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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the three month period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number 333-80849
Sunhawk.com Corporation
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(Exact name of small business issuer as specified in its charter)
Washington 91-1568830
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
223 Taylor Ave. N., Suite 200, Seattle WA 98109-5017
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(Address of principal executive offices)
(206) 728-6063
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(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of December 31, 1999, the
registrant had 0 shares of preferred stock outstanding and 1,399,380 share of
common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
Form 10-QSB
Three months ended March 31, 2000
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Page
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PART I: FINANCIAL INFORMATION
Item 1.
Balance Sheet 1
Statements of Operations 2
Statements of Shareholders' Equity 3
Statements of Cash Flows 4
Notes to Financial Statements 5 - 7
Item 2.
Management's Discussion And Analysis or Plan of Operation 7 - 11
PART II: OTHER INFORMATION 11
SIGNATURES 12
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
SUNHAWK.COM CORPORATION
Balance Sheet
(unaudited)
<TABLE>
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March 31, 2000
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ASSETS
Current assets:
Cash and Cash Equivalent $ 10,593,186
Short-Term Investments (Held to Maturity) 2,025,944
Accounts Receivable 10,096
Inventory 16,464
Prepaid Expenses 380,235
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Total current assets 13,025,925
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Property and equipment, net 380,406
Other assets:
Digital sheet music masters (net of accumulated amortization
of $58,679 475,551
Patents & trademarks, at cost (net of accumulated
amortization of $10,701 110,190
Music catalog distribution rights (net of
accumulated amortization of $150,756 1,168,362
Prepaid digital sheet music masters 985,966
Long-term Investment (Held to Maturity) 996,814
Prepaid Expenses 246,858
Deposits
27,484
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Total other assets 4,011,225
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Total assets $ 17,417,556
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of Credit $ 600,000
Accounts payable and accrued expenses 837,494
Payable to Eller McConney LLC 322,764
Payable to shareholder 290,000
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Total current liabilities 2,050,258
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Long-term liabilities:
Payable to Eller McConney LLC $ 1,000,000
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Total long-term liabilities 1,000,000
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Total liabilities 3,050,258
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Shareholders' equity
Preferred stock, no par value:
Authorized shares -- 10,000,000
Outstanding shares - none --
Common stock, no par value:
Authorized shares -- 30,000,000 18,753,141
Outstanding shares - 3,009,380 at March 31, 2000
Accumulated deficit (4,385,843)
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Total shareholders' equity (deficit) 14,367,298
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Total liabilities and shareholders' equity $ 17,417,556
============
</TABLE>
See accompanying notes to financial statements.
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SUNHAWK.COM CORPORATION
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
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Sales $ 58,377 $ 28,897 $ 97,933 $ 45,394
Cost of goods sold:
Royalties, materials, shipping,
and credit card
processing fees 43,148 13,870 73,025 24,746
Amortization of digital sheet
music masters and music catalog
distribution rights 52,105 9,138 102,960 12,182
----------- ----------- ----------- -----------
Total Cost of Goods Sold 95,253 23,008 175,985 36,928
----------- ----------- ----------- -----------
Gross profit (loss) (36,876) 5,889 (78,052) 8,466
Selling, general and administrative 1,753,526 570,053 2,739,523 1,129,166
----------- ----------- ----------- -----------
Loss from operations (1,790,402) (564,164) (2,817,575) (1,120,700)
Other Income(expense) 47,763 (72,398) 31,441 (113,928)
----------- ----------- ----------- -----------
Net loss $(1,742,639) $ (636,562) $(2,786,134) $(1,234,628)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $ (0.80) $ (0.71) $ (1.55) $ (0.97)
=========== =========== =========== ===========
Weighted average common shares for
net loss per share computations:
Basic and diluted 2,171,670 900,376 1,795,282 1,270,879
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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SUNHAWK.COM CORPORATION
Statements of Stockholders' Equity (Deficit)
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Common Stock Shareholders' Total
-------------------------------- Accumulated Equity
Shares Amount Deficit (Deficit)
------------ ------------ ------------- ------------
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Balance, October 1, 1996 643,657 $ 901 $ (618,561) $ (617,660)
Exercise of common stock
Options 9,195 -- -- --
Sale of common stock 229,878 4 -- 4
Compensation related to sale of
common stock -- 96,316 -- 96,316
Net loss -- -- (910,983) (910,983)
------------ ------------ ------------ ------------
Balance, September 30, 1997 882,730 97,221 (1,529,544) (1,432,323)
Sale of common stock 8,829 100,000 -- 100,000
Net loss -- -- (1,475,579) (1,475,579)
------------ ------------ ------------ ------------
Balance, September 30, 1998 891,559 197,221 (3,005,123) (2,807,902)
Exercise of common stock
Options 28,121 225 -- 225
Issuance of common stock to
acquire music catalog
distribution rights 99,073 1,319,118 -- 1,319,118
Sale of common stock 112,659 1,500,000 -- 1,500,000
Conversion of notes payable
to shareholders, including
accrued interest of $286,039 267,968 3,568,406 -- 3,568,406
Forgiveness of note payable
to shareholder -- 1,000,000 -- 1,000,000
Recapitalization of
accumulated deficit due to
termination of "S"
corporation status
effective April 1, 1999 -- (4,239,751) 4,239,751 --
Net loss -- -- (2,834,337) (2,834,337)
------------ ------------ ------------ ------------
Balance, September 30, 1999 1,399,380 3,345,219 (1,599,709) 1,745,510
Issuance of common stock, net of
$1,906,588 cost (unaudited) 1,610,000 15,407,922 -- 15,407,922
Net loss (unaudited) -- -- (2,786,134) (2,786,134)
------------ ------------ ------------ ------------
Balance, March 31, 2000 (unaudited) 3,009,380 $ 18,753,141 $ (4,385,843) $ 14,367,298
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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SUNHAWK.COM CORPORATION
Statements of Cash Flows
(unaudited)
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Six Months Ended
March 31,
---------------------------------
2000 1999
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OPERATING ACTIVITIES
Net loss $ (2,786,134) $ (1,234,628)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation 51,081 15,005
Amortization 104,433 15,689
Changes in operating assets and liabilities:
Increase in accounts receivable (2,447) --
Decrease in inventory 627 247
Increase in prepaid expenses (622,524) --
Increase in deposits (250) --
Increase in accounts payable and accrued Expenses 128,227 13,655
Increase in payable to Eller McConney LLC 152,807 60,190
Accrued interest on notes payable to Shareholder (115,394) 113,928
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Net cash and cash equivalents used in
operating activities (3,089,574) (1,015,914)
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INVESTING ACTIVITIES
Purchases of property and equipment (177,647) (28,968)
Purchase of digital sheet music masters (92,945) (177,532)
Purchase of investments (3,022,758) --
Cost of patents and trademarks (13,207) (12,771)
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Net cash and cash equivalents used in
investing activities (3,306,557) (219,271)
------------ ------------
FINANCING ACTIVITIES
Proceeds from line of credit 900,000 --
Payments on line of credit (400,000) --
Proceeds from sale of common stock to existing shareholders -- 1,500,000
Proceeds from notes payable issued to shareholders -- 1,355,000
Proceeds from issuance of common stock, net of offering costs 16,471,017 --
Increase in deferred offering costs -- (54,188)
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Net cash and cash equivalents provided by
financing activities 16,971,017 2,800,812
------------ ------------
Net increase in cash and cash equivalents 10,574,886 1,565,627
Cash and cash equivalents at beginning of period 18,300 59,093
------------ ------------
Cash and cash equivalents at end of period $ 10,593,186 $ 1,624,720
============ ============
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)
Reclassification of Deferred offering costs to common stock 1,063,095 --
Prepayment of digital sheet music masters to
Eller McConney LLC 1,000,000 --
</TABLE>
See accompanying notes to financial statements.
