<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2000
REGISTRATION NO. 333-80849
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUNHAWK.COM CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 2741 91-1568830
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
223 TAYLOR AVENUE NORTH, SUITE 200
SEATTLE, WASHINGTON 98109
(206) 728-6063
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
MARLIN ELLER
CHIEF EXECUTIVE OFFICER AND PRESIDENT
SUNHAWK.COM CORPORATION
223 TAYLOR AVENUE NORTH, SUITE 200
SEATTLE, WASHINGTON 98109
(206) 728-6063
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
<TABLE>
<S> <C> <C>
THE OTTO LAW GROUP, PLLC RUSKIN, MOSCOU, KELLEY DRYE & WARREN LLP
DAVID M. OTTO, ESQ. EVANS & FALTISCHEK, PC M. RIDGWAY BARKER, ESQ.
999 THIRD AVENUE, SUITE 3210 STUART M. SIEGER, ESQ. TWO STAMFORD PLAZA
SEATTLE, WASHINGTON 98104 170 OLD COUNTRY ROAD 281 TRESSER BOULEVARD
(206) 262-9545 MINEOLA, NEW YORK 11501-4366 STAMFORD, CONNECTICUT 06901
(516) 663-6546 (203) 351-8032
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- -------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- -------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- -------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE(1) PRICE(2) FEE(2)
<S> <C> <C> <C> <C>
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Common Stock, no par value................ 1,610,000shares $12.50 $20,125,000 $5,313
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Underwriter's warrants to purchase shares
of Common Stock, no par value(3)........ 140,000shares $0.001 $ 140 None(4)
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Common Stock, no par value, issuable upon
exercise of Underwriter's warrants...... 140,000shares $15.00 $ 2,100,000 $ 555
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Common Stock, no par value, issuable upon
exercise of bridge loan warrants(3)..... 41,680shares $12.50 $ 521,000 $ 138
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Total...................................................................................... $6,006
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</TABLE>
(1) Bona fide estimate for computation of the registration fee pursuant to Rule
457(a) under the Securities Act.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
(3) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares of common
stock as may become issuable by reason of the anti-dilution provisions set
forth in the warrants.
(4) None pursuant to Rule 457(g) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 3
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it
is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 26, 2000
PROSPECTUS
1,400,000 Shares
[SUNHAWK.COM CORPORTION(TM) LOGO]
Common Stock
-------------------------
This is an initial public offering of 1,400,000 shares of common stock of
Sunhawk.com Corporation.
No public market currently exists for our shares. It is expected that the
shares will be listed for trading on the NASDAQ SmallCap(R) Market and the
Pacific Stock Exchange.
It is expected that the initial public offering price will be between
$11.50 and $12.50 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF FACTORS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Sunhawk.com................... $ $
</TABLE>
The underwriter may, for 30 days after the date of this prospectus,
purchase up to an additional 210,000 shares of common stock from us at the
initial public offering price less the underwriting discount.
-------------------------
The underwriting agreement provides that the shares are being offered on a
firm-commitment basis, such that the underwriter will purchase all of the
1,400,000 shares if any of the shares are purchased. The underwriter expects to
deliver the shares against payment in New York, New York on February , 2000.
-------------------------
JOSEPH GUNNAR & CO., LLC
February , 2000
<PAGE> 4
[Inside Cover Page]
Fore front: Sound waves emanating from music notes centered on page. Various
blocks with arrows pointing to aspects of Company's business.
Background: Digital screen depicting digital codes and squares.
Text: - Get Digital
- Internet based digital rights management distribution system
for the secure publishing, enhancing and preparing of digital
content
- Direct Digital Distribution
- Sheet music, books, games, audio, video, images, theater, plays,
musicals, lectures
- Protection, Encryption
- "tech solutions for secure content distribution"
- Enhancement, preparation and delivery
- Education and entertainment
- Worldwide delivery
[Inside Back Cover]
Fore front: Various images of people involved in business, entertainment and
educational situations.
Background: Circular presentation creating larger images as one moves away
from the center
Text: www.sunhawk.com
digital solutions
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus.
Sunhawk.com Corporation has developed and is operating an Internet based
digital rights management ("DRM") system that secures, enhances and prepares and
publishes copyrighted digital content ("Proprietary Digital Products") for
distribution over the Internet.
Anything that can be copyrighted can also be digitized and distributed over
the Internet, including text, audio, video, photographic images, film, sheet
music, literature, and software. While most information available on the
Internet is intended to be free, Proprietary Digital Products are expected to be
sold or licensed, and new systems are required to allow these transactions to
take place securely over the Internet, to account for them, and to restrict
copying.
Our DRM distribution system is based upon proprietary software that
encrypts Proprietary Digital Products so that they can be viewed and heard, if
applicable, only by the customer. We distribute our Solero(R) viewer via the
Internet, which identifies the customer and allows the Proprietary Digital
Products which are downloaded to the customer to be viewed, heard, if
applicable, and printed out, after payment. For two years we have been
efficiently conducting secure international distribution of certain Proprietary
Digital Products on behalf of our business partners, as either a principal or
service provider, and will market our DRM technology to others for their use, as
appropriate.
In addition to our ability to securely distribute Proprietary Digital
Products, we are, with patented technology, enhancing copyrighted materials to
add significant value to them. We have applied such technology initially for
digitally enhancing sheet music, and these enhanced products have been sold
since 1997. Sheet music is digitized and enhanced by us to animate the notes
played while hearing them, allowing for variations in tempo, allowing the user
to add or subtract instruments and showing notes being played on a keyboard or
other instrument being scored, all in a real-time interactive manner. Our
business partners in the digitized sheet music activities to date, with whom we
have long term licenses, include Warner Bros. Publications U.S. Inc. ("Warner"),
which also owns 7% of Sunhawk.com, EMI Christian Music Publishing ("EMIC") a
division of EMI Christian Music Group, and Mel Bay Publications, Inc. ("Mel
Bay").
We also securely distribute music in the MP3 compressed format using our
DRM distribution system for our partners. Additionally, discussions are underway
with book publishers and other owners of text to digitize and distribute these
Proprietary Digital Products. We also intend to act as a publisher of
Proprietary Digital Products of which we will own the rights.
We are committed to all aspects of secure digital publishing including
developing, directly operating and, as appropriate, licensing our secure
technology infrastructure, enhancing client Proprietary Digital Products and
producing our own Proprietary Digital Products. We believe that Internet based
marketing and sale of Proprietary Digital Products will rapidly expand and will
become a leading form of Internet commerce content when secure distribution
methods such as our DRM distribution system are available.
We were incorporated in the State of Washington on August 20, 1992. Our
principal executive offices are located at 223 Taylor Avenue North, Suite 200,
Seattle, Washington 98109, and our telephone and fax numbers are (206) 728-6063
and (206) 728-6416, respectively. Our e-mail address is [email protected], and
our web site address is www.sunhawk.com. Information accessed on or through our
web site does not constitute a part of this prospectus.
3
<PAGE> 6
THE OFFERING
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<S> <C>
Common stock offered by us.............. 1,400,000 shares
Common stock outstanding immediately
prior to the date of this offering.... 1,399,380 shares
Common stock to be outstanding after
this offering......................... 2,799,380 shares
Over-allotment option................... 210,000 shares
Use of proceeds......................... We anticipate that the net proceeds from this offering will
be used for:
- sales, marketing, brand building and website enhancement
activities;
- working capital for general business purposes;
- production of Proprietary Digital Products;
- acquisition of licenses for production of Proprietary
Digital Products;
- research and development of additional features of our
distribution system;
- repayment of bridge financing loans; and
- upgrading existing facilities and acquisition of
equipment, including leasehold improvements.
Proposed Nasdaq SmallCap(R) Market
Symbol................................ "SNHK"
Proposed Pacific Stock Exchange
Symbol................................ "SHA"
</TABLE>
Except as otherwise indicated, all information in this prospectus assumes
that the underwriter does not exercise the option granted by Sunhawk.com to
purchase additional shares in this offering.
4
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
The following table summarizes the financial data of our business and
should be read in conjunction with "Management's discussion and analysis of
financial condition and results of operations."
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ $ 100,575 $ 27,263 $ 15,066
Gross profit (loss).................................. (71,150) 4,746 10,052
Loss from operations................................. (2,732,083) (1,349,125) (844,406)
Net loss............................................. (2,834,337) (1,475,579) (910,983)
Net loss per share --
basic and diluted.................................. $ (2.46) $ (1.66) $ (1.04)
Weighted average common shares for net loss per share
computations -- basic and diluted.................. 1,154,214 887,689 875,424
</TABLE>
The following table provides a summary of our balance sheet as of September
30, 1999. The "as adjusted" column reflects the sale of 1,400,000 shares of
common stock in this offering at an assumed initial public offering price of
$12.00 per share after deducting the estimated underwriting discounts,
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $(1,337,009) $13,424,086
Total assets................................................ 3,130,128 16,828,128
Total shareholders' equity.................................. 1,745,510 15,443,510
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
---------------------- TOTALS AS OF
1999 1998 1997 SEPTEMBER 30, 1999
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<S> <C> <C> <C> <C>
SUMMARY OPERATING DATA:
Solero(R) song titles published................... 4,959 1,516 538 7,013
Solero(R) pages published......................... 27,146 5,778 2,429 35,353
Total online digital products sold................ 16,931 3,404 125 20,460
</TABLE>
5
<PAGE> 8
RISK FACTORS
WE CURRENTLY HAVE AN UNSOUND FINANCIAL CONDITION WHICH ADVERSELY AFFECTS OUR
OPERATIONS.
Presently, we are operating at a loss and are financing our operations with
borrowed funds. This situation has limited the growth of our business,
substantially increased our debt and resulted in a going concern qualification
report from our independent auditors. We will be unable to continue our business
as presently conducted unless we obtain the proceeds of this offering.
WE HAVE INCURRED LOSSES SINCE INCEPTION IN CONNECTION WITH THE DEVELOPMENT OF
OUR DRM AND ENCRYPTION TECHNOLOGY AND E-COMMERCE OPERATIONS, AND MAY INCUR
FUTURE LOSSES AND AS A RESULT, OUR OPERATIONS MAY SUFFER.
To date, we have had limited revenues and have incurred losses from
operations. We incurred net losses of $2,834,337, $1,475,579, and $910,983 for
the years ended 1999, 1998, and 1997, respectively. The aggregate amount of our
accumulated deficit as of September 30, 1999 was $1,599,709 after adjustment for
the change in tax status from an "S" Corporation to a "C" Corporation. We expect
to continue to devote substantial resources to the production of Solero(R)
digital sheet music and Sunhawk Audio files, sales and marketing activities and
the acquisition of rights to additional sheet music, recorded music and other
digital content. As we expand our technology to address electronic distribution
of other types of content we expect to incur additional significant increases in
research and development costs as well as in sales and marketing. Accordingly,
we expect to incur significantly larger losses in the next 12 months. We may
find that these efforts are more expensive than we currently anticipate, which
would further increase our losses. As a result, we will need to generate
significant revenues to achieve and maintain profitability. Our business
strategy may not be successful, and we cannot predict when, or if, we will
become profitable. If we achieve profitability, we may not be able to sustain
it.
WE WILL NEED ADDITIONAL FINANCING AND IF WE CANNOT SECURE SUCH FINANCING, THERE
WOULD BE SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our capital requirements have been and will continue to be significant. In
the past, we have been substantially dependent upon loans and contributions from
our shareholders. The proceeds of this offering together with existing funds are
expected to be sufficient to meet our cash requirements for the next 12 months.
Beyond that period, we will require additional funds in order to meet our
strategic business objectives and remain competitive. This capital may not be
available on acceptable terms, if at all. If we raise additional funds by
issuing equity or convertible debt securities, the percentage ownership of our
shareholders will be reduced, and these securities may have rights, preferences
or privileges senior to those of our shareholders. If we cannot obtain
sufficient funds, we may not be able to grow our operations, make technological
developments or compete effectively and there would be a substantial doubt as to
our ability to continue as a going concern.
6
<PAGE> 9
OUR DRM AND ENCRYPTION, CONTENT ENHANCEMENT AND ELECTRONIC COMMERCE BUSINESSES
ARE DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND,
CONSEQUENTLY, OUR OPERATING RESULTS MAY BE UNCERTAIN.
We were incorporated in August 1992 but did not go online with our web site
until February 1997 and did not make our first sale online until March 1997.
Accordingly, we have a limited operating history upon which you can evaluate our
business and prospects, which makes it difficult to forecast our future
operating results. The new and evolving nature of using e-commerce for the
distribution of Proprietary Digital Products increases these uncertainties. You
must consider our business in light of the risks, uncertainties and problems
frequently encountered by companies with limited operating histories.
