subsection (4). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit, proceeding or litigation against such party in respect to which a
claim for contribution may be made against another party or parties under this
subsection (4), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subsection (4), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
(t) Notwithstanding the foregoing provisions of this
Section 7.3, no registration rights shall be extended pursuant to this Section 7
with respect to any Warrant Securities (i) which have been sold pursuant to and
in accordance with an effective Registration Statement, (ii) sold in accordance
with Rule 144 under the Securities Act or (iii) eligible for sale under Rule
144(k) under the Securities Act.
8. Adjustments.
8.1 Adjustments of Number of Shares. The number of
shares of Common Stock that the holder of any Warrants shall be entitled to
receive upon each exercise thereof shall be determined by multiplying:
(a) the number of shares of Common Stock that would otherwise
(but for the provisions of this Section 8) be issuable upon such
exercise, as designated by the holder hereof pursuant to Section 4; by
(b) a fraction of which the numerator is $____ and the
denominator is the Exercise Price in effect on the date of such
exercise;
provided, however that no adjustment pursuant to this Section 8 shall occur as a
result of (i) shares of Common Stock issued pursuant to the Underwriting
Agreement, (ii) shares of Common Stock issued upon the exercise of other
Warrants or (iii) shares of Common Stock issued upon the exercise of outstanding
options and warrants granted prior to the date hereof and which are described in
the Registration Statement (collectively, the "Excluded Issuances").
8.2 Adjustment of Exercise Price.
8.2.1 Initial Exercise Price. The Exercise Price, which
will initially be 120% of the public offering price with respect to the
Offering, shall be adjusted and readjusted from time to time as provided in this
Section 8 and, as so adjusted or readjusted, shall remain in effect until a
further adjustment or readjustment thereof is required by this Section 8;
provided, however, that there shall be no adjustment of the Exercise Price due
to Excluded Issuances.
8.2.2 Issuance of Additional Shares of Common Stock. In
case the Company, at any time or from time to time after the date on which the
Registration Statement becomes effective under the Securities Act (the
"Effective Date"), shall issue or sell Additional Shares of Common Stock (as
defined below), including Additional Shares of Common Stock deemed to be issued
pursuant to Section 8.3 or Section 8.4, without consideration or for a
consideration per share less than either the Exercise Price or the Fair Market
Value (as defined below) of the shares of Common Stock outstanding immediately
prior to such issue or sale, then, and in each such case, the Exercise
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Price shall be reduced, subject to Section 8.9, concurrently with such issue or
sale, to a price (calculated to the nearest cent) determined by multiplying such
Exercise Price by a fraction of which
(a) the numerator shall be (i) the number of shares of Common
Stock outstanding immediately prior to such issue or sale plus (ii) the
number of shares of Common Stock which the aggregate consideration
received by the Company for the total number of Additional Shares of
Common Stock so issued or sold would purchase at the lesser of such
Exercise Price or Fair Market Value immediately prior to such issue or
sale, and
(b) the denominator shall be the number of shares of Common
Stock outstanding immediately after such issue or sale.
For the purposes of this Section 8.2.2, (x) immediately after any Additional
Shares of Common Stock shall be deemed to be issued pursuant to Section 8.3 or
Section 8.4, such Additional Shares of Common Stock shall be deemed to be
outstanding, and (y) treasury shares shall not be deemed to be outstanding.