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SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
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 also sells its technology
solutions to owners of proprietary digital products interested in selling their
content over the Internet. Sunhawk.com's internally developed proprietary
technology, Solero(R), allows customers to view, play, print and store the
encrypted digital sheet music files. This technology can also be applied to
other proprietary digital content.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Sunhawk.com considers all liquid investments with maturities of 90 days or less
at purchase to be cash equivalents. Cash equivalents at March 31, 2000 amounted
to $3,504,163
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). The amortization periods generally
range from five to fifteen years. Amortization expense is included in cost of
goods sold and was $14,416 and $9,138 for the three months ended March 31, 2000
and 1999, respectively, and $27,582 and $12,182 for the six months ended March
31, 2000 and 1999, respectively. Sunhawk.com periodically evaluates the digital
sheet music masters for impairment.
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MUSIC CATALOG DISTRIBUTION RIGHTS
Music Catalog Distribution rights are stated at cost less accumulated
amortization. Amortization is calculated on a straight-line basis over the
remaining term of the underlying distribution agreement, approximately eight and
one-half years. Amortization expense is included in the cost of goods sold and
was approximately $37,700 for the three months ended March 31, 2000 and
approximately $75,400 for the six months ended March 31, 2000. Sunhawk.com
periodically evaluates these music catalog distribution rights for impairment.
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USE OF ESTIMATES
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.
3. DISTRIBUTION AGREEMENTS
In May and June 1998, Sunhawk.com entered into distribution agreements with
Warner Bros. Publications U.S. Inc. and EMI Christian Music Publishing,
respectively. These agreements provide Sunhawk.com with nonexclusive rights to
distribute selected digital sheet music from the respective music catalogs
maintained by Warner Bros. Publications U.S. Inc. and EMI Christian Music
Publishing. The terms of the agreements are approximately ten and five years,
respectively.
The Warner Bros. Publications U.S. Inc. agreement provides Sunhawk.com with the
nonexclusive right to distribute selected digital sheet music from the Warner
Bros. Publications U.S. Inc. music catalog. As a nonforfeitable part of the
consideration and as inducement to enter into the agreement, Sunhawk.com agreed
to issue 99,073 shares of its common stock to Warner Bros. Publications U.S.
Inc., 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.
As a result of the sale of common stock to certain founders on March 31, 1999,
the contingency was removed, the shares were issued to Warner Bros. Publications
U.S. Inc. and became fully vested and non-forfeitable under the terms of the
agreement. The value of the shares of common stock issued to Warner Bros.
Publications U.S. Inc. was 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.
On December 7, 1999, Sunhawk.com entered into a distribution agreement with
Maranatha! Music (Maranatha). This agreement provided Sunhawk.com with the
non-exclusive right to promote, sell, license and distribute selected digital
sheet music from Maranatha's respective music catalog. The term of the agreement
is approximately five years.
On January 5, 2000, Sunhawk.com entered into a distribution agreement with Mel
Bay Publications, Inc. This agreement provides Sunhawk.com with the
non-exclusive and non-transferable right to distribute selected digital sheet
music from Mel Bay's music catalog. The term of the agreement is for
approximately five years.
4. CONSULTING AGREEMENTS
On February 15, 2000, Sunhawk.com entered into a Consulting Agreement with a
newly appointed member of Sunhawk.com's advisory board. Pursuant to the
Consulting Agreement, the advisory board member will provide consulting services
to Sunhawk.com, including developing strategic alliances with third parties. As
compensation for the services performed under the Consulting Agreement, the
advisory board member was issued a five-year warrant to purchase 105,000 shares
of Sunhawk.com's common stock. Certain shares underlying this warrant are
subject to Sunhawk.com's stock price achieving specific closing prices over a
period of time.
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On February 18, 2000, Sunhawk.com entered into a Consulting Agreement with a
newly appointed member of its board of directors. Pursuant to the Consulting
Agreement, the board member will provide consulting services to Sunhawk.com
including introducing Sunhawk.com to content owners who could benefit from
Sunhawk.com's technology. As compensation for the services performed under the
Consulting Agreement, the board member was issued a five-year warrant to
purchase 120,000 shares of Sunhawk.com's common stock. Certain shares underlying
this warrant are subject to Sunhawk.com's stock price achieving specific closing
prices over a period of time.
Both Consulting Agreements are subject to performance criteria and may be
cancelled by either party providing sixty (60) days notice. The warrants may be
adjusted for stock splits, recapitalization, or reorganization of Sunhawk.com
and are exercisable at the initial public offering price of $12.00 per share.
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5. 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. Avtograf, a Russian joint stock
company in which Eller McConney LLC has a 94% interest, provides these services
under an informal agreement with Eller McConney LLC. At March 31, 2000,
Sunhawk.com owed $322,764 to Eller McConney LLC for services previously
rendered.
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The digital sheet music masters for which production services were provided
represented approximately 47% and 44% of the digital sheet music acquired by
Sunhawk.com during the three months ended March 31, 2000 and 1999, respectively
and 55% and 43% for the six months ended March 31, 2000 and 1999, respectively.