WE DO NOT HAVE EXPERIENCE IN CONTENT AREAS OTHER THAN SHEET MUSIC AND IF WE ARE
UNSUCCESSFUL IN THE DEVELOPMENT AND INTRODUCTION OF NEW PROPRIETARY DIGITAL
PRODUCTS, OUR BUSINESS WOULD BE HARMED.
We must continue to develop new or enhanced Proprietary Digital Products in
a timely manner in order to take advantage of rapid technological change and new
business opportunities. We may fail to successfully identify new product
opportunities and develop and bring new or enhanced Proprietary Digital Products
to market in a timely manner or these Proprietary Digital Products may fail to
achieve the market acceptance or price stability necessary for profitability. In
order to remain competitive we may change our business model to take advantage
of new business opportunities, including business areas in which we do not have
extensive experience. For example, we intend to extend our technology to digital
content types other than music, and may start licensing our DRM technology. If
we fail to successfully develop these or other business opportunities, our
business would be harmed.
WE RELY ON MARLIN ELLER AND OTHER KEY EMPLOYEES, WHOSE KNOWLEDGE OF OUR DRM AND
ENCRYPTION TECHNOLOGY, DIGITAL SHEET MUSIC AND THE MUSIC PRODUCTS INDUSTRY ARE
CRITICAL TO OUR OPERATIONS. OUR INABILITY TO RETAIN KEY EMPLOYEES COULD HARM OUR
OPERATIONS.
Our success depends substantially on the continued services of our
executive officers and key employees, in particular Marlin Eller, our chairman
of the board, chief executive officer and president. The loss of the services of
Mr. Eller or any of our other executive officers or key employees could harm our
business. We have obtained a $1,000,000 key man life insurance policy on the
life of Mr. Eller. None of our executive officers or key employees currently has
a contract that guarantees employment. There can be no assurance that any of
these persons will remain employed by us or that these persons will not
participate in businesses that compete with us in the future.
WE MAY FACE PATENT INFRINGEMENT AND OTHER INTELLECTUAL PROPERTY INFRINGEMENT
CLAIMS RELATED TO OUR DRM, CONTENT ENHANCEMENT AND E-COMMERCE ACTIVITIES WHICH,
IF SUCCESSFULLY ENFORCED, WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We depend, to a very material extent, on our patents and other technology
related to our DRM system and related to our sheet music Proprietary Digital
Products. We understand that the patenting of digital and Internet technologies
has increasingly become a major focus of e-commerce companies. Patents are
perceived as a means of barring
7
<PAGE> 10
competition and adding value. While we attempt to avoid infringing known
proprietary rights of third parties, there is no assurance that we will not be
found to infringe upon the proprietary and other rights of others. We generally
have not conducted, and do not conduct comprehensive patent searches to
determine whether the technology used in our products infringe third party
patents. Since the United States patenting process takes an extended period of
time, during which there is usually no disclosure of the patent application, we
would generally not know about a patent that blocks the use of one or more
aspects of our technology until the patent is granted. It can be expected that
patents granted in key areas of Internet commerce will be subject to vigorous
challenge. There is no assurance as to what blocking patents may be granted, or
as to how a challenge to such patents would be resolved. In any event, we expect
that the process will be time consuming and expensive, and potentially
materially adverse to our business.
At the present time, patents have been issued to third parties relating,
for example, to the Internet and e-commerce in general, as well as to the secure
distribution of digital information over the Internet, and the downloading of
music over the Internet in particular. Other DRM and online music distribution
companies have received letters from companies alleging infringement of their
patents. In the future, we, or if we decide to license our technology, our
licensees, could be found to infringe upon these and other patent rights.
ASSERTING OUR INTELLECTUAL PROPERTY RIGHTS RELATIVE TO OUR DRM, ENCRYPTION,
CONTENT ENHANCEMENT AND E-COMMERCE MAY INVOLVE US IN EXPENSIVE LITIGATION
AGAINST PARTIES WITH GREATER FINANCIAL RESOURCES, WHICH COULD HARM OUR OPERATING
RESULTS.
Circumstances may arise that would cause us to pursue legal remedies in
order to protect our rights and interests in our intellectual property. Any such
litigation, while in our best interests, may be lengthy and expensive. In
addition, any such litigation may be against parties better able than we are to
afford the extensive costs often associated with such litigation. We cannot
assure you that we will be able to bear the expense required to pursue prolonged
litigation to the best conclusion for us.
WE DEPEND UPON OUR INTELLECTUAL PROPERTY RIGHTS RELATED TO OUR DRM, ENCRYPTION,
CONTENT ENHANCEMENT AND E-COMMERCE BUSINESS, WHICH IF INFRINGED UPON, COULD
SUBJECT US TO LITIGATION AND HARM OUR BUSINESS.
We consider our patents, trademarks, trade secrets and other similar
intellectual property to be a valuable part of our business. To protect our
intellectual property rights, we rely upon copyright, trademark, patent and
trade secret laws and generally enter into confidentiality agreements with our
employees, consultants, vendors and corporate business partners. We cannot
assure you that applicable U.S. or foreign laws or our use of confidentiality
agreements will provide sufficient protection from misappropriation or
infringement of our intellectual property rights or the unauthorized use or
distribution of our products, particularly in foreign countries where laws or
law enforcement practices may not protect our intellectual property rights as
fully as in the United States. If third parties were to use or otherwise
misappropriate our copyrighted materials, trademarks or other intellectual
property rights without our consent or approval, independently develop products
utilizing our technologies or breach the security provided by our encryption and
e-commerce technology, our competitive position could be harmed, or we could
become involved in litigation to enforce our rights. Our failure or inability to
protect our intellectual property rights could harm our business.
8
<PAGE> 11
OUR INABILITY TO PROMOTE EFFECTIVELY OUR WEBSITE, SHEET MUSIC AND OTHER
PROPRIETARY DIGITAL PRODUCTS COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
OPERATIONS.
In addition to providing quality products and customer service, we will
need to increase our advertising and marketing expenditures to increase
awareness of our website and create and maintain brand loyalty among our
customers. Our marketing strategy may include traditional print advertising and
promotions as well as Internet strategies such as the placement of banner ads on
third party websites, the purchase of words on search engines, and the creation
of distribution relationships with high-traffic websites. There can be no
assurance that we will be able to execute such strategies or that they will be
successful. If we fail to effectively promote and maintain our website, brands
and products in a way that increases our revenues and attracts customers, our
business, results of operations and financial condition could be materially
adversely affected.
IF WE FAIL TO CONTINUOUSLY UPGRADE OUR WEBSITE IN ORDER TO ATTRACT AND RETAIN
CUSTOMERS FOR OUR SHEET MUSIC AND OTHER PROPRIETARY DIGITAL PRODUCTS, WE MAY NOT
BE ABLE TO INCREASE SALES AND OUR BUSINESS WILL BE HARMED.
If our potential or existing customers do not find our website an
attractive and convenient place to shop, we will not attract or retain customers
and our sales will suffer. If our competitors' websites are easier to use or
better able to satisfy customer needs, our customer traffic and our business
could be adversely affected. In order to keep our website competitive and
encourage its use we must continuously increase and improve its accessibility,
music titles and other content, and ease of use. Developing and integrating new
Proprietary Products, features, content, services or technologies into our
website on a timely basis could be expensive and time consuming and there can be
no assurance that our efforts will be successful, meet with market acceptance or
enhance our brand loyalty.
BECAUSE WE ARE AN EXCLUSIVELY ONLINE-BASED BUSINESS, OUR REPUTATION AND BUSINESS
MAY BE HARMED BY NATURAL AND MAN-MADE DISASTERS AND OTHER DISRUPTIONS THAT
RESULT IN SYSTEM FAILURES.
Substantially all of our computer hardware for operating Sunhawk.com is
currently located at a single facility in Seattle, Washington. Because our
customers can only access our products online, our ability to sell Proprietary
Digital Products over the Internet successfully and provide high quality
customer service depends on the efficient and uninterrupted operation of our
computer and communications systems at that facility. We are in the process of
installing a redundant system and designing a formal disaster recovery plan.
However, should a disaster occur prior to the completion of the foregoing, it
could harm our business. In addition, our systems are vulnerable to damage from
fires, earthquakes, floods and other natural hazards as well as
telecommunications failures, power losses, computer viruses, vandalism and
similar events. The occurrence of any of the foregoing could lead to
interruptions, delays, loss of data or the inability to sell our products. Our
customers may become dissatisfied by any system failure or delay that interrupts
our ability to provide service. Sustained or repeated system failures could
affect our reputation, which would harm our business.
9
<PAGE> 12
IF ADDITIONAL SALES AND OTHER TAX OBLIGATIONS ARE IMPOSED ON US BECAUSE OF THE
TAXATION OF INTERNET-BASED TRANSACTIONS, OUR SALES AND OTHER TAX OBLIGATIONS MAY
INCREASE AND OUR BUSINESS MAY BE HARMED.
As a Washington-based company, we collect sales taxes for transactions in
the State of Washington only. However, the future taxation requirements for
online transactions are uncertain. One or more local, state, federal or foreign
jurisdictions may seek to impose additional sales or other tax obligations on
us. Proposals have been made at various state and local levels that would impose
additional taxes on the sale of goods and services over the Internet. None of
these has been adopted as of this date. If adopted, however, such taxes could
impair the growth of e-commerce and our business could be harmed. In 1998,
Congress passed the Internet Freedom Act, which imposes a three-year moratorium
on state and local taxes on Internet-based transactions. We cannot assure you
that this moratorium will be extended. Failure to renew this moratorium would
allow various states to impose taxes on e-commerce, which could harm our
business.
THE FAILURE OF THIRD PARTIES TO MAINTAIN AND IMPROVE THE INTERNET INFRASTRUCTURE
OVER WHICH WE DISTRIBUTE OUR SHEET MUSIC AND OTHER PROPRIETARY DIGITAL PRODUCTS
AND THE FAILURE OF OUR SERVICE PROVIDERS TO PROVIDE NECESSARY INTERNET SERVICES
COULD HARM OUR BUSINESS.
Our success depends, in large part, upon third parties maintaining the
Internet infrastructure to provide a reliable network with the speed, ease of
use, data capacity, security and hardware necessary for reliable Internet access
and services. The failure by these parties to provide the necessary services to
maintain the viability of the Internet could harm our business.
THERE IS NO EXISTING INDUSTRY STANDARD FOR THE DISTRIBUTION OF PROPRIETARY
DIGITAL PRODUCTS AND IF A COMPETING STANDARD IS ADOPTED, OUR BUSINESS WOULD BE
HARMED.
There is currently no generally adopted industry standard, and one may
never materialize, for the creation, storage and distribution of interactive
Proprietary Digital Products. Some of our competitors distribute sheet music and
other Proprietary Digital Products in a non-interactive, non-playable format
that is significantly less expensive to produce. While we also have the ability
to produce sheet music and other Proprietary Digital Products in a non-playable,
non-interactive format, our business will be harmed if this format becomes the
standard adopted by publishers and consumers. We cannot assure you that our
Solero(R) format will be a successful format for the creation, storage and
distribution of interactive Proprietary Digital Products, or that it will be
adopted by customers in sufficient numbers for us to be successful. Further, if
another format for the creation, storage and delivery of interactive digital
sheet music and other Proprietary Digital Products emerges, we cannot assure you
that we will be able to obtain a license to such technology on favorable terms
or at all, or that it will be possible to convert our digital sheet music and
other Proprietary Digital Products into that alternate format.
IF WE ARE UNABLE TO ADAPT AND RESPOND TO EXISTING EFFORTS TO ESTABLISH A
STANDARD COMPATIBLE WITH OUR METHOD FOR DISTRIBUTING PROPRIETARY DIGITAL
PRODUCTS OUR BUSINESS WOULD BE HARMED.
The market for digital music products is characterized by new developments
in technology and evolving industry standards. For example, some of the major
recording studios have recently announced a plan to develop a universal standard
for the electronic
10
<PAGE> 13
delivery of recorded music called the Secure Digital Music Initiative, or SDMI,
and have announced their intention to make this delivery method available in the
future. To our knowledge, however, SDMI has not yet issued a complete standard.
Widespread industry and consumer acceptance of these and other standards could
significantly harm our business if we are not able to adapt and respond to these
and other standards.
SECURITY BREACHES TO OUR DRM SYSTEM, PROPRIETARY DIGITAL PRODUCTS AND OTHER
SYSTEMS AND SOFTWARE WE USE TO OPERATE OUR BUSINESS AND MAINTAIN OUR DATABASE
MAY HARM OUR REPUTATION AND BUSINESS AND MAY CAUSE US TO EXPEND SIGNIFICANT
ADDITIONAL RESOURCES TO PROTECT AGAINST FUTURE BREACHES.