"Additional Shares of Common Stock" shall mean all shares (including treasury
shares) of Common Stock issued or sold (or pursuant to Sections 8.3 or 8.4,
deemed to be issued) by the Company after the Effective Date, whether or not
subsequently reacquired or retired by the Company, other than shares of Common
Stock issued upon the exercise of the Warrants. "Fair Market Value," with
respect to shares of Common Stock outstanding at any time shall be determined as
follows:
(a) If a public market exists for the Common Stock, the Fair
Market Value of the Common Stock shall be (i) the closing price of the
Common Stock on the Business Day (as defined below) prior to such
issuance on the principal national securities exchange on which the
Common Stock is at the time traded or, if none, the Nasdaq Stock Market
("Nasdaq") or (ii) if there is not such a sale on such day or if Common
Stock is not at that time traded on the Nasdaq or on a national
securities exchange, the average of the lowest closing bid and highest
closing asked prices on such day as reported by the National
Association of Securities Dealers (or any successor organization); or
(b) If a public market for the Common Stock does not exist,
the Fair Market Value of the Common Stock shall be determined in good
faith by the Board of Directors promptly after the issuance of any
Additional Shares of Common Stock or the occurrence of any other event
or the existence of any other circumstance as a result of which the
Fair Market Value of the Common Stock would be required for any
provision of this agreement, and the Company shall promptly deliver to
each Holder a certificate of the Secretary of the Company setting forth
the amount of the Fair Market Value of the Common Stock and certifying
that the amount was determined by the Board of Directors of the
Company. If any Holder disagrees with the Fair Market Value set forth
in that certificate, such Holder may, together with any other Holders
who so disagree, engage an independent investment bank or firm of
independent public accountants to act as appraiser, the expense of
which shall be borne by such Holder or Holders, to determine the Fair
Market Value of the Common Stock, and such Holder shall deliver such
appraisal to the Company within 30 days after the date of delivery of
the certificate referenced to above. Within five days after delivery to
the Company of such appraisal, the appraiser engaged by the Holder and
a person designated by the Board (the expense of which shall be borne
by the Company) shall meet in order to resolve any questions or
differences with respect to the Fair Market Value of the Common Stock.
If such persons agree on a Fair Market Value of the Common Stock, such
Fair Market Value shall be the Fair Market Value. If no such agreement
is reached, the Fair Market Value shall be determined within ten days
after such meeting by an appraiser who shall be selected by the
appraiser engaged by the Holder and the person designated by the Board
(or, if they do not agree on an appraiser within ten days, another
independent investment bank or firm of independent public accountants
to act as appraiser selected by the American Arbitration Association),
the expense of which shall be shared equally by such Holder or Holders,
on the one hand, and the Company, on the other hand, and the
determination of that third appraiser shall be conclusive and binding
on both the Company and the Holder. In determining the Fair Market
Value of any share of Common Stock, all Warrants shall be treated as if
they had been exercised for the number of shares of Common Stock
issuable upon their exercise, and the Fair Market Value of any
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Warrants shall be equal to the Fair Market Value of the Shares of
Common Stock issuable upon the exercise of such Warrants less the
exercise price of such Warrants.
8.2.3 Dividends and Distributions. In case the Company at
any time or from time to time after the Effective Date shall declare, order, pay
or make a dividend or other distribution on Common Stock (including, without
limitation, any distribution of stock or other securities, property or options
by way of dividend, spin-off, reclassification, corporate rearrangement, or any
redemption or acquisition of stock or options or other securities), then, and in
each such case, the Exercise Price in effect immediately prior to the close of
business on the record date fixed for the determination of holders of any class
of securities entitled to receive such dividend or other distribution shall be
reduced, subject to Section 8.9, effective as of the close of business on such
record date, to a price (calculated to the nearest cent) determined by
multiplying such Exercise Price by a fraction of which
(a) the numerator shall be the Exercise Price in effect
immediately prior to the close of business on such record date minus
the value of such dividends or other distributions (as determined in
good faith by the Board of Directors of the Company) applicable to one
share of Common Stock, and
(b) the denominator shall be such Exercise Price in effect
immediately prior to the close of business on such record date;
provided, however, that no such reduction shall be made pursuant to this Section
8.2.3 for a dividend payable in Additional Shares of Common Stock or in Options
(as defined below) for Common Stock, or a dividend payable in cash or other
property and declared out of the earned surplus (i.e., retained earnings, when
and if the Company has any) of the Company (excluding any portion thereof
resulting from a revaluation of property). For purposes of the foregoing, a
dividend payable other than in cash shall be considered payable out of earned
surplus only to the extent that such earned surplus is charged an amount equal
to the fair value of such dividend at the time of declaration as determined in
good faith by the Board of Directors of the Company. "Options" shall mean
rights, options or warrants to subscribe for, purchase or otherwise acquire
either Additional Shares of Common Stock or Convertible Securities. "Convertible
Securities" shall mean any shares (other than Common Stock), evidences of
indebtedness or other securities directly or indirectly convertible into or
exchangeable for Additional Shares of Common Stock.