Effective February 14, 2000, Sunhawk.com entered into a five-year assignment and
assumption agreement with Avtograf, Eller McConney LLC and Music Production
International, a Russian corporation. The assumption and assignment agreement
requires 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 letter agreement that provides, among other things, the payment
to Eller McConney LLC the amount of $1,000,000. Payment of the principal and
interest is based on the number of pages received and accepted from Music
Production International over a period of five years and is to be paid quarterly
in arrears with a maximum principal payment of $200,000 per annum. In connection
with this agreement, Avtograf will assign to Music Production International its
obligation to provide production services for digital sheet music. Thereafter,
Music Production International will be obligated to provide production services
for digital sheet music for Sunhawk.com at an anticipated minimum rate of 4,500
pages per month totaling 270,000 pages over a period of five years, at no
additional cost to Sunhawk.com. The letter agreement reflecting the future
payment of $1,000,000 to Eller McConney LLC is accounted for as a prepayment for
digital sheet music production services from Music Production International over
a period of five years, with recourse to Eller McConney LLC in the event of
non-performance. Neither Eller McConney LLC, Mr. Eller, Ms. McConney, nor
Sunhawk.com has an ownership interest in Music Production International.
6. BRIDGE FINANCING LOAN AGREEMENTS
On January 12, 2000, Sunhawk.com entered into an Agency Agreement with Joseph
Gunnar & Co., LLC to obtain from third parties bridge financing loans totaling
$1,000,000. The loans bore interest at a rate of 8.5% per annum and were repaid
in full from proceeds received from the initial public offering. In conjunction
with the bridge financing loans, a total of 41,680 warrants were granted to
the third parties and are exercisable commencing six months following the
closing date of the offering at the initial public offering price of $12.00. The
warrants may be adjusted for stock splits, recapitalization, or reorganization
of Sunhawk.com.
7. SUBSEQUENT EVENTS
On April 14, 2000, Sunhawk.com entered into a Letter of Intent agreement with
Copyright Control Services, Inc. (Copyright) whereby Sunhawk.com will acquire
all of the assets from, and assume certain of the liabilities of Copyright in
exchange for 400,000 shares of Sunhawk.com's common stock for purchase of its
assets. Additionally, certain executives of Copyright will receive a three-year
warrant agreement to purchase up to an additional 600,000 shares of
Sunhawk.com's common stock at a strike price of (i) $24 per share for Year One;
(ii) $30 per share for Year Two; and (iii) $36 per share for Year Three. Also,
as part of the closing of the agreement, Sunhawk.com will retain the services of
certain of Copyright's executives. Copyright Control Services (CCS) offers
custom tailored anti-piracy services to all businesses that are losing revenue
or value from copyright infringement on the Internet. In the event that
Sunhawk.com's stock price exceeds $26.00 per share on or before the closing of
this deal, Sunhawk.com may terminate this transaction without liability to
Copyright. Conversely, in the event that Sunhawk.com's stock equals or is less
than $6.50 per share on or before the closing of this deal, Copyright may
terminate this transaction without liability to Sunhawk.com. The purchase is
expected to close by June 1, 2000.
On April 27, 2000, Sunhawk.com entered into an $850,000 line-of-credit agreement
with a financial institution. On May 1, 2000, $600,000 was drawn down on the
line-of-credit to pay off the previous line of credit. The applicable interest
rate is Prime plus 0.05% (9.05% at April 27, 2000). The line-of-credit matures
on May 15, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Sunhawk.com Corporation was 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;
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- 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(R) format. We launched our
website 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 Bros. Publications U.S. Inc. and EMI Christian Music Publishing for
the right to sell and distribute selected portions of their sheet music
catalogs. From March 1997 through March 31, 2000 we sold approximately 35,484
digital sheet music products and approximately 3,585 traditional printed sheet
music products and CD-ROMs. Through March 31, 2000, 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. Our contracts with
publishers require us 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. Materials costs
consist of CD-ROMs and the cost of printed sheet music books. 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.
Amortization of the cost of producing digital masters 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. 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 approximately $38,000 per quarter through the
remaining term of the Warner Bros. Publications U.S. Inc. contract, which ends
December 31, 2007.
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.
Selling expenses consist primarily of promotional and advertising
expenditures, including payroll and payroll-related expenses. We have incurred
little 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(R) 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.
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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, among others, Warner Bros.
Publications U.S. Inc. and EMI Christian Music Publishing;
- further develop and extend the application of our DRM and encryption
technologies;
- extend our technology into other content areas;
- further develop our operational infrastructure and web site;
- distribute and sell certain recorded music;
- increase the size of our staff;
- expand our sales, marketing and business development efforts; and
- upgrade our software and hardware.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
SIX MONTHS ENDED MARCH 31, 1999
Sales
Sales for the six months ended March 31, 2000 were $97,933 compared to $45,394
for the six months ended March 31, 1999. This increase in sales resulted from
providing a wider selection of music titles in our Solero(R) format, an increase
in our print sheet music sales and increased advertising of our product. In
addition, in order to increase customer traffic to our web site, we offered a
variety of promotional features on our web site and provided special services
for our strategic partners.
Cost of goods sold
Cost of goods sold for the six months ended March 31, 2000 were $175,985
compared to $36,928 for the six months ended March 31, 1999. The increase in
cost of goods sold was primarily due to the amortization of $75,378 of the music
catalog distribution rights. Amortization of these rights did not commence until
third quarter of fiscal year 1999. The increase was also due to an increase
during the six months ended March 31, 2000 in the proportion of royalty-bearing
sales to sales of public domain titles, which do not bear royalties, as well as
an increase in the cost related to the print music sales. Additionally,
amortization of digital sheet music masters during the six months ended March
31, 2000 increased as the number of digital sheet music titles produced during
that period increased. For the six months ended March 31, 2000, royalty payments
accounted for $28,192, or 28.8% of sales. Costs associated with the amortization
of digital sheet music masters accounted for $27,582, or 28.2% of sales and
costs associated with the amortization of music catalog distribution rights were
$75,378, or 77.0% of sales. For the six months ended March 31, 1999, royalty
payments accounted for $12,637, or 27.8% of sales, and costs associated with the
amortization of digital sheet music masters accounted for $12,182, or 26.8% of
sales.
Selling, general and administrative expenses
Selling expenses for the six months ended March 31, 2000, were $351,902,
including advertising costs of $283,141, compared to $78,090, with advertising
costs of $58,170, for the six months ended March 31, 1999. Selling expenses for
both periods consisted primarily of expenditures incurred in connection with
advertising, attending trade shows, expansion of our web site and
payroll-related expenses, as well as marketing consulting. General and
administrative expenses for the six months ended March 31, 2000 were $2,387,621
compared to $1,051,076 for the six months ended March 31, 1999. The increase
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was primarily due to the expansion of our production capabilities to grow our
digital sheet music catalog, professional fees, hiring additional key management
personnel, and increases in corporate facility expenses necessary to operate the
business, fees related to bridge financing in the six months ended March 31,
2000.