A party who is able to circumvent our security measures could
misappropriate Proprietary Digital Products without paying the required license
fees, disrupt our operations, erase or modify purchase transaction and other
information, or gain unauthorized access to proprietary information. Security
breaches could also harm our reputation and expose us to litigation and
liability. We may be required to expend significant capital and other resources
to address problems caused by attempts to compromise our security. We cannot
assure you that our security measures will prevent security breaches or that a
failure to prevent such security breaches will not seriously harm our business.
ANY DELAYS IN THE DESIGN, DEVELOPMENT AND DISTRIBUTION OF NEW PROPRIETARY
DIGITAL PRODUCTS OR ERRORS IN THESE PROPRIETARY DIGITAL PRODUCTS AND SOFTWARE
COULD HARM OUR BUSINESS AND OPERATING RESULTS.
In order to remain competitive we must continue to innovate and develop new
versions of our software to distribute and enhance Proprietary Digital Products.
Software development is inherently difficult to manage and keep on schedule. Our
failure to manage and keep development projects on schedule might hurt our
business. In addition, complex software products like ours often contain errors
or defects, including errors relating to security, particularly when first
introduced or when enhancements or new versions are released. Defects or errors
in current or future products could result in delayed or failed introduction of
our products, negative publicity, a delay or failure to achieve market
acceptance, lost revenues, or products liability and other claims, any of which
could seriously harm our business and operating results.
WE MAY BE SUBJECT TO CHANGES IN GOVERNMENT REGULATIONS AND THE LAW RELATIVE TO
THE DESIGN, DEVELOPMENT AND DISTRIBUTION OF DIGITAL CONTENT WHICH, IF ADOPTED,
COULD HARM OUR BUSINESS.
As commerce on the Internet continues to evolve, federal, state or foreign
agencies may adopt laws and regulations that cover our business. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. We,
for example, distribute music which include lyrics which some may find
objectionable. It is possible that governments will enact legislation that may
be applicable to us to regulate areas such as content, privacy, pricing,
security, encryption, illegal and harmful content, access charges and
retransmission activities. The introduction of such laws and regulations could
expose us to significant liability. In addition, any such new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase our cost of doing
11
<PAGE> 14
business or increase our legal exposure, which could have a material adverse
effect on the our business, financial condition and results of operations.
OUR FAILURE TO PROTECT CONSUMER INFORMATION WE ACQUIRE OVER THE INTERNET FROM
UNLAWFUL USE AND DISTRIBUTION COULD SUBJECT US TO LITIGATION AND HARM OUR
BUSINESS.
A significant concern regarding e-commerce over the Internet has been the
need for secure transmission of consumer information. We rely on encryption and
credit card authentication technology for the purpose of securely transmitting
confidential information such as customer credit card numbers. Despite our
security efforts, if third parties were able to breach our network security or
otherwise misappropriate our users' personal information or credit card
information, we could be subject to liability. In addition, it is our policy to
hold credit card information confidential pursuant to our privacy policy. We may
need to expend significant capital and other resources to protect against
security breaches or to remedy problems caused by any breaches. Any compromise
of our encryption and authentication technology or our privacy policy could harm
our business.
THE DRM AND DISTRIBUTION OF DIGITAL CONTENT BUSINESSES ARE HIGHLY COMPETITIVE,
AND THE FAILURE OF OUR DRM SYSTEM OR DIGITAL DISTRIBUTION MODEL TO COMPETE
EFFECTIVELY WITH OUR COMPETITORS' SYSTEMS AND DISTRIBUTION MODELS WOULD HARM OUR
BUSINESS.
Many of our current and potential competitors in the DRM business are well-
established companies that have greater financial, marketing, distribution,
brand recognition and other resources than we have. There can be no assurance
that we will be able to compete effectively against these companies.
Additionally, larger, well-established and well-financed entities such as AT&T,
IBM, Liquid Audio, Microsoft, Xerox, Intertrust Technologies and Preview Systems
may acquire, invest in, or form joint ventures with our e-commerce competitors
or other publishers or suppliers of Proprietary Digital Product.
If these or other companies successfully develop competing technologies or
acquire significant ownership in Proprietary Digital Products, our business
could be harmed.
OUR EFFORTS TO SECURE NEW SOURCES OF PUBLISHING RIGHTS FOR PROPRIETARY DIGITAL
PRODUCTS MAY RESULT IN ADDITIONAL COSTS TO US, WHICH COULD HARM OUR BUSINESS.
We may be required to pay substantial royalty advances or be required to
make payments to acquire proprietary product conversion and distribution rights
from new sources in the future. We cannot assure you that we will be able to
recoup advances or payments, if any, that may be payable for such rights. Our
failure to make such payments could harm our relationships with our licensors,
including, but not limited to, cancellation of our license agreements. In
addition, license fees payable to publishers and other owners of proprietary
product may increase as we continue to expand our Proprietary Digital Products
and as competition for these products increases. Publishers, record companies,
copyright owners, performance rights societies, and other owners of proprietary
product may make claims for royalties in addition to those we are currently
paying. If we are required to pay increased or additional licensing fees, these
increased payments could reduce our margins and could harm our business.
12
<PAGE> 15
WE DEPEND ON CONTRACTS WITH THREE MUSIC PUBLISHERS FOR A MAJORITY OF OUR SHEET
MUSIC CATALOG WHICH, IF TERMINATED, WOULD DECREASE OUR AVAILABLE CATALOG OF
SHEET MUSIC AND HARM OUR BUSINESS.
A majority of our current and anticipated catalog of Solero(R) digital song
titles are licensed from Warner, Mel Bay and EMIC. Although our agreements with
Warner, Mel Bay and EMIC are for remaining terms of approximately eight, five
and three years, respectively, the agreements could be terminated prior to the
normal expiration of their terms in the event of any uncured material breach or
default. Any termination of the Warner, Mel Bay or EMIC agreements would
decrease the availability of digital sheet music that we offer customers and
would harm our business.
UNLESS WE ENTER INTO NEW LICENSE AGREEMENTS TO GROW OUR CATALOG OF DIGITAL SHEET
MUSIC AND OTHER PROPRIETARY DIGITAL PRODUCTS, WE MAY NOT BE ABLE TO GENERATE
SUFFICIENT REVENUE TO CONTINUE OPERATIONS.
Our success will depend in part on our ability to build relationships with
music publishers and publishers of other Proprietary Digital Products. The
rights to a substantial number of the commercially significant sheet music
titles are owned by Warner/Chappel, EMI Music Publishing, BMG Music Publishing,
MCA Music Publishing and Sony/ATV Music Publishing in the United States. The
rights to other Proprietary Digital Products are widespread. While we expect to
continue to seek to obtain the necessary rights to convert and distribute
Solero(R)sheet music and other Proprietary Digital Products, there can be no
assurance that we will secure such rights on commercially reasonable terms. Our
failure to grow our catalog of music titles and other Proprietary Digital
Products may affect our sales, which would have a material adverse effect on our
business.
DIGITAL SHEET MUSIC IS AN UNPROVEN PRODUCT, AND IF OUR SYSTEM FOR PREPARING,
ENHANCING AND DISTRIBUTING DIGITAL SHEET MUSIC AND PROPRIETARY DIGITAL PRODUCTS
IS NOT WIDELY ADOPTED, OUR BUSINESS COULD BE HARMED.
Our future success in the distribution of sheet music and other Proprietary
Digital Products will depend on our ability to significantly increase sales of
our Solero(R) digital sheet music and other Proprietary Digital Products over
the Internet, while successfully managing costs. If music publishers, other
music content providers and consumers do not adopt the Internet as a means of
distributing digital sheet music in general, and our products, in particular,
our business would be harmed.
THE MUSIC PRODUCTS BUSINESS IS FRAGMENTED AND HIGHLY COMPETITIVE, AND THE
FAILURE OF OUR SOLERO(R) SHEET MUSIC AND SUNHAWK AUDIO PRODUCTS TO COMPETE
EFFECTIVELY WITH OUR COMPETITORS' PRODUCTS WOULD HARM OUR BUSINESS.
Our competition includes:
- traditional retail sheet music merchants, including conventional
mail-order companies;
- various music merchandisers that sell instruments and related music
products over the Internet;
- music publishers that sell products directly over the Internet on a
mail-order basis; and
- assorted e-commerce web sites selling books and music over the Internet,
including print sheet music at lower prices in some cases than we
currently offer.
13
<PAGE> 16
Many of our current and potential competitors are well-established
companies that have greater financial, marketing, distribution, brand
recognition and other resources than we have. There can be no assurance that we
will be able to compete effectively against these companies. Additionally,
larger, well-established and well-financed entities such as major music
publishers may acquire, invest in, or form joint ventures with our e-commerce
competitors or other sheet music publishers or suppliers who develop their own
Internet distribution channels, any of which could harm our business.
Companies that are currently in similar or potentially competing businesses
include Sheet Music Direct, which is affiliated with Hal Leonard Corporation and
Music Sales Corporation, Infomusique S.A., Net4Music, Musicnotes and Coda Music
Technology. If these or other companies successfully develop competing
technologies or acquire significant catalogs of music, our business could be
harmed. In addition, in expanding the Sunhawk Audio portion of our business, we
will face significantly increased competition and different competitive
challenges from other Internet audio providers than we currently experience.
UNLESS WE ACHIEVE SUFFICIENT SALES TO RECOUP OUR FIXED COSTS OF CONVERTING MUSIC
INTO THE SOLERO(R) AND SUNHAWK AUDIO FORMAT OUR BUSINESS MAY NOT SUCCEED.
We expect to devote substantial resources to converting music into the
Solero(R) and Sunhawk Audio format. There can be no assurance that we will be
able to generate sufficient revenues from product sales to recoup our fixed
conversion costs for all or any portion of the music that we convert.
WE MAY BE EXPOSED TO LIABILITY FOR MUSIC AND OTHER CONTENT ON OUR WEB SITE AND
ELSEWHERE THAT, IF FOUND TO BE DEFAMATORY OR IN VIOLATION OF A THIRD PARTY'S
COPYRIGHT, TRADEMARK OR OTHER RIGHTS COULD HARM OUR BUSINESS.
We may be subject to claims for copyright or trademark infringement,
negligence, defamation, obscenity or on other grounds related to the music and
information available for download or use on our web site and distributed on
CD-ROMS, enhanced CDs and elsewhere. The area of law relating to the digital
distribution of music and other materials over the Internet is unsettled, and we
face risks associated with, for example, content appearing on sites to which we
link, content appearing on sites created by members of our associates program,
and a failure by us to obtain all necessary rights to distribute our music
products. Any liability incurred as a result of such claims or from the loss of
the rights to distribute our music products could harm our business.
WE DEPEND ON THE CONTINUED GROWTH OF E-COMMERCE FOR THE SALE OF OUR PROPRIETARY
DIGITAL PRODUCTS, AND ANY DECREASE IN CONSUMER USE OF THE INTERNET FOR THE
PURCHASE OF OUR PROPRIETARY DIGITAL PRODUCTS WOULD HARM OUR BUSINESS.
Our future revenues and any potential future profits are dependent upon
widespread acceptance and increased use of the Internet as a medium for
commerce. We cannot predict whether customers who have used traditional means of
commerce will instead purchase digital and pre-printed sheet music or digitally
recorded music over the Internet. Customer concerns over the security of
transactions conducted on the Internet, together with concerns over the privacy
of users, may inhibit the growth of the Internet and e-commerce. If use of the
Internet does not continue to grow, or if the necessary Internet infrastructure
or complementary services are not developed and maintained to effectively
support any growth that may occur, our business could be harmed.
14
<PAGE> 17
OUR FAILURE TO ACCOMMODATE UNANTICIPATED INCREASES IN CUSTOMER TRAFFIC SEEKING
TO PURCHASE OUR PROPRIETARY DIGITAL PRODUCTS COULD RESULT IN THE LOSS OF
EXISTING OR POTENTIAL CUSTOMERS AND HARM OUR BUSINESS.
Our success will depend in part on our ability to quickly and effectively
scale our operations to accommodate any significant increase in customer traffic
and orders. If we do not successfully scale our operations to accommodate
increased customer demands for our products, our business could be harmed.
THE UNAVAILABILITY OF OUR FOREIGN SUBCONTRACTORS ON WHOM WE DEPEND TO CONVERT
SHEET MUSIC INTO THE SOLERO(R) FORMAT COULD DISRUPT OR INCREASE THE COST OF OUR
DIGITAL SHEET MUSIC PRODUCTION AND HARM OUR BUSINESS.