8.3 Treatment of Options and Convertible Securities. In
case the Company, at any time or from time to time after the Effective Date
shall issue, sell, grant or assume, or fix a record date for the determination
of holders of any class of securities entitled to receive, any Options or
Convertible Securities, then, and in each such case, the maximum number of
Additional Shares of Common Stock issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities shall be deemed to be
issued for purposes of Section 8.2.2 as of the time of such issue, sale, grant
or assumption, or, in case such a record date shall have been fixed, as of the
close of business on such record date; provided, however, that such Additional
Shares of Common Stock shall not be deemed to be issued if the consideration per
share of such shares, as determined pursuant to Section 8.5, would be equal to
or greater than the greater of the Exercise Price or the Fair Market Value of
the shares of Common Stock on the Business Day on which such Additional Shares
of Common Stock shall be deemed to be issued; and provided further, however,
that in each such case in which Additional Shares of Common Stock would have
been deemed to be issued,
(a) no further Additional Shares of Common Stock shall be
deemed to be issued upon the subsequent issue or sale of Common Stock
or any other securities of the Company pursuant to the exercise of such
Options or the conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
shall provide in any manner for any increase in the consideration
payable to the Company, or decrease in the number of Additional Shares
of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Exercise Price computed upon the original issue, sale,
grant or assumption of such Options or Convertible Securities (or upon
the fixing of the record date with respect thereto), and any subsequent
adjustments in such Exercise Price, shall, upon any such increase in
consideration or decrease in the number of Additional Shares of Common
Stock issuable becoming effective, be recomputed to reflect such
increase or decrease insofar as
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it affects such Options, or the rights of conversion or exchange under
such Convertible Securities, as are outstanding at the time such
increase or decrease becomes effective;
(c) upon the expiration of any such Options or of the rights
of conversion or exchange under any such Convertible Securities which
shall not have been exercised, or upon purchase by the Company and
cancellation or retirement of any such Options which shall not have
been exercised or of any such Convertible Securities the rights of
conversion or exchange under which shall not have been exercised, the
Exercise Price computed upon the original issue, sale, grant or
assumption of such Options or Convertible Securities (or upon the
fixing of the record date with respect thereto), and any subsequent
adjustments in such Exercise Price, shall, upon such expiration,
cancellation or retirement, be recomputed as if:
(i) in the case of Options for Common Stock or of
Convertible Securities, the only Additional Shares of Common
Stock issued or sold were the Additional Shares of Common
Stock, if any, actually issued or sold upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities and the consideration received thereupon was
(A) in the case of Options, an amount equal
to (x) the consideration actually received by the
Company for the issue, sale, grant or assumption of
all such Options, plus (y) the consideration actually
received by the Company upon exercise of any such
Options, minus (z) the consideration paid by the
Company for any purchase of such Options which were
not exercised; or
(B) in the case of Convertible Securities,
an amount equal to (x) the consideration actually
received by the Company for the issue, sale, grant or
assumption of all such Convertible Securities (unless
theretofore taken into account pursuant to clause
(ii) below) which were actually converted or
exchanged, plus (y) the consideration actually
received by the Company upon such conversion or
exchange, minus (z) the consideration paid by the
Company for any purchase of such Convertible
Securities the rights of conversion or exchange under
which were not exercised; and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise of such Options were issued
at the time of the issue, sale, grant or assumption of such
Options, and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was an amount equal to (x) the consideration actually
received by the Company for the issue, sale or grant of all
such Options, plus (y) the consideration deemed to be received
by the Company (pursuant to Section 8.5) upon the issue or
sale of the Convertible Securities with respect to which such
Options were actually exercised, minus (z) the consideration
paid by the Company for any purchase of such Options that were
not exercised; and
(d) no readjustment pursuant to subdivision (b) or (c) above
shall have the effect of increasing the Exercise Price by an amount in
excess of the amount of the adjustment thereof originally made pursuant
to the issue, sale, grant or assumption of such Options or Convertible
Securities.