Other Income/(Expense)
Other income/(expense) for the six months ended March 31, 2000 and 1999 was
$31,441 and ($113,928), respectively. The increase in other income/(expense)
primarily relates to interest received from short- and long-term investments
made subsequent to the initial public offering in February 2000 and the
conversion of loans made to us by the Eller McConney 1995 Family Living Trust
into common stock on March 31, 1999.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1999
Sales
Sales for the three months ended March 31, 2000 were $58,377 compared to $28,897
for the three months ended March 31, 1999. This increase in sales resulted from
providing a wider selection of music titles in our Solero(R) format and
increased advertising of our product. In addition, in order to increase customer
traffic to our web site, we offered a variety of promotional features on our web
site and provided special services for our strategic partners.
Cost of goods sold
Cost of goods sold for the three months ended March 31, 2000 were $95,253
compared to $23,008 for the three months ended March 31, 1999. The increase in
cost of goods sold was primarily due the amortization of approximately $38,000
of the music catalog distribution rights. Amortization of these rights did not
commence until third quarter of fiscal year 1999. The increase was also due to
an increase during the three months ended March 31, 2000 in the proportion of
royalty-bearing sales to sales of public domain titles, which do not bear
royalties. Additionally, amortization of digital sheet music masters during the
three months ended March 31, 2000 increased as the number of digital sheet music
titles produced during that period increased. For the three months ended March
31, 2000, royalty payments accounted for $19,287, or 33% of sales. Costs
associated with the amortization of digital sheet music masters accounted for
$14,416, or 24.7% of sales and costs associated with the amortization of music
catalog distribution rights were $37,689, or 64.5% of sales. For the three
months ended March 31, 1999, royalty payments accounted for $7,900, or 27.3% of
sales, and costs associated with the amortization of digital sheet music masters
accounted for $9,138, or 31.6% of sales.
Selling, general and administrative expenses
Selling expenses for the three months ended March 31, 2000, were $171,069
including advertising costs of $123,318, compared to $57,181, with advertising
costs of $42,147, for the three months ended March 31, 1999. Selling expenses
for both periods consisted primarily of expenditures incurred in connection with
advertising, attending trade shows, expansion of our web site and
payroll-related expenses. In the third quarter of 1999, we initiated our
strategic marketing plan. As part of this plan, we experienced a significant
increase in advertising and marketing consultant costs as part of the new
strategic marketing plan. General and administrative expenses for the three
months ended March 31, 2000 were $1,582,457 compared to $512,872 for the three
months ended March 31, 1999. The increase was primarily due to the expansion of
our production capabilities to grow our digital sheet music catalog,
professional fees, hiring key management personnel, and increases in corporate
facility expenses necessary to operate the business for both periods, and fees
related to bridge financing in the three months ended March 31, 2000.
Other Income/(Expense)
Other income/(expense) for the three months ended March 31, 2000 and 1999 was
$47,763 and ($72,398), respectively. The increase in other income/(expense)
primarily relates to the conversion of loans made to us by the Eller McConney
1995 Family Living Trust into common stock on March 31, 1999 and interest
received from short- and long-term investments.
15
<PAGE> 16
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 March 31, 2000, we had cash and cash equivalents of
$10,593,186 and working capital of $10,975,667.
On January 12, 2000, Sunhawk.com entered into an Agency Agreement with Joseph
Gunnar & Co., LLC to obtain from third parties bridge financing loans totaling
$1,000,000. The loans, which closed on January 26, 2000, bore interest at a rate
of 8.5% per annum and were repaid in full from proceeds received from the
initial public offering. A total of 41,680 warrants were granted to the third
parties and are exercisable commencing six months following the closing date of
the offering at the initial public offering price of $12.00. The warrants may be
adjusted for stock splits, recapitalization, or reorganization of Sunhawk.com.
At the closing of the bridge financing, Sunhawk.com paid Joseph Gunnar & Co.,
LLC (i) a commission equal to 7% of the aggregate loan amount; (ii) a
structuring fee equal to 3% of the aggregate loan amount; (iii) reimbursement of
out-of-pocket expenses; and (iv) reimbursement of reasonable fees and
disbursements of counsel to Joseph Gunnar & Co., LLC. The loans were paid in
full on February 22, 2000.
On February 15, 2000, we issued 1,610,000 shares of common stock in an initial
public offering at the price of $12.00 per share. The offering generated
approximately $19 million in proceeds.
Net cash used in operating activities totaled $3,089,574 for the six months
ended March 31, 2000 compared with net cash used in operating activities of
$1,015,914 for the six months ended March 31, 1999. The increase in net cash
used in operating activities for the six months ended March 31, 2000, as
compared to the prior year, was primarily attributable to increases in
advertising, the expansion of our production capabilities to grow our digital
sheet music catalog, prepaid expenses, professional fees, hiring key management
personnel, and increases in corporate facility expenses necessary to operate the
business.
Net cash used in investing activities was $3,306,557 for the six months ended
March 31, 2000 compared to $219,271 for the six months ended March 31, 1999. The
increase in cash used in investing activities for the six months ended March 31,
2000, as compared to the prior year, was primarily due to the purchase of
long-term investments with proceeds received from the initial public offering
and an increase in equipment purchase to upgrade our website capabilities.
Net cash provided by financing activities was $16,971,017 for the six months
ended March 31, 2000 compared to $2,800,812 for the six months ended March 31,
1999. The increase in net cash for financing activities for the six months ended
March 31, 2000, as compared to prior year, was primarily derived from proceeds
received from the initial public offering.
YEAR 2000 COMPLIANCE
Although we have not experienced any Year 2000 problems, it is possible that
Year 2000-related issues may cause problems or disruptions. While we believe
that all of our systems are Year 2000 compliant, we cannot assure you that we
will not discover a problem during 2000 that needs to be upgraded, modified or
replaced. In addition, we depend on a number of third-party vendors to provide
both information and non-information technology systems and services. While we
believe that our material third-party systems and services are Year 2000
compliant, we cannot be sure that we will not experience any problems during
2000. We also cannot provide any assurance that governmental agencies, utility
companies, Internet access companies and others outside of our control will not
experience any future Year 2000 problems.
We believe that the Year 2000 issue will not have a material adverse
effect on our business, financial condition or operating results. However,
despite all of our efforts to-date towards insuring Year 2000 compliance, latent
issues may still surface in the future that require upgrades, modifications or
replacement, all of which could be time-consuming and expensive. In addition,
there can be no assurance that utility companies, Internet access companies and
our third-party vendors will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure such as a
prolonged Internet, telecommunications or electrical failure.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
16
<PAGE> 17
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10.3 Retainer Agreement with The Otto Law Group, PLLC
dated February 20, 2000.
Exhibit 10.4 Executed letter agreement with Eller McConney LLC
for prepayment of digital masters dated February
15, 2000.
Exhibit 10.5 Letter of Intent to Acquire Copyright Control
Services, Inc. dated April 14, 2000.