While our encryption, quality control and Internet operations are located
at our offices in Seattle, Washington, substantially all of our "raw" digital
sheet music is produced by third-party contractors overseas. These relationships
may be affected by political or economic uncertainties, termination of our
existing agreements or personnel shortages. Because of distance and different
legal systems, we would have difficulty enforcing our agreements with these
contractors. Although domestic third-party providers of these services are
available, we believe that such services are more costly. If the supply of music
converted into our Solero(R) format from foreign third-party subcontractors is
disrupted for any reason, our ability to produce additional Solero(R) music
titles will be disrupted until other service providers are contracted with, and
our business could be harmed.
THE FAILURE OF THIRD PARTIES ON WHOM WE RELY TO FULFILL ORDERS FOR TRADITIONAL
PRINTED SHEET MUSIC COULD PREVENT US FROM SATISFYING CUSTOMER ORDERS AND RESULT
IN THE LOSS OF EXISTING OR POTENTIAL CUSTOMERS AND THUS HARM OUR BUSINESS.
Although we have accounts with several distributors, we obtain
substantially all of our traditional printed sheet music directly from an
unaffiliated third-party distributor with whom we do not have a written
agreement. There can be no assurance that if our distributor relationship were
terminated, we would be able to find an alternative, comparable supplier capable
of providing printed sheet music on terms that we would find satisfactory. To
the extent our distributor does not have sufficient capacity or is otherwise
unable to fulfill orders on a timely basis, such capacity constraints could harm
our business. We also rely on third-party carriers for traditional printed sheet
music shipments and are therefore subject to the risks, including employee
strikes and inclement weather, associated with these carriers' ability to
provide delivery services to meet our shipping needs. If we fail to adequately
address these and other order fulfillment risks, our business would be harmed.
ALTHOUGH WE HAVE NOT EXPERIENCED ANY YEAR 2000 PROBLEMS, THE OCCURRENCE OF ANY
YEAR 2000 PROBLEMS COULD HARM OUR BUSINESS.
Our software, products and information systems were developed using a
four-digit year code. As a result, we believe that our software, products and
information systems will function properly with respect to dates in the Year
2000 and thereafter. While we have not experienced any Year 2000 problems to
date, we cannot assure you that we will not encounter latent issues that will
require upgrades, modifications or replacements. Any resulting system failures
or significant upgrades or modifications could harm our business. We have
established contingency plans. The failure by us to successfully implement our
contingency plans to address future problems relative to Year 2000 matters could
harm our business.
15
<PAGE> 18
ANY FAILURE BY THIRD-PARTIES THAT PROVIDE PRODUCTS AND SERVICES ON WHICH WE RELY
TO ADDRESS POTENTIAL YEAR 2000 RISKS COULD HARM OUR BUSINESS.
There can be no assurance that the products, software and systems of other
companies on which our products, software, systems and operations rely will
function properly with respect to dates in the Year 2000 and thereafter. We have
identified our critical vendors and are monitoring their Year 2000 compliance
programs. The failure of any of our critical vendors to adequately address the
Year 2000 problem could harm our business.
OUR OFFICERS AND DIRECTORS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER
SUNHAWK.COM AFTER THIS OFFERING, WHICH WILL ENABLE THEM TO EXERCISE SIGNIFICANT
INFLUENCE OVER ALL MATTERS REQUIRING SHAREHOLDERS APPROVAL.
Immediately after the closing of this offering, the Eller and McConney 1995
Family Living Trust, of which Mr. Eller, our chairman of the board, chief
executive officer and president, and Mary McConney, our treasurer, serve as the
trustees, will own 1,024,284 shares of our outstanding common stock, which will
represent 36.6% of our outstanding common stock or 34.0% if the underwriters'
over-allotment option is exercised in full. Accordingly, the Eller and McConney
1995 Family Living Trust will have significant influence over the election of
directors and other matters submitted to a vote of our shareholders. Moreover,
our executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own 40.2% of our outstanding common stock, or 37.3% if
the underwriters' over-allotment option is exercised in full, upon the
completion of this offering. As a result, these shareholders will possess
significant influence over us, with the ability to significantly influence all
matters requiring approval by our shareholders.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS CONTAINED UNDER WASHINGTON LAW, WHICH
MAY MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of Washington law, could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our shareholders.
Specifically, Chapter 19 of the Washington Business Corporation Act generally
prohibits a "target corporation" from engaging in certain significant business
transactions with a defined "acquiring person" (a person acquiring 10% or more
of the capital stock of the target corporation) for a period of five years after
the acquisition, unless the transaction or acquisition of shares is approved by
a majority of the members of the target corporation's board of directors prior
to the time of acquisition. This provision may have the effect of delaying,
deterring or preventing a change in control of our company. The existence of
these antitakeover provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements include statements about our plans, objectives, expectations and
intentions and other statements that are not historical facts. When we use the
words "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions, we are generally identifying
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are many factors that could cause actual results
to differ materially from those expressed or implied by these forward-looking
statements, including the factors discussed above.
16
<PAGE> 19
USE OF PROCEEDS
The estimated net proceeds to us of this offering, assuming an initial
public offering price of $12.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, will be approximately $13,698,000. We currently expect to apply the
estimated net proceeds as follows:
<TABLE>
<CAPTION>
USE AMOUNT PERCENTAGE
- ------------------------------------------------------ ----------- ----------
<S> <C> <C>
Sales and Marketing, including sales force
enhancement; brand building program development and
implementation; marketing and advertising programs
and upgrading and maintaining our DRM technology and
website............................................. $ 8,000,000 59%
Working capital for general business purposes
including utilities, telephone, rent, office supplies
and computer repair................................... 1,120,000 8%
Production of Proprietary Digital Products including
Solero(R) digital sheet music and Sunhawk Audio
Music files......................................... 1,078,000 8%
Research and development of additional features for
our DRM distribution system......................... 1,000,000 7%
Acquisition of additional licenses for the production
of Proprietary Digital Products..................... 1,000,000 7%
Repayment of bridge financing loans................... 1,000,000 7%
Acquisition and upgrade of equipment for our DRM
distribution system................................. 250,000 2%
Reconfiguration of headquarters facilities............ 250,000 2%
----------- ---
Total....................................... $13,698,000 100%
=========== ===
</TABLE>
We cannot assure you that the above dollar amounts will be specifically
allocated as set forth in the foregoing table. Nonetheless, our management will
only have discretion to apply proceeds from this offering in a manner other than
as set forth above in extraordinary circumstances. Allocation of net proceeds is
further subject to future events including general economic conditions, changes
in our strategy and response to competitive pressures and consumer preferences
associated with the music industry and Internet commerce. Pending ultimate
application, the net proceeds will be invested in interest-bearing securities
guaranteed by the U.S. government or its agencies.
17
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis; and
- on an "as adjusted" basis to reflect the receipt by us of the
estimated net proceeds from this offering;
You should read this information together with our financial statements and
the notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; none issued and outstanding................... -- --
Common stock, no par value; 30,000,000 shares
authorized; 1,399,380 shares issued and outstanding,
actual; 2,799,380 shares issued and outstanding, as
adjusted............................................. $ 3,345,219 $17,043,219
Accumulated deficit....................................... (1,599,709) (1,599,709)
----------- -----------
Total shareholders' equity........................... 1,745,510 15,443,510
----------- -----------
Total capitalization............................ $ 1,745,510 $15,443,510
=========== ===========
</TABLE>
The foregoing table assumes no exercise of any outstanding stock options.
In addition to the shares of common stock to be outstanding after this offering,
we may issue additional shares of common stock under the following plans and
arrangements:
- 17,932 shares of common stock subject to options outstanding under our
1996 Stock Option Plan and 266,210 shares available for future issuance
under the plan as of September 30, 1999;
- 140,000 shares of common stock reserved for issuance upon exercise of the
underwriter's warrants; and
- 41,680 shares of common stock reserved for issuance upon exercise of the
warrants as part of the bridge financing loan agreements.
18
<PAGE> 21
DILUTION
Our net tangible book value (deficiency) at September 30, 1999 was
$(659,781), or $(.47) per share. Net tangible book value per share represents
the amount of our total tangible assets less our total liabilities divided by
the number of shares of common stock outstanding as of September 30, 1999. After
giving effect to the sale of the 1,400,000 shares of common stock offered in
this prospectus at an assumed initial public offering price of $12.00 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our as adjusted net tangible book value at
September 30, 1999 would have been $14,101,314, or $5.04 per share. This
represents an immediate increase in net tangible book value of $5.51 per share
to existing shareholders and an immediate dilution of $6.96 per share, or 58.0%
of the assumed initial public offering price of $12.00, to new investors
purchasing shares of common stock in this offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.00
Net tangible book value (deficiency) per share at September
30, 1999.................................................... $(.47)
Increase per share attributable to new investors.......... 5.51
-----
As adjusted net tangible book value per share after this
offering.................................................. 5.04
------
Dilution per share to new investors......................... $ 6.96
======
</TABLE>
The table below sets forth on an adjusted basis at September 30, 1999,
after giving effect to the sale of the 1,400,000 shares of common stock offered
in this prospectus at an assumed initial public offering price of $12.00 per
share, the following information both for our existing shareholders and for
investors purchasing shares of common stock in this offering:
- the number of shares of common stock purchased from us;
- the total consideration paid to us; and
- the average price paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 1,399,380 50% $ 5,883,497 25.9% $ 4.20
New investors............. 1,400,000 50% 16,800,000 74.1% 12.00
--------- ----- ----------- -----
Total........... 2,799,380 100.0% $22,683,497 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of any outstanding stock options.
As of September 30, 1999, there were outstanding options to purchase 17,932
shares of common stock under the 1996 Stock Option Plan, at a weighted average
exercise price of $10.77 per share. To the extent that outstanding options are
exercised, there will be further dilution to new investors.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
we do not anticipate paying cash dividends in the foreseeable future. Any future
determination with regard to the payment of dividends will be at the sole
discretion of our board of directors.
19
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data for the years ended September 30,
1999, 1998, and 1997 are derived from our financial statements, which have been
audited by Ernst & Young LLP, independent auditors. The financial statements
include all adjustments, consisting of normal recurring adjustments, which we
consider necessary for a fair presentation of our financial position and results
of operations for these periods. When you read the selected financial data
below, it is important that you also read the historical financial statements
and related notes to those statements appearing elsewhere in this prospectus, as
well as the section of this prospectus entitled "Management's discussion and
analysis of financial condition and results of operations." The historical
results and the results for the year ended September 30, 1999 are not
necessarily indicative of the results that may be expected of future results.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales..................................... $ 100,575 $ 27,263 $ 15,066
Cost of goods sold...................... 171,725 22,517 5,014
----------- ----------- -----------
Gross profit (loss)..................... (71,150) 4,746 10,052
Selling, general and administrative
expenses............................. 2,660,933 1,353,871 854,458
----------- ----------- -----------
Loss from operations.................... (2,732,083) (1,349,125) (844,406)
Interest income......................... 13,140 -- --
Interest expense on notes payable to
shareholders......................... (115,394) (126,454) (66,577)
----------- ----------- -----------
Net loss................................ $(2,834,337) $(1,475,579) $ (910,983)
=========== =========== ===========
Net loss per share -- basic and
diluted.............................. $ (2.46) $ (1.66) $ (1.04)
=========== =========== ===========
Weighted average common shares for net
loss per share computations -- basic
and diluted.......................... 1,154,214 887,689 875,424
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $(1,337,009) $(3,213,584) $(1,602,704)
Total assets.............................. 3,130,128 508,516 212,831
Total shareholders' equity (deficit)...... 1,745,510 (2,807,902) (1,432,323)
</TABLE>
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements and other financial information included elsewhere in
this prospectus.
OVERVIEW
We were incorporated in August 1992 and began distributing and selling
digital sheet music over the Internet in March 1997. From the date of
incorporation until March 1997, our operating activities consisted principally
of the following:
- creating our digital sheet music catalog;
- developing and patenting our technology;
- establishing international operations for the production of digital sheet
music;
- negotiating for the rights to distribute and sell sheet music;
- developing a corporate infrastructure for the management of data;
- producing digital sheet music;
- creating and distributing CD-ROM collections; and
- developing the Sunhawk.com web site.
In September 1996, we began selling CD-ROMs of the complete works of Scott
Joplin, and in July 1997, we began selling CD-ROMs of Handel's Messiah, both
containing digital sheet music in our Solero(R) format. We launched our web site
in February 1997 and made our first sale of digital sheet music in March 1997.
In 1998, we established our strategic alliances and entered into contracts with
Warner and EMIC for the right to sell and distribute selected portions of their
sheet music catalogs. From March 1997 through September 30, 1999, we sold
approximately 20,500 digital sheet music products and approximately 1,400
traditional printed sheet music products and CD-ROMs. Through September 30,
1999, substantially all of our sales have been derived from the sale of digital
or printed sheet music and CD-ROMs through our web site and from special
promotions and services for our strategic partners.