"Business Day" shall mean any day of the year which is not a Saturday,
Sunday or a day on which banks are required or authorized to close in the State
of New York.
8.4 Treatment of Stock Dividends, Stock Splits, etc. In
case the Company at any time or from time to time after the Effective Date shall
fix a record date for the determination of holders of any class of securities
entitled to receive any dividend or other distribution on any class of stock of
the Company payable in Common Stock, or shall otherwise effect any subdivision
of the outstanding shares of Common Stock into a greater number of shares of
Common Stock, then, and in each such case, Additional Shares of Common Stock
shall be deemed to be issued (a) in the case of any such dividend or other
distribution, immediately after the close of business on such record date, or
(b) in the case of any such subdivision, at the close of business on the day
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immediately prior to the day upon which such corporate action shall have become
effective.
8.5 Computation of Consideration. For the purposes of
this Section 8:
(a) The consideration for any Additional Shares of Common
Stock actually issued or sold or for the issue, sale, grant or
assumption of any Options or Convertible Securities, irrespective of
the accounting treatment of such consideration, shall
(i) insofar as it consists of cash, be computed as
the amount of cash actually received by the Company, without
deducting any expenses paid or incurred by the Company, or any
commissions or compensation paid or concessions or discounts
allowed by the Company to underwriters, dealers or others
performing similar services in connection with any such issue
or sale;
(ii) insofar as it consists of consideration
(including securities as defined in the Securities Act) other
than cash, be computed as the market value thereof at the time
of any such issue, sale, grant or assumption as determined in
good faith by the Board of Directors of the Company (which
determination shall be evidenced in a certificate delivered
promptly to each Holder and which determination shall be
subject to the procedures for disagreement as provided in item
(b) of the definition of "Fair Market Value" in Section
8.2.2); and
(iii) insofar as Additional Shares of Common Stock
are issued or sold, Options or Convertible Securities are
issued, sold, granted or assumed together with other stock or
securities or other assets of the Company for a consideration
that covers both, be the proportion of such consideration
(computed as provided in clauses (i) and (ii) above) allocable
to such Additional Shares of Common Stock or Convertible
Securities as determined in good faith by the Board of
Directors of the Company (which determination shall be
evidenced in a certificate delivered promptly to each Holder
and which determination shall be subject to the procedures for
disagreement as provided in item (b) of the definition of
"Fair Market Value" in Section 8.2.2).
(b) The following shall be deemed to be issued without
consideration: (i) all Additional Shares of Common Stock, Options or
Convertible Securities issued in payment of any dividend or other
distribution on any class of stock of the Company; and (ii) all
Additional Shares of Common Stock issued to effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of
Common Stock otherwise than by payment of a dividend in Common Stock.
Additional Shares of Common Stock, Options or Convertible Securities
issued to directors, management, employees and related parties shall be
deemed to be issued (i) without consideration if not issued for cash or
property and (ii) for less than either the Exercise Price or the Fair
Market Value to the extent that any cash or the fair value of property,
as determined in good faith by the Board of Directors, received for
such securities is less than either the Exercise Price or the Fair
Market Value of such securities.
(c) Additional Shares of Common Stock deemed to have been
issued for consideration pursuant to Section 8.3 shall be deemed to
have been issued for a consideration per share determined by dividing
(i) the total amount, if any, actually received by
the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration) payable to the
Company upon the exercise of all such Options or the
conversion or exchange of all such Convertible Securities or,
in the case of Options for Convertible Securities, the
exercise of all such Options for Convertible Securities and
the conversion or exchange of all such Convertible Securities,
in each instance computing such consideration as provided in
the foregoing subdivision (a), by
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<PAGE> 16
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment
of such number) issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities or,
in the case of Options for Convertible Securities, the
exercise of such Options and the conversion or exchange of
such Convertible Securities.
8.6 Adjustments for Combinations, etc. In case the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Exercise Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be increased proportionately.