Exhibit 10.6 Form of Warrant Agreement
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Sunhawk.com Corporation
---------------------------------------
(Registrant)
Date May 15, 2000 /s/ Marlin Eller
-------------- -------------------------------------
Marlin Eller, Chief Executive Officer
Date May 15, 2000 /s/ Tricia Parks-Holbrook
-------------- --------------------------------------
Tricia Parks-Holbrook,
Chief Financial Officer
17
<PAGE> 1
Exhibit 10.3
RETAINER AGREEMENT
THIS RETAINER AGREEMENT, (the "Agreement") effective February 20, 2000
(the "Effective Date") is entered into by and between Sunhawk.com Corporation, a
Washington corporation (the "Company"), and The Otto Law Group, PLLC, a
Washington limited liability company, hereinafter the ("TOLG").
WHEREAS, the Company desires to retain TOLG and TOLG has consented to
provide various services and to otherwise be available to assist with Company
matters seven (7) days per week, twenty-four (24) hours per day.
NOW, THEREFORE, the Company and TOLG agree to the following terms and
conditions of the Agreement.
1. Retention. Beginning on the Effective Date, the Company will
retain TOLG, and TOLG will accept retention by the Company, and
TOLG shall also have an obligation to report to the Company's
Chief Executive Officer in accordance with the terms of this
Agreement.
2. Duties.
2.1 TOLG's primary duties will be to be available seven (7)
days per week, twenty-four (24) hours per day, to
provide advice and assistance to the Company and perform
such other reasonable duties as the Chief Executive
Officer of the Company determines.
2.2 As part of TOLG's duties and compensation hereunder,
TOLG will communicate, if requested, with those
representatives of the Company as determined by the
Company's Chief Executive Officer.
3. Time Obligations. If and when requested by the Company's Chief
Executive Officer, TOLG will devote whatever time is necessary
and use his best efforts to complete the duties set forth
herein.
4. Compensation. In connection with TOLG remaining available to
provide services under the terms of this Agreement, TOLG shall
receive cash compensation in the amount of three hundred
eighty-five thousand dollars ($385,000) (the "Retainer Amount"),
which cash compensation shall be deemed paid as of the Effective
Date. Further, TOLG shall continue to provide, and shall be paid
separately at the designated hourly
<PAGE> 2
rate on a monthly basis, for legal services relating to
corporate finance, securities, contracts, corporate governance,
mergers and acquisitions, other matters involving the Company's
operations, any securities issuance and compliance,
documentation preparation and review and identifying and
structuring transactions between the Company and appropriate
strategic partners including, without limitation, companies
involved in or otherwise benefiting from, the Company's
technology and/or products and related information. TOLG shall
also assist the Company in its efforts to develop its business
development and sales and marketing operations, complete certain
strategic goals and develop a business plan
5. Term and Termination.
5.1 Unless otherwise terminated, in writing, as provided in
this Section 5, this Agreement shall expire on February
19, 2003.
5.2 This Agreement shall be terminated, in writing, upon the
following:
(a) Dissolution of TOLG;
(b) Inability of TOLG to perform the duties set
forth herein for a period of thirty (30)
consecutive days in any one calendar year due to
sickness or of any principal of TOLG; or
(c) For cause as provided in Section 6.1.
5.3 TOLG shall be entitled to its entire Retainer Amount
regardless of whether termination (i) is with or without
cause by either the Company or TOLG, as the case may be
or (ii) occurs under this Section 5.
6. Cause and Breach.
6.1 Where reference is made in this Agreement to termination
being by the Company with or without cause, "cause"
shall mean cause given by the Company to TOLG and is
limited to the following:
(a) Repeated failure or refusal to carry out the
reasonable written directions of the Company,
provided such directions are consistent with the
duties and obligations herein set forth to be
performed by TOLG; or
<PAGE> 3
(b) Violation of a state or federal law involving
the commission of a crime against the Company or
a felony materially adversely affecting the
Company.
7. Notice. All notice and requests in connection with the Agreement
shall be in writing and may be given by personal delivery,
registered or certified mail, return receipt requested, telegram
or any other customary means of communications addressed as
follows:
Advisor: David M. Otto, Esq.
The Otto Law Group
999 Third Avenue
Suite 3210
Seattle, WA 98104
Sunhawk.com
Corporation: Marlin Eller, CEO
Sunhawk.com Corporation
223 Taylor Avenue North, Suite 200
Seattle, WA 98109
Or to such other address as the party to receive the notice or
request shall designate by notice to the other. The effective
date of any notice or request shall be five (5) days from the
date which it is sent by the addressor by registered or certified
mail, or when delivered to a telegraph company, properly
addressed as above with charges prepaid, or when personally
delivered.
8. Assignment. The rights of either party shall not be assigned or
transferred either voluntarily or by operation of law without the
other party's written consent, nor shall the duties of either
party be delegated, in whole or part, either voluntarily or by
operation of law without the other party's written consent. Any
unauthorized assignment transfer or delegation shall be of no
force or effect.
9. Independent Counsel. TOLG also acts as counsel to the Company.
All parties have retained independent legal counsel to advise
them with respect to this Agreement and are not relying on the
Company or its counsel for legal or tax advise.
10. Independent Contractor. TOLG is an independent contractor. This
Agreement shall not create the relationship of employer and
employee, a partnership, or a joint venture. The Company shall
not control or direct the details and means by which TOLG
performs its business and services. TOLG shall determine the
number of days and hours of its work as well as
<PAGE> 4
the number of assistants, partners or employees utilized by TOLG
in its responsibilities under this Agreement. TOLG shall be
solely responsible for the amount of wages, benefits, work
schedules and/or any conditions of any of either TOLG's
assistants, partners or employees. Finally, TOLG is an
independent contractor and not an employee of the Company and
agrees to comply with all federal and state tax and Social
Security legislation as applicable to such independent
contractors. TOLG has no authority to bind the Company or incur
any obligation on behalf of the Company.
11. Confidential Information and Covenant. As a result of TOLG's
independent contractor relationship with the Company, TOLG could
acquire confidential information about the Company. TOLG will
respect the confidences of the Company and will not, at any
time, during or after termination of this Agreement, directly or
indirectly, divulge or disclose for any purpose whatsoever, or
use for their own benefit, any confidential information that has
been created or obtained by or disclosed to TOLG as a result of
his relationship with the Company, including but not limited to,
technology concepts or projects as they relate to the business
and technology developed by the Company. In addition, all
information created or received by TOLG shall be deemed the
property of the Company and no information shall be furnished to
persons not associated with this Agreement without prior
permission of the Company.
12. Miscellaneous.
12.1 Waiver. No waiver of any of the provisions of this
Agreement shall be valid unless in writing, signed by
the party against whom such waiver is sought to be
enforced, nor shall failure to enforce any right
hereunder constitute a continuing waiver of these same
or a waiver of any other right hereunder.