Sales are primarily derived from digital and printed sheet music offered
over the Internet and either downloaded directly from our web site or ordered
from our web site and delivered via regular mail or overnight courier. Sales are
net of any applicable discounts, and sales of traditional printed sheet music
include shipping and handling charges. A customer's account is settled by
directly charging his credit card. For digital sheet music downloaded over the
Internet, revenues are recognized upon execution of the order. Revenues from
sales of traditional printed sheet music are recognized upon shipment of the
printed sheet music from our offices in Seattle, Washington.
Cost of goods sold consists principally of the costs associated with
royalty payments, materials, amortization of the cost of producing digital
masters, shipping costs and credit card processing fees. In order to expand our
digital sheet music catalog, we entered into contracts with Warner and EMIC for
initial terms of ten and five years, respectively, from the date of execution.
These contracts provide us with access to selected portions of the music
catalogs of Warner and EMIC. Upon the sale of any digital title licensed from
Warner or EMIC, we are required to remit the appropriate royalty to the
respective
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publisher. Royalty payments range from 10% to 70% and are based on actual sales,
less credit card processing fees and shipping costs, if any. Inventory consists
of CD-ROMs and the cost of the printed sheet music books. Amortization of the
cost of producing digital masters relates to the digital sheet music and is
based on the shorter of estimated useful lives or the term of the distribution
contracts for the digital masters. Shipping costs and credit card processing
fees include costs related to the shipping of traditional printed sheet music
and the processing of credit card payments for printed and digital sheet music.
We expect that our cost of goods sold will increase significantly as we
accelerate our production of digital sheet music and enter into additional
strategic partnerships to further develop and expand our catalog of digital
sheet music and recorded music. Furthermore, amortization of the music catalog
distribution rights began in the quarter ended June 30, 1999, resulting in an
increase in cost of goods sold. The amortization of music catalog distribution
rights is approximately $38,000 per quarter through the remaining term of the
Warner contract, which ends December 31, 2007.
Selling expenses consist primarily of promotional and advertising
expenditures, including payroll and payroll-related expenses. We have incurred
minimal advertising expenditures to date as we have focused our efforts on
creating our digital sheet music catalog and securing strategic alliances and
the rights to digitize sheet music. We expense all advertising costs as
incurred, and we expect selling expenses to increase significantly as we seek to
increase the number of Solero(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.
To date we have incurred and expect to continue to incur substantial costs
in order to:
- expand our sheet music catalog;
- produce, distribute and sell digital and printed sheet music;
- develop our technologies;
- acquire patents and other intellectual property rights;
- acquire the rights to sheet music;
- secure and maintain relationships with Warner and EMIC;
- further develop our operational infrastructure and web site;
- distribute and sell certain recorded music;
- increase the size of our staff;
- expand our sales and marketing efforts; and
- upgrade our software and hardware.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE YEAR
ENDED SEPTEMBER 30, 1998
Sales
Sales for the year ended September 30, 1999, were $100,575 compared to
$27,263 for the year ended September 30, 1998. This increase in sales resulted
from entering into
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strategic alliances with Warner and EMIC, offering printed sheet music on our
web site and providing a wider selection of music titles in our Solero(R)
format. We also benefitted from the overall increase in Internet shopping. 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 year ended September 30, 1999 were $171,725
compared to $22,517 for the year ended September 30, 1998. The increase in cost
of goods sold was primarily due to commencement of the amortization of the music
catalog distribution rights during the third quarter of fiscal year 1999. The
increase was also due to an increase during the year ended September 30, 1999 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 year ended September 30, 1999 increased as the number of digital
sheet music titles produced during that period increased. For the year ended
September 30, 1999, royalty payments accounted for $38,159, or 38% of sales.
Costs associated with the amortization of digital sheet music masters accounted
for $20,946, or 21% of sales and costs associated with the amortization of music
catalog distribution rights were $75,378, or 75% of sales. For the year ended
September 30, 1998, royalty payments accounted for $4,183, or 15% of sales, and
costs associated with the amortization of digital sheet music masters accounted
for $8,347, or 31% of sales.
Selling, general and administrative expenses
Selling expenses for the year ended September 30, 1999, were $547,694,
including advertising costs of $218,403, compared to $82,915, with advertising
costs of $36,005, for the year ended September 30, 1998. Selling expenses for
both periods consisted primarily of expenditures incurred in connection with
advertising, attending trade shows, establishing and maintaining our strategic
alliances with Warner and EMIC, expansion of our web site and payroll-related
expenses. In the third quarter of 1999, we initiated our strategic marketing
plan. As part of this plan, we experienced a significant increase in advertising
costs as part of the new strategic marketing plan. General and administrative
expenses for the year ended September 30, 1999 were $2,113,239 compared to
$1,270,956 for the year ended September 30, 1998. The increase was primarily due
to the expansion of our production capabilities to grow our digital sheet music
catalog, hiring key management personnel, increases in corporate facility
expenses necessary to operate the business, and the relocation of our office.
Interest expense on notes payable to shareholder
Interest expense for the year ended September 30, 1999, was $115,394
compared to $126,454 for the year ended September 30, 1998. On October 1, 1999,
the accrued interest amount of $113,928 was converted to a note payable to
shareholder and began accruing interest. The interest expense was attributable
to loans made to us by the Eller and McConney 1995 Family Living Trust, which
loans were converted into common stock on March 31, 1999.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR
ENDED SEPTEMBER 30, 1997
Sales
Sales for the year ended September 30, 1998 were $27,263 compared to
$15,066 for the year ended September 30, 1997. Sales for the year ended
September 30, 1997 consisted of sales over the Internet of sheet music converted
into Solero(R) format and CD-ROMs. The increase in sales was principally due to
the expansion of our music catalog and customer base, which resulted from the
inclusion of song titles from the Warner and EMIC catalogs and the addition of
traditional printed sheet music on our web site.
Cost of goods sold
Cost of goods sold for the year ended September 30, 1998 was $22,517
compared to $5,014 for the year ended September 30, 1997. The increase in cost
of goods sold was due to an increase in the proportion of royalty-bearing sales
to sales of public domain titles which do not bear royalties and an increase in
the amortization of digital sheet music masters due to the increase in the
number of digital sheet music titles from $1,804, or 12% of the sales for the
year ended September 30, 1997, to $8,347, or 31% of sales for the year ended
September 30, 1998.
Selling, general and administrative expenses
Selling expenses for the year ended September 30, 1998 were $82,915
compared to $65,021 for the year ended September 30, 1997. This increase was due
primarily to our attendance at more trade shows and general advertising. General
and administrative expenses for the year ended September 30, 1998 were
$1,270,956 compared to $789,437 for the year ended September 30, 1997. This
increase was primarily due to the expenses associated with operating a larger
office, improvements and upgrades to our facilities and software and hardware,
increases in the number of personnel necessary to support the growth of our
business and operations, and costs incurred in connection with adding production
and programming functions and enhancing the features and functionality of our
web site and related technology.
Interest expense on notes payable to shareholder
Interest expense for the year ended September 30, 1998 was $126,454
compared to $66,577 for the year ended September 30, 1997. This increase was due
to the additional debt we incurred in order to satisfy our operating costs and
expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily with funds
received from the sale of equity to and loans from the Eller and McConney 1995
Family Living Trust. As of September 30, 1999, we had cash of $18,300 and a
working capital deficiency of $1,337,009. We are currently financing our daily
operations primarily through a line of credit with a financial institution. As
of the date of this prospectus, $1,000,000 has been drawn on this line of
credit.
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On January 12, 2000, Sunhawk.com entered into an Agency Agreement with
Joseph Gunnar & Co., LLC, (which is also the underwriter of this offering, to
obtain from third parties bridge financing loans totaling $1,000,000. The loans
will bear interest at a rate of 8.5% per annum and will be due at the earlier of
the closing of this offering or 8 months. The loans will hold a first security
on Sunhawk.com's assets as collateral. The loans will have a 50% warrant
coverage, which equates to 1,042 warrants per $25,000 of loan proceeds for a
total of 41,680 warrants at the initial public offering price, which is assumed
to be $12.00 per share. The warrants may be adjusted for stock splits,
recapitalization, or reorganization of Sunhawk.com. The warrants will be
exercisable commencing six months following the closing date of this offering.
Upon closing, payments to Joseph Gunnar & Co., LLC will include (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 are expected to close on or about January 26, 2000.
Net cash used in operating activities totaled $1,711,433 for the year ended
September 30, 1999 compared to $1,210,904 for the year ended September 30, 1998.
The increase for the year ended September 30, 1998, as compared to the prior
year, was primarily attributable to increases in advertising and production
staff.
Net cash used in investing activities was $511,490 for the year ended
September 30, 1999 compared to $267,533 for the year ended September 30, 1998.
The increase in cash used in investing activities for the year ended September
30, 1998, as compared to the prior year, was primarily for the acquisition of
property, equipment, digital sheet music masters, patents and trademarks.
Net cash provided by financing activities was $2,182,130 for the year ended
September 30, 1999 compared to $1,513,902 for the year ended September 30, 1998.
The increase in net cash for financing activities for the year ended September
30, 1999 was primarily derived from proceeds from the sale of common stock to
the Eller and McConney 1995 Family Living Trust in the aggregate amount of
$1,500,000 and proceeds from notes payable in the aggregate amount of $1,645,000
issued to the Eller and McConney 1995 Family Living Trust which, along with
other notes payable to the Eller and McConney 1995 Family Living Trust, were
converted into common stock at a conversion price of $13.31 per share on March
31, 1999. This was offset by an increase of $1,063,095 in deferred offering
costs in the year ended September 30, 1999 compared to the prior year. Net cash
provided by financing activities for the year ended September 30, 1998 was
primarily derived from proceeds from notes payable issued to the Eller and
McConney 1995 Family Living Trust in the aggregate amount of $1,413,902, which,
along with other loans by the Eller and McConney 1995 Family Living Trust, were
converted into common stock at $13.31 per share on March 31, 1999.
We believe that the net proceeds from our prior financing, the debt to
equity conversion by the Eller and McConney 1995 Family Living Trust, and this
offering will provide us with the necessary cash proceeds to allow Sunhawk.com
to continue operations through at least January, 2001. We have no current
arrangements with respect to, or potential sources of, additional financing. If
we seek to raise additional capital, we cannot assure you that any future
financing will be available to us if needed, on commercially reasonable terms,
or at all. Any inability to obtain additional financing if needed may cause us
to be unable to continue as a going concern and it would be necessary to
consider other alternatives such as substantially curtailing our operations.
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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.
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BUSINESS
OVERVIEW
We are an Internet based digital rights management and digital publishing
company. We provide DRM technology, Proprietary Digital Products preparation and
enhancement and a digital distribution infrastructure for the secure digital
delivery of Proprietary Digital Products over the Internet. Our DRM technology
enables us to securely distribute licensed copyright-protected digital content
on behalf of our strategic partners and, ultimately, on behalf of any owner of
such material. We prepare, enhance and distribute digital content through our
website, www.sunhawk.com, and to customers who link to us from the websites of
our strategic partners, Warner and EMIC. We pay a royalty on each sale of
Proprietary Digital Product content that occurs on our website or through the
websites of our strategic partners or affiliates.
Our DRM technology, digital content preparation and enhancement and digital
distribution infrastructure provide the foundation for our operations. This
structure enables us to provide a full spectrum of value added services to
copyright owners and other publishers of Proprietary Digital Products for sale
over the Internet.
LIMITATIONS OF THE TRADITIONAL PHYSICAL METHOD OF SALE AND DISTRIBUTION OF
PROPRIETARY DIGITAL PRODUCTS
Proprietary Digital Products are characterized by two elements: copyrighted
digital content and associated licensing or sale rights. Copyrighted products
have traditionally been distributed through a physical distribution chain. The
book text or sheet music is copied onto physical media, inserted into physical
packaging and physically distributed through a multi-party distribution chain
that eventually delivers the goods to a retail store or a corporate reseller
where they are ultimately purchased by the customer.
Each participant in the physical distribution of Proprietary Digital
Products must manage independently the costs of manufacturing, warehousing and
shipping physical inventory. In addition, the physical distribution process
imposes significant time delays and geographic constraints on the delivery of
products. These numerous and complex inter-relationships pose challenges to the
timely and accurate sharing of information about customers, products, pricing,
inventory and order status. Further, limitations on warehousing, transportation
systems and retail shelf space restrict the number of products that publishers
can make available to customers and discourage distributors from carrying low
volume products.
INTERNET BACKGROUND
The Internet has emerged not only as the fastest growing communications
medium in history, but also as one of the most efficient distribution channels
for commerce. According to International Data Corporation, total worldwide
Internet commerce spending was $50.4 billion in 1998 and is estimated to grow to
$1.3 trillion in 2003.