8.7 Merger or Consolidation. In the event of (i) any
reclassification (including, without limitation, a reclassification effected by
means of an exchange or tender offer by the Company or any Subsidiary) or change
of outstanding Common Stock (other than a change relating to par value, or as a
result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which holders
of Common Stock shall be entitled to receive securities or other assets
(including cash) with respect to or in exchange for Common Stock or (iii) any
sale or conveyance of the assets of the Company as, or substantially as, an
entirety to any other corporation as a result of which holders of Common Stock
shall be entitled to receive securities or other assets (including cash) with
respect to or in exchange for Common Stock, then the Company or the successor or
purchasing corporation, as the case may be, shall execute and deliver to the
Holder upon surrender of the Warrant Certificate held by such Holder a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon full exercise of such Warrant, the
kind and amount of shares of stock and/or other securities and/or property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock for which such Warrant might have been exercised
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance. Such supplemental warrant agreement shall
provide for adjustments which shall be as nearly equivalent as practicable to
the adjustments provided for in this Section 8. The above provision of this
subsection shall similarly apply to successive events of the type described in
this Section 8.7.
8.8 Dilution in Case of Other Securities. In case any
Other Securities (as defined below) shall be issued or sold, or shall become
subject to issue or sale upon the conversion or exchange of any Common Stock or
Other Securities of the Company (or any issuer of Other Securities or any other
person referred to in Section 8.7), or shall become subject to subscription,
purchase or other acquisition pursuant to any Options issued, sold, granted or
assumed by the Company (or any such other issuer or person) for a consideration
that dilutes, in accordance with the standards established in the other
provisions of this Section 8 or otherwise, the purchase rights granted by the
Warrants, then, and in each such case, the computations, adjustments and
readjustments provided for in this Section 8 with respect to the Exercise Price
shall be made and applied as nearly as possible in the manner so provided, to
determine the amount of Other Securities that the Holder of such Warrants shall
be entitled to receive upon the exercise of such Warrants, in order to protect
such Holder against such dilution of purchase rights. "Other Securities" shall
mean any stock (other than Common Stock) of the Company or of any other person
that the Holders of the Warrants at any time shall be entitled to receive, or
shall have received, upon the exercise of the Warrants, in lieu of or in
addition to Common Stock, or that at any time shall be issuable or shall have
been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to this Section 8 or otherwise.
8.9 Minimum Adjustment of Exercise Price. If the amount
of any adjustment of the Exercise Price required pursuant to this Section 8
would be less than $0.01, such amount shall be carried forward, and adjustment
with respect thereto shall be made at the time of and together with any
subsequent adjustment that, together with such amount and any other amount or
amounts so carried forward, shall aggregate at least $0.01.
8.10 Certificate of Adjustment. After each adjustment of
the Exercise Price or the amount of Warrant Securities purchasable upon exercise
of Warrants pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman, President, Treasurer or Secretary of the
Company setting forth: (i) the Exercise Price, as so adjusted; (ii) the amount
of Warrant Securities purchasable upon exercise of each Warrant after
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<PAGE> 17
such adjustment; and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with its records and
cause a brief summary thereof to be sent by ordinary first class mail to each
Holder at such Holder's last address as it shall appear on the registry books of
the Company.
8.11 Validity of Warrant Certificate. Notwithstanding any
adjustments or changes in the Exercise Price or the amount of Warrant Securities
purchasable upon exercise of Warrants, Warrant Certificates theretofore and
thereafter issued shall continue to express the Exercise Price per share and the
amount of Warrant Securities purchasable thereunder as of the date such Warrant
Certificates were originally issued; provided, the Holders shall be entitled to
exercise Warrants represented by such Warrant Certificates after giving effect
to each such adjustment and change, and such Warrant Certificate shall be deemed
to incorporate each such adjustment and change as if new Warrant Certificates
reflecting each such adjustment and change had been issued to the Holders.
8.12 No Dilution or Impairment. The Company shall not, by
amendment of its certificate of incorporation or bylaws or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issue,
sale, grant or assumption of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
agreement or the Warrants, but will at all times, whether or not requested to do
so, in good faith assist in the carrying out of all such terms and in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the Holders of the Warrants against dilution or other impairment.
Without limiting the generality of the foregoing, the Company take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Shares upon the exercise of all
Warrants from time to time outstanding.