12.2 Amendments. All amendments of this Agreement shall be
made in writing, signed by the parties, and nor oral
amendment shall be binding on the parties.
12.3 Integration. This Agreement constitutes the entire
agreement between the parties relating to the subject
matter hereunto and supersedes and cancels any other
prior oral and/or written agreement or understandings of
the parties in connection with such subject matter
12.4 Severability. The enforceability or invalidity of any
provision or provisions of this Agreement shall not
render any other provision of provisions hereof
unenforceable or invalid. If any one or more of the
provisions of this Agreement shall for any reason be
excessively broad as to duration, scope, activity or
subject, it shall be construed by reducing
<PAGE> 5
such provisions, so as to be enforceable to the extent
compatible with applicable law.
12.5 Headings. The headings or titles in this Agreement are
for the purpose of reference only and shall not in any
way affect the interpretation or construction of this
Agreement.
12.6 Governing Law. This Agreement will be governed by the
laws of the State of Washington, applicable to
agreements between Washington residents to be performed
within the State of Washington. Any disputes arising out
of or from this Agreement shall be submitted to binding
arbitration for resolution in Seattle, Washington.
12.7 Attorney's Fees. In the event of litigation to enforce
this Agreement, the prevailing party will be entitled to
recover its reasonable attorneys' fees as determined by
the court.
IN WITNESS HEREOF, the parties have executed this Agreement as of the
day and year first above written.
THE OTTO LAW GROUP, P.L.L.C.
By:
------------------------------------
Name:
Title:
SUNHAWK.COM CORPORATION
By:
-------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.4
LETTER AGREEMENT
FEBRUARY 15, 2000
As part of the Assignment and Assumption Agreement of the Right to Receive Sheet
Music, it is agreed that Sunhawk.com will pay Eller McConney LLC $1,000,000
subject to the receipt and acceptance of a sufficient number of pages of sheet
music. Payment of the $1,000,000 is based on the number of pages received and
accepted from Music Production International over a period of five years and is
to be paid quarterly in arrears with a maximum principal payment of $200,000 per
annum.
Agreed and Accepted,
/s/ Tricia Parks-Holbrook, CFO /s/ Mary E. McConney
Sunhawk.com Corporation Eller McConney LLC
<PAGE> 1
Exhibit 10.5
SUNHAWK.COM CORPORATION
Copyright Control Services, Inc.
Mr. David Powell, Managing Director
6 Hampton Hill Business Park
219-221 High Street
Hampton Hill, TW12 INP
United Kingdom
Re: Letter of Intent
Dear David:
This Letter of Intent dated this 14th day of April, 2000, (the
"Effective Date") will confirm the serious intent of Sunhawk.com Corporation, a
Washington corporation ("Buyer") to acquire all of the assets from, and assume
certain of the liabilities of, Copyright Control Services, Inc., a Delaware
corporation ("Seller") (the "Transaction"). Buyer and Seller may be referred to
herein individually as the "Company", and collectively as the "Companies". This
letter also confirms Seller's serious intent to sell all of its assets to Buyer.
In connection with the consummation of the Transaction contemplated by
this Letter of Intent, Buyer shall purchase at closing all of Seller's assets,
and assume certain identified liabilities of Seller, for the following
consideration:
1. The Acquisition.
1.1 Seller's shareholders shall receive Four Hundred
Thousand (400,000) shares of Buyer's Common Stock (the
"Shares). The Shares shall (i) not have registration
rights, (ii) be subject to certain "lock-up" provisions
and (iii) with respect to those Shares held by Mr. David
Powell and Mr. Julian Searle (collectively the
"Executives"), vest ratably over the three (3) year term
of their respective employment agreements.
1.2 In the event the closing price of Buyer's Common Stock
on the NASDAQ Small Capitalization Market equals or
exceeds $26.00 per share at any time on or prior to the
closing, then Buyer may terminate this Transaction
without liability to Seller or any of its officers,
directors, shareholders, agents, or any other party
associated with the preparation, negotiation and
contemplated closing of the Transaction. Conversely, in
the event the closing price of Buyer's Common Stock on
the NASDAQ Small Capitalization Market equals or is less
than $6.50 per share at any time on or prior to the
closing, then Seller may terminate this Transaction
without
LETTER OF INTENT
Page - 1 of 6
<PAGE> 2
liability to the Buyer or any of its officers,
directors, shareholders, agents, or any other party
associated with the preparation, negotiation and
contemplated closing of the Transaction.
1.3 The Executives, and such other parties as the Executives
and Buyer mutually agree, shall receive a warrant to
acquire an additional six hundred thousand (600,000)
shares of Buyer's Common Stock (the "Warrant"). The
shares underlying the Warrant shall vest, two hundred
thousand (200,000) shares annually, over a three (3)
year period, twelve (12) months in arrears, subject to
the satisfaction of certain performance criteria, which
criteria shall be agreed upon by Buyer and Seller. The
"strike" price of each two hundred thousand (200,000)
share "tranche" shall be as follows:
$24.00 per share - Year One
$30.00 per share - Year Two
$36.00 per share - Year Three
In the event the performance criteria is not satisfied
for either year one, two or three, then (i) the shares
underlying the Warrant for that year shall not vest,
(ii) the two hundred thousand (200,000) shares
underlying that portion of the Warrant shall revert to
treasury stock and any right to such shares shall be
forfeited by either the Executives and/or their assigns
and (iii) the "strike" price for the shares underlying
the succeeding "tranche" shall be adjusted in accordance
with the above.
1.4 Buyer shall enter into a three (3) year employment
agreement with each of the Executives. Each employment
agreement will include appropriate stock option grants
on terms to be mutually agreed upon.
2. Post-closing Matters.
Immediately after the closing of the Transaction the following
appointments shall be made:
David Powell shall serve as President of the Copyright Control
Services Division of Buyer to be located in London, England and
Julian Searle shall serve as Chief Technology Officer of the
Copyright Control Services Division also located in London,
England.
3. Conditions to Closing of Transaction.
Buyer and Seller understand and agree that consummation of the
above-described Transaction is subject to the following:
LETTER OF INTENT
Page - 2 of 6
<PAGE> 3
3.1 The approval of the transaction by the Board of
Directors and Shareholders of Buyer and Seller;
3.2 The ownership by Buyer at closing of the assets of
Seller, which shall be free and clear of any and all
liens and/or encumbrances, except as otherwise agreed to
between Buyer and Seller;
3.3 The preparation, negotiation, execution and delivery of
an Asset Purchase Agreement satisfactory to Buyer and
Seller, which shall contain all representations,
conditions, covenants and agreements customary for a
transaction of this nature described herein and shall
provide for obtaining all requisite corporate and other
consents and approvals;
3.4 The satisfactory completion of a review and
investigation by Buyer and Seller, their counsel and
agents, of the business, assets, financial condition and
prospects of Buyer and Seller; and
3.5 The form of the transaction and the documentation and
agreements entered into in connection with the
transaction contemplated herein being in form and
substance satisfactory to Buyer and Seller (the
"Definitive Agreements").