While most Internet commerce to date has involved the delivery of physical
goods like books and compact discs ordered online, the Internet is also becoming
a leading distribution channel for Proprietary Digital Products. Today, most
content is in, or can be put into, digital form. This content includes music,
videos, games, books, software,
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publications, business information, and images. The Internet can be used to
disseminate this digital information efficiently to broad audiences across
geographic boundaries, and eliminates many of the traditional costs associated
with manufacturing, packaging, and distribution. The growing number of
households and businesses connected to the Internet, and the widespread use of
electronic devices other than personal computers, such as set-top boxes,
portable music players, mobile phones, and other hand-held devices, all of which
are becoming connected to the Internet, make the Internet an ideal channel for
the distribution of Proprietary Digital Products. In addition, downloading
digital content is becoming significantly easier with the emergence and adoption
of broadband technologies including digital subscriber lines and cable modems,
and enhanced compression technologies including MP3 for music and MPEG-4 for
video. The Internet also complements the existing channels for distributing
Proprietary Digital Products on physical media like compact discs and DVDs.
SALE AND DISTRIBUTION OF PROPRIETARY DIGITAL PRODUCTS OVER THE INTERNET
The Internet provides an efficient platform for the electronic distribution
of Proprietary Digital Products. The electronic distribution of Proprietary
Digital Products can:
Reduce costs. Electronic distribution can reduce manufacturing, packaging,
inventory and shipping costs associated with physical media alternatives.
For sheet music and other Proprietary Digital Products distributed
electronically, businesses can reduce costs incurred managing physical
product and improve asset management through the electronic use reporting.
Secure electronic management of distribution and analysis of compliance
with licensing rights can also reduce illegal distribution and piracy.
Increase selling opportunities. Because electronic inventory requires no
physical shelf space, retailers, such as Sunhawk.com, can offer a virtually
unlimited number of products. Publishers, authors, artists and other
digital content owners can deliver new products and upgrades to retailers
or customers worldwide immediately upon their release. Retailers and
original equipment manufacturers can also expand distribution by providing
customers with encrypted digital content stored on computer hard drives,
DVDs or CDs and by allowing customers to complete the sales process through
the subsequent purchase of the Proprietary Digital Product over the
Internet.
Facilitate real-time information exchange. Electronic distribution can
provide publishers and retailers access to sales information on a real time
basis.
SUNHAWK.COM'S SOLUTION FOR THE SECURE SALE AND DISTRIBUTION OF PROPRIETARY
DIGITAL PRODUCTS OVER THE INTERNET.
The characteristics that make the Internet ideal for distributing
Proprietary Digital Products also make it susceptible to piracy and misuse.
Digital content, if not properly protected and managed, can be easily copied
without any degradation in quality, altered and defaced, and distributed with
the touch of a button to a large number of recipients. As the number of users
connected to the Internet and the amount of digital content transmitted over the
Internet increases, these users and this information become more vulnerable to
parties who wish to interfere with the integrity of digital information and
digital transactions. As a result, owners of Proprietary Digital Products,
including text, music and video publishers, are concerned about the ability to
protect the digital distribution of their content.
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Recent events in the music industry provide the most visible example of an
industry facing the problem of protecting and managing its rights related to
digital information. MP3 technology (which compresses music with near-compact
disc quality) has rapidly become recognized as a major threat to the music
industry. With readily available MP3-enabled software, music can be copied from
compact discs into computers, compressed to under 10% of its former size,
redistributed, played, and even copied back onto a blank compact disc for
private use or pirated resale. Songs in the MP3 format can be moved from
personal computers to portable consumer devices and then played through
headphones or stereo speakers. Every compact disc published and distributed is
at risk of being copied. Already, many popular titles have been digitized in the
MP3 format and widely distributed throughout the Internet. As a result, the
Internet is the principal channel of direct MP3 distribution.
Sunhawk.com's solution to the unauthorized sale and distribution of
Proprietary Digital Products over the Internet.
Our DRM distribution system uses encryption as the centerpiece for securely
protecting, distributing and managing digital data sold over the Internet.
Encryption is the process of changing data into a format that can be accessed
only by the intended recipient. The following is a description of how our
system, protected by a patent entitled "Encryption System with Transaction Coded
Decryption Key," works:
- A customer identifies himself/herself. In our system this is the
registration of the Solero(R) Viewer whereby each download Solero(R)
Viewer is assigned a unique identifier.
- A customer downloads data. When a customer requests data for download,
the data is uniquely encrypted for that customer's Solero(R) Viewer based
on the customer's unique identifier.
- A customer purchases data. When a customer purchases a license to use the
data, we also distribute the unique digital "key" necessary to unlock the
data.
- The data remains encrypted. The distributed file remains encrypted at all
times, and each time the digital content is used, it is decrypted
"on-the-fly" using the key provided to that Solero(R) Viewer system.
Since each digital file is uniquely encrypted and can only be decrypted by
the specific Solero(R) Viewer which was used to purchase the digital content,
unauthorized redistribution of the digital content is limited. Specifically,
digital rights are protected and managed at numerous levels:
- If a user passes a digital file to a friend, because the file remains
encrypted at all times and can only be decrypted by the unique "key"
provided upon purchase, the recipient cannot open the encrypted file and
therefore it cannot be used.
- If a user is able to identify the key and decrypt a file, and then
attempts to pass the decrypted file along to a friend, the friend's
Solero(R) Viewer will not read the decrypted file because only the
original user's key enabled Solero(R) Viewer works with that particular
decrypted file.
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- If a user illegally passes a decrypted file along with a purchased key to
a friend the key identifies the user and can be used to track users who
illegally provide files to other users.
Our DRM distribution system includes a download-then-pay feature. The
download-then-pay feature allows a customer to first download the file onto his
PC and preview a portion of the product before paying for it. This feature
minimizes online transaction failures, such as customer cancellations and
download malfunctions. Upon receipt of the customer's credit card information,
the digital content is "unlocked" with the digital key described above and the
customer can then view, play and print the content.
Our DRM distribution system provides a total solution to the concerns of
publishers that their copyrighted content be protected when distributed over the
Internet. Further, this distribution system and other proprietary technology
provides publishers and content owners with a method for efficiently monitoring
the distribution of content so that royalties due and owed to the publisher are
paid in a timely manner.
STRATEGY
Our business strategy is to use our patented and operational DRM
distribution system to empower artists, authors, musicians, publishers and other
owners of Proprietary Digital Products to sell their digital content on the
Internet through us in a secure and efficient manner and to become a leading
secure digital distribution solution provider. The key elements of our strategy
are:
Extend the application of our DRM distribution system -- We will target
leading technology and device companies that can, on an OEM basis, incorporate
our DRM technology in computers, consumer electronics and portable devices,
including lap tops and music players, so that it is readily available for
applications over the Internet. We are in the process of establishing strategic
relationships with certain of these companies to achieve "Sunhawk Inside"
status.
Apply our DRM distribution system to other Proprietary Digital Products
markets -- To date, we have focused predominantly on the sheet music market
because we believe it is a finite, identifiable and manageable market for
Proprietary Digital Products. As electronic distribution of other digital goods
such as audio, video, books, music, and film images develops commercially, we
may build our presence in these markets. We believe the security, distribution
and piracy concerns of these markets are similar to those of the music industry,
in general, and the sheet music industry, in particular, and we believe that our
solution will allow us to address these needs successfully.
Expand strategic partnerships -- We will expand our strategy of providing
our DRM distribution system to artists, authors, musicians, publishers and
owners of Proprietary Digital Products to enable them to achieve greater control
over the distribution of their digital content and receive larger revenue
streams from the sale of their content. We are targeting relationships that will
establish our DRM distribution system initially in several specific markets,
including sheet music, audio, video and book publishing. We intend to leverage
our activities in the sheet music market to help encourage adoption and usage in
other markets, including establishing relationships with one or more artists.
Promote content preparation and enhancement services -- We have developed
interactive, animated and content rich sheet music on behalf of our strategic
partners Warner and EMIC. We intend to continue entering into direct
relationships with premier and emerging
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publishers, artists, musicians and other owners of digital content and
developing various features for this content that enhance both the content
owner's presentation and the user's experience. In addition, we will encourage
content providers to use our DRM distribution system for the secure delivery of
their content.
Provide electronic commerce services -- We enable our strategic partners to
sell their Proprietary Digital Products on our website and refer customers and
benefit from sales which originate from our strategic partners' websites. In
either case, our DRM distribution system securely manages all aspects of every
transaction.
By providing a combination of DRM technology, digital content preparation
and enhancement services and electronic commerce technology in multiple markets,
we will be able to offer a wide variety of services and technology to strategic
partners desiring to securely distribute Proprietary Digital Products over the
Internet.
PRODUCTS AND SERVICES
We have used sheet music as the initial product for the application of our
DRM distribution system, preparation and enhancement services and e-commerce
technology. In converting traditional printed sheet music into a digital
encrypted format that can be delivered over the Internet through our DRM
distribution system and then viewed, listened to, stored on and printed from a
customer's computer, we have changed the manner in which sheet music is
published, distributed and purchased. We are replacing traditional printed sheet
music with a playable, interactive digital format containing security and
educational features. Our products offer customers a highly efficient and more
complete and enjoyable musical experience while providing music publishers with
a means to limit the unauthorized redistribution of their digital sheet music
and efficiently monitor the royalties due upon purchase.
DRM DISTRIBUTION TECHNOLOGY. Our DRM distribution technology delivers
digital sheet music and music in the MP3 format over the Internet to individuals
and businesses in a manner that is user-friendly and protects the copyrighted
content of composers, owners, authors and publishers. Utilizing our proprietary
technology, we are able to convert scanned images of printed music into
interactive digital music, which customers are then able to download, play and
purchase. Through our DRM distribution technology, we are able to limit the
unauthorized distribution by the end-user of the music files and efficiently
track the royalty payments to be paid to the publisher and others. As a result,
our offerings are attractive both to end-user consumers as well as to composers,
authors, owners, publishers and other strategic partners.
DIGITAL AND PRINTED SHEET MUSIC CATALOG. Our web site provides customers
with easy access to our catalog of print and digital sheet music products. Our
current customers include musicians, composers, educators, recreational
musicians and other individuals interested in music. A customer can access our
store front at www.sunhawk.com or through referrals from the Warner and EMIC web
sites. Once a customer has entered our web site, he may search for a song by
composer, artist, title or keyword. In addition, our titles are arranged by
music type such as rock, classical, Christian and country, and a customer can
browse these pages based on his own music preferences and interests. Our site
also features "top ten" lists, new releases and editor's picks to further
stimulate customer interest in our products.
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Our library of interactive digital sheet music in the Solero(R) format
contains numerous song titles and represents many genres of classical and
popular music. Customers may also purchase traditional printed sheet music on
our web site by ordering the selected song titles online and having the sheet
music delivered in print form by mail or courier service.
PREPARATION AND ENHANCEMENT. Our preparation and enhancement services
provide publishers and customers with a content rich digital product. We have
the ability to digitize large amounts of content that, heretofore, has not been
converted into a digital format and to add features to this content that create
a unique and enhanced user experience. We are currently digitizing significant
portions of Warner's and EMIC's sheet music catalogs and creating and selling an
interactive sheet music product that provides the customer with a variety of
features not otherwise available from the traditional paper product.
Our Sunhawk software allows us to create a library of digital content. The
Solero(R) software provides a digital format for the conversion, creation,
completion, storage and distribution of digital sheet music as well as other
digital content. This format can capture standard music notation, audio, lyrics,
guitar tablature and chords, big note formats and other forms of digital
content. The digital information is then stored in a sophisticated relational
database, which allows for advanced searches and efficient distribution to end-
users.
The Solero(R) musical optical character recognition software performs
"musical OCR" by converting scanned images of printed music into digital music.
We have a proprietary technology for electronically storing the musical symbols
contained in a musical score, such as note heads and stems, in a nonsequential
format. This process, which is protected by a patent entitled "Method and
Apparatus for Nonsequential Storage of and Access to Digital Musical Score and
Performance Information," works as follows:
- The digital music technology assigns a different table for each type of
symbol, such as a table for stems.
- Each table contains cross-references that enable the musical score to be
quickly and accurately generated in visual or audio form.
- The nonsequential format facilitates forward and backward compatibility
of different versions of the format and produces files that are highly
compressible.
The Solero(R) Editor is used to complete the conversion to digital music
initiated by the Solero(R) OCR software and is also used by composers to create
and engrave, the process of typesetting music notation and original music. The
Solero(R) Editor was specifically developed with the needs of music publishers
in mind in order to encourage its adoption as a standard for music engraving.
The Solero(R) Editor enables us to finalize and refine our digital sheet music.