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable, without expense, upon the surrender
thereof by the Holder at the principal executive office of the Company, for a
new Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
such Warrant Certificates, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor in lieu thereof.
10. Elimination of Fractional Interests. The Company
shall not be required to issue certificates representing fractions of shares of
Common Stock upon the exercise of the Warrants to purchase Common Stock, nor
shall it be required to issue scrip or pay cash in lieu of fractional interests,
it being the intent of the parties that all fractional interests shall be
eliminated by rounding any fraction up to the nearest whole number of shares of
Common Stock or other securities, properties or rights.
11. Reservation and Listing of Securities. The Company
shall at all times reserve and keep available out of its authorized capital
stock, solely for the purpose of issuance upon the exercise of the Warrants,
such number of shares of Common Stock or other securities, property or rights as
shall be issuable upon exercise thereof. The Company covenants and agrees that,
upon exercise of the Warrants and payment of the Exercise Price therefor, all
shares of Common Stock and other securities issued by the Company upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any security holder of the Company. As long
as the Warrants shall be outstanding, the Company shall use its reasonable best
efforts to cause the Common Stock issuable upon the exercise of the Warrants to
be listed (subject to official notice of issuance) on all securities exchanges
on which the Common Stock may then be listed and/or quoted by NASDAQ if the
Common Stock issued to the public is so quoted.
12. Notices to Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to receive
dividends or to vote or to consent or to receive notice as a stockholder with
respect to any meetings of stockholders for the election of directors or any
other matter or as
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<PAGE> 18
having any rights whatsoever as a stockholder of the Company. If, however, at
any time prior to the expiration of the Warrants and their exercise, any of the
following events shall occur:
(a) the Company shall set a record date for the
purpose of entitling holders of shares of Common Stock to
receive a dividend or distribution payable otherwise than in
cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the
books of the Company;
(b) the Company shall offer to all the holders of
shares of Common Stock any additional shares of capital stock
of the Company or securities convertible into or exchangeable
for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event to each Holder at least 15 days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution or offer, or entitled
to vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer books,
as the case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with any of the events
described in this Section 12.
13. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to a Holder, to the address of such Holder as
shown on the books of the Company; or
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may
designate by notice to the Holders.
14. Supplements and Amendments. The Company and the
Underwriters may from time to time supplement or amend this Agreement without
the approval of any Holders (other than the Representative) in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Representative may deem necessary or desirable and which the Company and
the Representative deem shall not adversely affect the interests of the Holders
in any material respect.
15. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the
close of business on August [_], 2006. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on August [_], 2011.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS
AGREEMENT AND EACH WARRANT CERTIFICATES ISSUED HEREUNDER SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL
BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT GIVING EFFECT TO
THE RULES OF SAID STATE GOVERNING THE CONFLICT OF LAWS.
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<PAGE> 19
The Company, the Representative and the Holders hereby agree
that any action, proceeding or claim against it arising out of, or relating in
any way to, this Agreement shall be brought and enforced in the courts of the
State of New York or of the United States of America for the Southern District
of New York, and irrevocably submits to such jurisdiction, which jurisdiction
shall be exclusive. The Company, the Representative and the Holders hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum and also hereby irrevocably waive any right or claim to trial by jury in
connection with any such action, proceeding or claim. Any such process or
summons to be served upon any of the Company, the Representative and the Holders
(at the option of the party bringing such action, proceeding or claim) may be
served by transmitting a copy thereof, by registered or certified mail, return
receipt requested, postage prepaid, addressed to it at the address set forth in
Section 13 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
The Company, the Representative and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
17. Entire Agreement; Modification. This Agreement
(including the Underwriting Agreement to the extent portions thereof are
referred to herein) contains the entire understanding between the parties hereto
with respect to the subject matter hereof. Except as set forth in Section 14
hereof, this Agreement may not be modified or amended except by a writing duly
signed by the Company, Holders of Warrants or Warrant Securities representing a
majority of the shares of Common Stock issuable or issued hereunder and the
party against whom enforcement of the modification or amendment is sought.
18. Severability. If any provision of this Agreement
shall be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision of this Agreement.