4. Deadlines.
If the Definitive Agreements have not been executed and delivered by
5:00 p.m. Pacific Standard time on June 1, 2000, despite the parties good faith
negotiation towards that end ("Drop Dead Negotiation Date"), then the obligation
of the parties to go forward with negotiations shall terminate unless extended
in writing by mutual agreement. In addition, the Definitive Agreements will
provide that, unless extended in writing by mutual agreement, they shall
terminate and be of no further force or effect if the Transaction is not
consummated by 5:00 p.m. Pacific Standard time on June 1, 2000 ("Drop Dead
Consummation Date").
5. Maintenance of Status Quo.
Seller agrees, for a period ending with the Drop Dead Negotiation Date
(or if Definitive Agreements are executed, ending with the Drop Dead
Consummation Date) that, unless otherwise consented to in writing by Buyer, it
shall:
5.1 carry on its business in substantially the same manner
as heretofore and not introduce any material new method
of management, operation or accounting;
5.2 maintain its properties, facilities and equipment and
other assets in as good working order and condition as
at present, ordinary wear and tear excepted;
LETTER OF INTENT
Page - 3 of 6
<PAGE> 4
5.3 perform all its material obligations under debt and
lease instruments and other agreements relating to or
affecting its assets, properties, equipment and rights;
5.4 maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments,
except in the ordinary course of business, but subject
further to the limitations contained in section 6.4
hereof;
5.5 keep in full force and effect present insurance policies
or other comparable insurance coverage;
5.6 use its best efforts to maintain and preserve its
business organization intact, retain its present
employees and maintain its ongoing relationship with
suppliers, customers and others having business
relations with it;
5.7 not effect any change in the capital structure of the
organization, including, but not limited to, the
issuance of any option, warrant, call, conversion right
or commitment of any kind with respect to its capital
stock or the purchase or other reacquisition of any
outstanding shares of treasury stock with the exception
of converting certain outstanding senior convertible
note instruments into equity;
5.8 maintain present salaries and commission levels for all
officers, directors, employees and agents;
5.9 prohibit expenditures outside the normal course of
business;
5.10 maintain compliance with all permits, laws, rules and
regulations, consent orders, etc.
5.11 not declare any dividends nor pay out bonuses other than
normal merit bonuses to employees, fees, extraordinary
commissions or any other unusual distributions to the
stockholders, directors, management or other personnel.
6. No Shop.
Seller agrees, for a period ending with the Drop Dead Negotiation Date
(or if Definitive Agreements are executed ending with the Drop Dead Consummation
Date) that, unless required under the Definitive Agreements or otherwise
consented to in writing by Buyer, it shall not:
6.1 issue any equity securities to any party other than the
other Company, except pursuant to an existing employee
benefit plan or upon exercise of warrants or options
outstanding on the date hereof or conversion of
convertible securities outstanding on the date hereof;
LETTER OF INTENT
Page - 4 of 6
<PAGE> 5
6.2 merge with or into any other entity other than Buyer;
6.3 sell any material assets or a substantial amount of its
assets to any person or entity other than Buyer;
6.4 incur any indebtedness in excess of U.S. $10,000 to any
person or entity other than Buyer, without written
approval by Buyer;
6.5 submit any proposal to its shareholders which, if
approved, would result in a sale or agreement to sell
any equity interest in it in excess of 1% to any person
or entity other than Buyer other than in the ordinary
course of business or pursuant to agreements existing on
the date hereof without written approval by Buyer; or
6.6 submit for consideration by its Board of Directors any
proposal involving, or enter into negotiations with, any
party other than Buyer with respect to any transaction
in 6.1 through 6.5 above.
7. Confidentiality.
Buyer and Seller will hold and cause its respective employees, agents
and advisors to hold in confidence all documents and information concerning the
other Company, as the case may be, which have been or will be furnished in
connection with the Transaction contemplated hereby. Whether or not the
Transaction is consummated, such confidential treatment will be maintained for a
period of not less than three (3) years from the Effective Date, except to the
extent such information (a) was previously known to the receiving party prior to
disclosure by the disclosing party, (b) is in the public domain through no fault
of the receiving party, (c) is lawfully acquired by the receiving party from a
third party under no obligation of confidence to the disclosing party, or (d) is
required by law to be disclosed. Such documents and information will not be used
for either the benefit of the receiving party or the detriment of the disclosing
party otherwise in any manner, and all documents, materials and other written
information provided by the disclosing party to the receiving party, including
all copies and extracts thereof, will be returned to the disclosing party
promptly upon written request.
8. Publicity/Regulatory Reports.
All regulatory reports, permit applications and filings, and all press
releases, announcements or other publicity pertaining the Transaction will be in
mutually agreeable form, subject to any applicable regulatory requirements.
9. Governing Law.
This Letter of Intent shall be governed by and construed in accordance
with the laws of the State of Washington, without giving effect to any
requirements thereof which might otherwise cause the application of the law of
another jurisdiction.
LETTER OF INTENT
Page - 5 of 6
<PAGE> 6
10. No Binding Obligation.
Except as otherwise provided herein, this Letter of Intent is intended
to serve only as a mutual expression of the intentions of the parties, and the
parties shall not be legally obligated with respect to the contemplated
Transaction unless and until formal Definitive Agreements in mutually
satisfactory form are agreed upon, approved by the respective Board of Directors
(and, if necessary, shareholders) of the Companies, and executed and delivered
by the Companies, whereupon the provisions of the Definitive Agreements will
supercede this Letter of Intent.
11. Counterparts.
This Letter of Intent may be signed in two or more counterparts, each of
which shall constitute an original, and all of which together shall constitute
one and the same agreement.
Please indicate your acceptance of this Letter of Intent by signing the
signature page of this letter and returning it to us at our Seattle office by
hand, courier service or facsimile prior to 5:00 p.m. Pacific Standard time on
April 14, 2000. This offer will expire if not accepted by you before then. If
you accept this offer, we will distribute fully executed original counterparts
of this letter to each accepting party.
Sincerely,
Sunhawk.com Corporation
/s/ Marlin J. Eller
-------------------------------------
Marlin J. Eller
CEO and President
Accepted and agreed this 14th day of April, 2000.
Copyright Control Services, Inc.