The Solero(R) Viewer is used to play and print the music and view the
animation of the Solero(R) format files that have been created with the
Solero(R) OCR software and the Solero(R) Editor, and to play the Sunhawk Audio
files.
SOLERO(R) VIEWER. We provide our Solero(R) Viewer free of charge on our web
site. Simply by clicking the "download" button on the Sunhawk.com web site,
customers can download our Solero(R) Viewer, thus gaining the ability to
download and view our digital sheet music products. As of September 30, 1999,
approximately 50,000 Solero(R) Viewers had been downloaded and registered.
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<PAGE> 35
Once a customer has selected a title that is available in our Solero(R)
format, he can download the digitized music file onto his PC and listen to a
portion of the music before paying for the title, thus allowing him to preview
various selections before electing to purchase. In addition, our Solero(R)
Viewer allows the customer, upon purchase, to view and print the music, or, when
listening to its audio playback, change its tempo, instruments or sing or play
his own musical instrument along with it. A screen shot of our Solero(R) Viewer
and its various features is set forth below:
[SOLERO VIEWER PICTURE]
1) Open the music index
2) Purchase music
3) Print the score
4) Move from page to page
5) Select one or two page view
6) Visit Sunhawk.com
7) Change the instruments
8) Adjust the tempo
9) Start, stop or pause playback
10) Notes are highlighted on playback
11) Optional player piano view
12) View of the music index
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SUNHAWK AUDIO. Our e-commerce technology enables us to compress recorded
music files utilizing MP3 technology, encrypt these files and deliver them to
customers in our Sunhawk Audio format. These Sunhawk Audio files can be
downloaded from our web site and stored on the customer's PC. When Sunhawk Audio
files are delivered and downloaded, they can only be played using our Solero(R)
Viewer and, by virtue of our encryption technology, can be accessed only by the
purchasing customer. In addition, as with digital sheet music, our DRM
distribution system facilitates the purchase of the music, limits any
unauthorized redistribution of this digital music and tracks royalty payments
owed to publishers and others.
ENHANCED CDS. We also enhance traditional audio CDs by including our
Solero(R) Viewer on these CDs. By including our Solero(R) Viewer on the CD, a
record company can include digital liner notes, graphics, text or any other
information on the enhanced CD. At the same time, the record company can include
on the CD a digital sheet music version of one of the songs featured on the CD
as well as links to our web site where the customer can download other digital
sheet music versions of the songs included on the audio CD. To date, EMIC has
distributed approximately 85,000 enhanced CDs containing our Solero(R) Viewer.
DIGITAL BOOKS. We are in discussions with publishers and other owners of
books to acquire the rights to digitize and distribute this content as
Proprietary Digital Products through our DRM system.
THE SUNHAWK.COM WEBSITE
Our website offers a variety of benefits to publishers, customers, artists,
musicians and other owners of digital content. We update our website frequently
to address expressed needs of our strategic partner publishers, customers,
musicians and artists and continue to seek to improve the user experience. The
following table describes some of the features of our current website:
FEATURES FOR CUSTOMERS
<TABLE>
<CAPTION>
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Search................... Quick search by artist/composer, title, keyword;
advanced search by product type.
- - Browse................... Browse catalog by genre, artist, title,
publisher.
- - Free Software............ Free Solero(R) Viewer, regular free songs.
- - New Releases............. Master list for current month and preceding
month; featured list.
- - Special Selections....... Cover art and description on home page and 8
genre pages, 10 selections on each page, updated
regularly.
- - Special Offers........... Regular and seasonal special offers for both
Solero(R) and print products.
- - Collections.............. Solero(R) and print collections with significant
savings over individual titles.
- - Help..................... Instructions on how to shop.
</TABLE>
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<TABLE>
<CAPTION>
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Music Lovers Club........ Discount incentive plan and other benefits of
membership.
- - Sponsored Links.......... Links to our strategic partners and special
interest music pages.
</TABLE>
FEATURES FOR PUBLISHERS
<TABLE>
<CAPTION>
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Tracking................. Publishers can track downloads and sales on
secure publisher-specific pages.
- - Cross-Links.............. Links to publisher sites.
- - Catalog.................. Separate listings and search by publisher
catalog.
- - Associates Program....... Publisher revenue opportunities by referring
customers from publisher website.
- - Cross-Promotions......... Opportunities for publishers to feature new music
and special promotions on the Sunhawk.com
website.
</TABLE>
SALES AND MARKETING
We employ several concurrent Internet and traditional marketing strategies
in an effort to drive traffic to our web site, increase customer interest in our
products and generate sales. As part of this multi-prong marketing approach, we
are expanding our program of establishing inbound links to our web site from
other third-party sites, such as portals, search engines, musical instrument
sites and related web sites. In addition, we have launched a related associates
program in which web site owners receive sales-based referral fees when they
link customers to us from their web sites. We also intend to augment our online
advertising efforts on industry-specific sites, such as music e-commerce,
publisher, artist and special interest music sites. Finally, we intend to
increase our use of one-to-one customer relationship marketing by continuing our
efforts of sending periodic informational and promotional emails to our current
Solero(R) registrants and expanding the number of individuals in our target
market who receive such online materials.
In addition to driving traffic to our web site through the use of Internet
advertising, we intend to strengthen our brand name and increase customer appeal
through the use of traditional marketing methods. Moreover, we intend to utilize
numerous forms of advertising to promote the Sunhawk and Solero(R) names and
products, including advertising in industry-specific publications, direct
mailing efforts to our target market, distributing CD-ROMs and enhanced audio
CDs containing our Solero(R) Viewer, and participation in trade show events.
These techniques will enable us to target existing and prospective customers in
a cost-efficient manner.
We believe that many traditional retail music stores prefer to carry very
little sheet music in order to avoid the expense of maintaining inventory. We
intend to structure alliances with retail music stores that will allow the music
store to access our web site directly at the store location. We believe this
on-site capability will both generate sales and increase our exposure to our
target market. In addition, we see an opportunity for reciprocal advertising
efforts between our web site and traditional retailers whereby these retailers
agree to promote our web site to their customers in exchange for free or
low-cost
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advertising of their stores on our web site. We also intend to penetrate the
music education market by establishing relationships with private and public
schools and music institutions, thereby increasing our target customer base and
expanding our distribution channels.
INTELLECTUAL PROPERTY
Our success will depend in large part on our ability to protect our
proprietary software and other intellectual property. To protect our proprietary
rights, we rely generally on patent, copyright, trademark and trade secret laws
and generally require our employees, consultants, vendors and corporate business
partners to execute confidentiality agreements. Despite these protections, a
third party could, without authorization, copy or otherwise obtain and use our
products or technology to develop similar technology. Moreover, our agreements
with employees, consultants and others who participate in product and service
development activities may be breached, we may not have adequate remedies for
any breach, and our trade secrets may become known or independently developed by
competitors.
Patents. We have been issued two patents and have two patent applications
and one continuation application pending in the United States relating to our
product architecture and technology. Specifically, we have been issued a patent
relating to our e-commerce technology, "Encryption System with Transaction Coded
Decryption Key," Patent Number 5,889,860, for which a continuation has been
filed to pursue the broader applications of this invention, as well as a patent
relating to our relational database storage of music information, "Method and
Apparatus for Nonsequential Storage of and Access to Digital Musical Score and
Performance Information," Patent Number 5,773,741. Two other patents relating to
music notation and music notation input, respectively, are pending.
Despite these efforts, our pending or future patent applications may not be
granted and our existing or future patents may be challenged, invalidated or
circumvented. Many of our current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has been issued or is
issued in the future, we would need either to obtain a license or to design
around the patent. We may not be able to obtain a required license on acceptable
terms, if at all, or to design around the patent.
We attempt to avoid infringing known proprietary rights of third parties in
our product and service development efforts. We have not, however, conducted and
do not conduct comprehensive patent searches to determine whether the technology
used in our products infringes patents held by third parties. In addition, it is
difficult to proceed with certainty in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that our products violate third-party proprietary rights, we
may not be able to obtain licenses on commercially reasonable terms to continue
offering these products, and efforts to re-engineer these products may not be
successful. Any subsequent litigation could involve substantial expense and
possible damages awards.
Trademarks. Sunhawk(R), Sunhawk.com, the Sunhawk.com logo and Solero(R) are
our trademarks and registered trademarks. We intend to continue to pursue the
registration of our other trademarks in the United States and in other
countries. However, we cannot assure you that we can prevent all third-party use
of our trademarks or that our trademarks will be available for use in
association with other Proprietary Digital Products.
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<PAGE> 39
All other trademarks and trade names appearing in this prospectus are the
property of their respective holders.
Copyrights and other proprietary rights. The underlying music we distribute
in digital and print form is protected by copyright law, unless the music has
become part of the public domain. Even if the underlying music has become part
of the public domain, we take steps to add copyrightable and other proprietary
elements in creating our Solero(R) editions. There is no assurance that the
steps we take will be adequate to protect these rights or that we will be
successful in preventing the illegal duplication, distribution or other use of
our products. Our failure to adequately limit the unauthorized redistribution of
our music products could result in litigation or liability, which could harm our
business.
We generally procure licenses for the music distributed in digital and
print form from third-party licensors, including music publishers and composers,
on a non-exclusive basis. Some of our competitors offer, or could offer, the
same sheet music song titles that we have licensed from these music publishers.
In some cases we own the copyrights in the underlying music. The underlying
music may be owned by a single copyright owner or have multiple copyright
owners. We have different licensing arrangements with these parties depending on
what rights we acquire. These arrangements range from formal contracts to
informal agreements based on the nature of the subject matter. We often rely on
our positive working relationships with copyright owners to obtain licenses on
favorable terms. Any changes in the nature or terms of these arrangements,
including any requirement that we pay significant fees for the use of the
content, or if such arrangements are found to be unenforceable, could have a
negative impact on the availability of content and could harm our business.
We currently hold various Internet domain names relating to our brands,
including the "Sunhawk.com" domain name. Domain names generally are regulated by
Internet regulatory bodies. The manner in which domain names are regulated in
the United States and in foreign countries is subject to change, and any adverse
change in these regulations could harm our business.
The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
jurisdictions.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
products and services, to perform key functions. Third-party technology licenses
may not continue to be available to us on commercially reasonable terms. The
loss of any of these technologies could harm our business. Moreover, although we
are generally indemnified against claims that our third-party technology
infringes the proprietary rights of others, this indemnification may be
unavailable or inadequate for all types of intellectual property rights. These
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential product service
redevelopment costs and delays, all of which could harm our business.
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COMPETITION
As an operator of a DRM distribution system for digital publishing and, in
particular, the distribution of digital sheet music over the Internet, we
currently or potentially compete with a variety of companies. With respect to
the market for DRM solutions, we believe competition is intense and rapidly
evolving. We expect competition to continue to increase both from existing
competitors and new market entrants. The DRM market is new and we are not aware
of any one competitor that has established a dominant position in the market.
However, it is possible that one or more companies could become a dominant,
competitive force in the future. Our primary competition currently comes from or
is anticipated to come from:
- companies offering secure digital distribution systems, including AT&T,
IBM, Liquid Audio, Microsoft, Preview Systems, Xerox and Intertrust
Technologies; and
- companies offering hardware-based content metering and copy protection
systems, including Sony, Wave Systems, and the 4C Entity, comprised of
IBM, Intel, Matsushita, and Toshiba.
- companies representing combined Internet distribution and Proprietary
Digital Products ownership such as AOL -- Time Warner -- EMI.
In addition to these two categories, in the future, operating system
manufacturers are likely to attempt to develop or license digital rights
management solutions for inclusion in their operating systems.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many of
these companies have broader customer relationships that could be leveraged,
including relationships with many of our customers. These companies also have
more established customer support and professional services organizations than
we do. Nonetheless, we believe our DRM distribution system has operated in a
reliable and commercial manner over an extended period of time for Warner and
EMIC.
With respect to the market for the preparation, enhancement and secure
distribution of digital sheet music, we do not believe any of our competitors,
other than Musicnotes, have converted substantial portions of sheet music into
an interactive digital format that can be stored, encrypted, previewed, played
and printed on a PC. Companies that are currently in similar or potentially
competing businesses include:
- Sheet Music Direct. SMD has developed an Internet-based,
purchase-on-demand delivery system for digital sheet music, but their
music is non-interactive and does not allow the user to play the music,
choose instruments or select tempo. The web site is affiliated with sheet
music distributors Hal Leonard Corporation and Music Sales Corporation.
- Infomusique S.A. Infomusique operates a web site that permits online
printing of non-interactive sheet music purchased from the web site as
well as the purchase of pre-printed sheet music by mail order.