19. Captions. The caption headings of the Sections of
this Agreement are for convenience of reference only, and are not intended, nor
should they be construed as, a part of this Agreement and shall be given no
substantive effect.
20. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person, corporation or entity other than the
Company, the Representative and any other Holders of Warrants and/or Warrant
Securities any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the Company
and the Representative and any other Holders of Warrants and/or Warrant
Securities.
21. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original and such counterparts shall together constitute but one
and the same instrument.
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<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
SUNHAWK.COM CORPORATION
By:______________________________________
Name:
Title:
Attest:
_____________________________________
Name:
Title:
COLEMAN AND COMPANY SECURITIES, INC.
By:______________________________________
Name:
Title:
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<PAGE> 21
EXHIBIT A
FORM OF WARRANT CERTIFICATE
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, [____________], 2004
No. W- __________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _________________, or
registered assigns, is the registered holder of _______ Warrants to purchase
initially, at any time from [_______________], 2001 until 5:30 p.m. New York
time on [_______________], 2004 (the "Expiration Date"), up to __________ fully
paid and nonassessable shares of Common Stock, no par value (the "Common
Stock"), of Sunhawk.com Corporation (the "Company"), at the initial exercise
price, subject to adjustment in certain events (the "Exercise Price"), of
$[__________] per share upon surrender of this Warrant Certificate and payment
of the Exercise Price, at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant Agreement dated
as of [______________], 1999 by and between the Company and Coleman and Company
Securities, Inc. (the "Warrant Agreement"). Payment of the Exercise Price, shall
be made by certified or official bank check in New York Clearing House funds
payable to the order of the Company and by surrender of this Warrant
Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the amount the type and/or number of the
Company's securities issuable hereunder may, subject to certain conditions, be
adjusted. Subject to Section 8.6 of the Warrant Agreement, in such event, the
Company will, at the request of the holder, issue a new Warrant Certificate
evidencing the adjustment in the Exercise Price and the number and/or type of
securities issuable upon the exercise of the Warrants; provided, however, that
the failure of the Company to issue such new Warrant Certificates shall not in
any way change, alter or otherwise impair the rights of the holder as set forth
in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Warrant Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such number of unexercised
Warrants.
<PAGE> 22
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of _______________________, _______
SUNHAWK.COM CORPORATION
[SEAL] By:______________________________________
Name:
Title:
Attest:
_________________________________________
Name:
Title:
<PAGE> 23
ANNEX A
TO WARRANT CERTIFICATE
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________________
shares of Common Stock and herewith tenders in payment for such securities a
certified or official bank check payable in New York Clearing House Funds to the
order of ___________________________________ in the amount of $________________,
all in accordance with the terms of Section 3 of the Representative's Warrant
Agreement dated as of ____________, 1999 by and between Sunhawk.com Corporation
and Coleman and Company Securities, Inc. The undersigned requests that a
certificate for such securities be registered in the name of
_________________________________________ whose address is
____________________________________________________________________________and
that such certificate be delivered to ________________ whose address is
________________________________________.
Dated:_________________ Signature______________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate)
_______________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE> 24
ANNEX B
TO WARRANT CERTIFICATE
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________ shares of
Common Stock all in accordance with the terms of Section 3.2 of the
Representative's Warrant Agreement dated as of __________, 1999 by and between
Sunhawk.com Corporation and Coleman and Company Securities, Inc. The undersigned
requests that a certificate for such securities be registered in the name of
_______________________ whose address is _____________________________ and that
such certificate be delivered to _____________________________ whose address is
____________________________________________________________________.
Dated:_________________ Signature______________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate)
_______________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE> 25
ANNEX C
TO WARRANT CERTIFICATE
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______________________________ hereby
sells, assigns and transfers unto ______________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
the within Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
_____________________________ Attorney to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated:_________________ Signature______________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate)
_______________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated April 9, 1999,
except for note 13, as to which the date is June 10, 1999 in Amendment No. 2 to
the Registration Statement (Form SB-2) and related prospectus of Sunhawk.com
Corporation for the registration of 1,200,000 shares of its common stock.
ERNST & YOUNG LLP
Seattle, Washington
August 24, 1999