/s/ David Powell
- -------------------------------------
Name: David Powell
-------------------------------
Title: Managing Director
------------------------------
LETTER OF INTENT
Page - 6 of 6
<PAGE> 1
Exhibit 10.6
WARRANT AGREEMENT
This WARRANT AGREEMENT has been made and entered into as of February 18,
2000, by and between SUNHAWK.COM CORPORATION, a Washington corporation (the
"Company"), and __________________________ (the "Holder").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Holder warrants (the
"Warrants") to purchase up to an aggregate of __________ shares of common stock,
$.0001 par value per share, of the Company (the "Common Stock"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement were
issued on February 15, 2000 by the Company to the Holder, or its designees, in
consideration for certain services provided to the Company by the Holder.
NOW, THEREFORE, in consideration of the premises hereto and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Grant. The Holder is hereby granted the right to purchase, at any
time from February 15, 2000, until 5:30 P.M., Pacific Standard time, on February
14, 2005 (the "Expiration Date"), up to an aggregate of ___________ 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 sold by the Company to the
public in the Company's initial public offering. 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.
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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, Holder 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.
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, the Holder 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.
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<PAGE> 3
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 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.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise price
of each Warrant shall be $_12.00_ 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 February
15, 2000 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 Warrants and Warrant Securities Holder of its intention to do so. If the
Warrants and Warrant
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<PAGE> 4
Securities Holder notifies 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 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 Holder 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 Covenants of the Company with Respect to Registration. In
connection with any registration under Section 7.1 hereof, the Company covenants
and agrees as follows:
(a) In connection with the Company's intention to file a
registration statement, the Company 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 Warrant Securities such number of
prospectuses as shall reasonably be requested
(b) The Company shall pay all costs, fees and expenses in
connection with all registration statements filed pursuant to Sections 7.1
hereof (excluding fees and expenses of the Holder'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.
(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.
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<PAGE> 5
(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 (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:
(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.
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<PAGE> 6
(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
Holder(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 Holder(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
7.2(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
7.2(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 7.2(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.
(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.
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<PAGE> 7
(l) The Company shall furnish to each Holder participating in the
offering and to each Holder, if any, a signed counterpart, addressed to such
Holder or Holder, 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 Holders in underwritten public offerings of securities.
(m) 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 of the General Rules and Regulations 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.
(n) The Company shall deliver promptly to each Holder
participating in the offering upon request, and to the managing Holders, 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 Holders 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 Holder shall reasonably request.
(o) In addition to Warrant Securities, upon the written request
therefor by any Holders, the Company shall include in the Registration Statement
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 7.2(q) hereof.
(p) 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
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<PAGE> 8
the public pursuant to a Registration Statement filed with the Commission under
the Securities Act.
(q) Indemnification and Contribution.
(1) The Company agrees to indemnify and hold harmless each
Holder (for purposes of this Section 7.2(q), "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 7.2(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.
(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
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<PAGE> 9
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 or on behalf of 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 7.2 (q) 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 7.2 (q), 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 7.2(q)(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 7.2(q) to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent, which shall not be unreasonably withheld or
delayed.
(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 7.2 (q), 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
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<PAGE> 10
of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Section 7.2 (q)
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,
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 7.2(q), 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.
(r) Notwithstanding the foregoing provisions of this Section 7.2,
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.
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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 $12.00 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 upon the exercise of other Warrants
or (ii) 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 Market Value Calculations. "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. "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. "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) immediately 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
11
<PAGE> 12
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 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.
8.3 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 immediately prior
to the day upon which such corporate action shall have become effective.
8.4 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, after deducting any expenses paid
or incurred by the Company, or any commissions or compensation paid or
concessions or discounts allowed by the Company to Holders, 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
12
<PAGE> 13
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 8.2.1), after deducting any expenses paid or incurred
by the Company, or any commissions or compensation paid or concessions
or discounts allowed by the Company to Holders, dealers or others
performing similar services in connection with any such issue or sale;
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 8.2.1).
(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.
8.5 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.
8.6 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
13
<PAGE> 14
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 8.6.
8.7 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.), 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.
8.8 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.
8.9 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 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.
14
<PAGE> 15
8.10 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.
8.11 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,
15
<PAGE> 16
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
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
16
<PAGE> 17
(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 Holders may from
time to time supplement or amend this Agreement without the approval of any
Holders (other than the Holder) 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 Holder may deem
necessary or desirable and which the Company and the Holder 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 February 14, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on February 14, 2010.
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 WASHINGTON 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.
The Company and the Holder 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 Washington or of the
United States of America for the Western District of Washington, and irrevocably
submits to such jurisdiction, which jurisdiction shall be exclusive. The Company
and the Holder 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 and the
Holder (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.
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.
17
<PAGE> 18
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
and the Holder 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 Holder 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.
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: Marlin Eller
Title: Chief Executive Officer
Attest:
- ------------------------------------
Name:
Title:
[HOLDER]
By:
------------------------------------
Name:
Title:
18
<PAGE> 19
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., PACIFIC STANDARD TIME, FEBRUARY 14, 2005
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 February 15, 2000 until 5:30 p.m. Pacific Standard time on
February 14, 2005 (the "Expiration Date"), up to __________ fully paid and
nonassessable shares of Common Stock, no par value (the "Common Stock"), of
Sunhawk.com Corporation, a Washington corporation (the "Company"), at the
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), of $12.00 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 Holder's Warrant Agreement
dated as of February 15, 2000 by and between the Company and __________ (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., Pacific Standard 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 8.4 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
19
<PAGE> 20
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.
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 February 15,2000
SUNHAWK.COM CORPORATION
[SEAL] By:
------------------------------------
Name:
Title:
Attest:
- ------------------------------------
Name:
Title:
<PAGE> 21
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 Warrant
Agreement dated as of February 15, 2000 by and between Sunhawk.com Corporation
and the Holder. 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> 22
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 Warrant
Agreement dated as of February 15, 2000 by and between Sunhawk.com Corporation
and the Holder. 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> 23
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)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 10,581,849
<SECURITIES> 2,025,986
<RECEIVABLES> 10,096
<ALLOWANCES> 0
<INVENTORY> 16,464
<CURRENT-ASSETS> 13,261,429
<PP&E> 674,918
<DEPRECIATION> 294,512
<TOTAL-ASSETS> 17,406,237
<CURRENT-LIABILITIES> 2,050,258
<BONDS> 0
0
0
<COMMON> 18,753,141
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,406,237
<SALES> 97,933
<TOTAL-REVENUES> 97,933
<CGS> 176,985
<TOTAL-COSTS> 176,985
<OTHER-EXPENSES> 2,739,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,111
<INCOME-PRETAX> (2,797,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,797,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,797,453)
<EPS-BASIC> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