- Net4Music. Net4Music has developed an Internet-based system that enables
publishers to digitize their sheet music from multiple sources into
Adobe's PDF format, and then distribute these scores through customized
orders.
- Coda Music Technology. Coda has announced that it has developed an alpha
version of a product that would allow online transmission and viewing of
musical scores.
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<PAGE> 41
- Musicnotes. Musicnotes has developed an Internet-based,
purchase-on-demand delivery system for digital sheet music. The music is
interactive with notes that light up on playback. The user also has the
ability to change tempo and select instruments. In the current version,
files must be purchased before download, and the program indicates that
printing of the files must be done at the time of download.
As we expand the Sunhawk Audio portion of our business as well as apply our
DRM distribution system and digital content preparation and enhancement services
to other digital content, we will face significantly increased competition and
different competitive challenges from other DRM and Internet content providers
than we currently experience.
We believe that we have established a variety of barriers to entry to
discourage others from entering into the business of online sale and
distribution of digital music over the Internet, including the following:
- We have developed proven technologies for encrypting and managing the
rights to digital content.
- This technology enables us to provide publishers with the comfort and
security that the digital music files will be used as authorized and that
they will receive the royalties for the purchase of the copyrighted
material.
- We have built a digital production process designed to create what we
believe is one of the largest interactive digital sheet music catalogs
available.
- We have developed and deployed a proven method of digital distribution
which has been adopted by Warner and EMIC, two important music
publishers.
- We have developed a process for creating additional features for, and
enhancing the customer's experience with a traditional media form (i.e.
sheet music) and believe we can extend this process into other digital
content.
- We have secured two patents to a portion of our technology and have
developed significant other proprietary software for the conversion and
distribution of digital content.
Despite these potential barriers to entry, many of our current and
potential competitors are well-established companies that have greater
financial, marketing, distribution, brand recognition and other resources than
we have, and there can be no assurance that we will be able to compete
effectively against these companies.
RESEARCH AND DEVELOPMENT
Since our inception, all of the time and financial resources dedicated to
research and development activities to develop our technology and digital sheet
music catalog have been expensed. Accordingly, we have not capitalized any
research and development expenditures. However, we estimate that we spent
approximately $220,000 in research and development activities during the last
three fiscal years. We cannot assure you that we will successfully develop new
technology or that competitors will not develop products, services or other
technology that are superior to ours.
GOVERNMENT REGULATION
As commerce on the Internet continues to evolve, federal, state, local or
foreign agencies may adopt laws and regulations that may impact our business,
including legislation and regulations relating to the distribution of music and
other content over the Internet and privacy and encryption issues. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation
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and personal privacy is uncertain. Further, the growing use of the Internet has
burdened the existing telecommunications infrastructure and has caused
interruptions in telephone service. Telephone carriers have petitioned the
government to regulate the Internet and impose usage fees on Internet service
providers. The imposition of such laws and regulations could expose us to
significant liability. In addition, any such new legislation or regulation or
government enforcement of existing regulations may limit the growth of the
Internet, increase our cost of doing business or increase our legal exposure,
any of which could harm our business.
FACILITIES
We lease approximately 20,000 square feet of office space in Seattle,
Washington at an annual rent of approximately $327,000. The remaining lease term
expires on September 1, 2001. These facilities currently house our employees,
and we conduct general corporate and administrative matters, software
development, cataloging, scanning, quality control, music editing, web site
development, server operations and data warehousing from this location. We
believe that our current leasehold facilities are adequate for our intended use
for the foreseeable future.
EMPLOYEES
As of January 26, 2000, we had approximately 47 full-time and 3 part-time
employees. None of our employees is represented by a labor union, and we believe
that our employee relations are good.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information about our directors, executive
officers and certain key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Marlin Eller 46 Chairman of the board, chief executive
officer and president
Tricia Parks-Holbrook 44 Chief financial officer
Jill Ohara 43 Vice president of operations
Gary Martin 46 Vice president of publishing
Mary E. McConney, Ph.D 45 Treasurer
Fred Anton 52 Director
Luis F. Talavera 34 Director
Patricia Tangora 45 Director
</TABLE>
Marlin Eller is a co-founder of Sunhawk.com and is currently our chairman
of the board, chief executive officer and president, positions he has held from
time to time since our inception in 1992. From 1982 to 1995, Mr. Eller held the
position of manager, software development, at Microsoft Corporation. At
Microsoft, Mr. Eller was the development lead for GDI, the graphics subsystem of
Windows 1.0; development lead for Pen Windows; and the designer of handwriting
recognition software. While at Microsoft, he was named as the inventor on six
patents. He also led groups involved in video and data compression and
encryption and started the Microsoft online services. He received his bachelor
of arts, phi beta kappa and magna cum laude, in mathematics/physics from Whitman
College in 1974 and his master of science in mathematics from the University of
Washington in 1979. Mr. Eller also co-authored the book, Barbarians Led by Bill
Gates, published by Henry Holt, Inc. in 1998, and co-authored the article,
Multiple-Scattering Calculations of X-Ray Absorption Spectra, published by The
American Physical Society in 1995. He was a visiting instructor in computer
sciences at Williams College for two years prior to joining Microsoft. Mr. Eller
is married to Ms. McConney, our treasurer.
Tricia Parks-Holbrook joined Sunhawk.com in June 1999 as our chief
financial officer. From 1989 to 1998, Ms. Parks-Holbrook was with KPMG Peat
Marwick, LLP as senior manager and was responsible for supervising the planning
and performance of assurance engagements with clients in a variety of
industries. From 1988 to 1989, she was with CP National Corporation in their
external reporting department. From 1979 to 1988, Ms. Parks-Holbrook worked with
PGL Corporation, a subsidiary of F.H. Tompkins, PLC, a public company in the
United Kingdom, serving the last three years in the capacity of controller. Ms.
Parks-Holbrook received her bachelor of science, cum laude, in business
administration with an accounting option from California State University at
Hayward, California in 1988. While there she received the San Francisco
Financial Executive Institutes Medallion Award. She is licensed and certified as
a public accountant in California (1991) and Washington (1998), and is a member
of the American Institute of Certified Public Accountants and the Washington
Society of Certified Public Accountants.
Jill Ohara joined Sunhawk.com in February 1998 as music production manager,
was promoted to vice president of production in April 1998 and has served as
vice president of operations since June 1999. From 1981 to 1997, Ms. Ohara
served with the U.S. National Academy of Sciences and was assigned to the
Radiation Effects Research Foundation, a
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<PAGE> 44
multicultural research foundation in Japan, where she served as chief of the
information technology department. Ms. Ohara received outstanding service awards
from NAS in 1995 and 1996. In other management and research roles at RERF, she
engaged in hardware/ software support, statistical programming, data analysis
and support of a dosimetry system used in the setting of worldwide radiation
protection standards. From 1979 to 1981, she served as statistician in the
Jonsson Comprehensive Cancer Center at the University of California at Los
Angeles, performing extensive programming for database management and
statistical analysis. Ms. Ohara received her bachelor of arts, magna cum laude,
in mathematics from UCLA in 1977 and her master of science in biostatistics from
UCLA in 1979. She has published articles in Biometrics, Radiation Research and
the American Journal of Roentgenology.
Gary Martin joined Sunhawk.com in January 1995 as our program manager and
has served as our vice president of publishing since June 1999. Mr. Martin
developed our digital music production operations and set up the initial Russia
music production facility. He also created the engraving specifications for our
Solero(R) Editor and the proprietary graphical font used in our Solero(R) music
scores. Mr. Martin currently oversees the quality of music production, promotes
and maintains new contracts with music publishers and coordinates the
development of our marketing team. From 1993 to 1994, while serving as vice
president of MacArthur Publishers, Inc., a desktop publishing company, Mr.
Martin worked with the Ancient Biblical Manuscript Center in California and
typeset The Dead Sea Scrolls Catalog (Scholars Press, 1994), one of the most
comprehensive database compilations on this topic to date. Mr. Martin earned a
bachelor of arts, cum laude, in physics-astronomy from Whitman College in 1975.
Mary E. McConney, Ph.D is a co-founder of Sunhawk.com and is currently our
treasurer. From 1992 until June 1999, Ms. McConney served as our chief financial
officer, secretary and treasurer and as a director. In addition, from 1988 to
the present, Ms. McConney has served as the president of HiroSoft International
Corporation, a corporation she founded that writes statistical programs for
modeling different kinds of risk functions. From 1985 to 1988, Ms. McConney was
employed in the fields of applied statistics and database design and
implementation by NAS. From 1977 to 1985, she was employed in the fields of
applied statistics, database design and policy analysis by the University of
Washington and the University of Pennsylvania. Ms. McConney received her
bachelor of arts in physics and environmental studies from Whitman College in
1976. While at the University of Pennsylvania, she received two master degrees,
one in economics in 1979 and one in urban planning in 1980, and a Ph.D in
spatial economics in 1983. Ms. McConney's duties at HiroSoft do not interfere
with her duties at Sunhawk.com since she devotes substantially all of her time
to her duties at Sunhawk.com. She has published articles in the Annals of the
New York Academy of Sciences, Urban Studies, Circulation and the Journal of the
American College of Cardiology.
Fred Anton has been a director of Sunhawk.com since July 1998. Since March
1998, Mr. Anton has served as the president/chief operating officer of Warner
Bros. Publications, where he also served as the chief financial officer/chief
operating officer from September 1996 to March 1998. From 1994 to September
1996, Mr. Anton served as vice president of finance for the Warner Music Group
and subsequently was made executive vice president/chief operating officer for
Warner Vision Entertainment. From July 1990 to 1994, he served as the vice
president international finance and administration at Time Warner, Inc. Mr.
Anton has a bachelor of arts degree in economics from Clark University in
Worcester, Massachusetts and a master of business administration degree from
Washington University in St. Louis, Missouri. He is a member of the American
Institute
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<PAGE> 45
of Certified Public Accountants and the New York State Society of Certified
Public Accountants. He is also on the board of directors of the Music
Publisher's Association.
Luis F. Talavera has been a director of Sunhawk.com since June 1999. Since
1998, Mr. Talavera has overseen seed-capital funding by N.S.L., an international
venture capital fund specializing in computer and communications ventures. Mr.
Talavera also currently serves as a board member for various technology
companies, including Global Product Channel, a Norwegian e-commerce solutions
company, and Poseidon, a French developer of swimming pool safety technology.
From 1988 to 1997, Mr. Talavera was employed by Microsoft Corporation, most
recently as a director of research and development. At Microsoft, Mr. Talavera
was one of the first members of the Pen Windows computing team and the co-author
of Microsoft's first handwriting recognition software. As a director of research
and development for Softimage, a subsidiary of Microsoft, from 1995 to 1997, Mr.
Talavera was responsible for the development and launch of Softimage IDS, the
first non-linear professional post-production system. Mr. Talavera received a
bachelor of science degree in computer engineering from the University of
California at San Diego in 1987. He also holds two patents that have been issued
and three patents that are pending.
Patricia Tangora has been a director of Sunhawk.com since June 1999. Ms.
Tangora is currently a member of Dethman & Tangora, LLC, an environmental
consulting firm. From 1989 to 1998, Ms. Tangora was a senior project manager at
R.W. Beck, Inc., a national consulting and engineering firm. She was made an
owner in that firm in 1997. At R.W. Beck, her work included conducting due
diligence reviews for project financing, negotiating long-term, multi-million
dollar service contracts and advising clients on development and environmental
compliance strategies for major projects. She was also responsible for
approximately $1 million in annual sales and participated in strategic planning
and marketing efforts within her area of practice. Ms. Tangora received her
bachelor of arts degree in english from Whitman College in 1976 and a bachelor
of science degree in civil/environmental engineering from the University of
Washington in 1979.
We currently have authorized five directors; however, one board seat
currently remains vacant. We are in the process of identifying a fifth director.
Both Ms. Tangora and Mr. Talavera are independent directors. We intend to
maintain at least two independent directors in the future. Directors are elected
by the shareholders at each annual meeting of shareholders to serve until the
next annual meeting of shareholders or until their successors are duly elected
and qualified.
AUDIT COMMITTEE AND COMPENSATION COMMITTEE
Our board of directors has established an audit committee and a
compensation committee. The audit committee, which currently consists of
Patricia Tangora and Luis Talavera, is responsible for reviewing our internal
accounting procedures and consulting with and reviewing the services provided by
our independent auditors. The compensation committee, which currently consists
of Fred Anton and Patricia Tangora, is responsible for reviewing and
recommending to our board of directors the compensation and benefits of all
officers of Sunhawk.com and establishing and reviewing general policies relating
to the compensation and benefits of our employees.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Directors' compensation. Effective as of the date of the completion of this
offering, as an inducement to joining our board of directors, each of our
non-employee directors has been granted, at the initial public offering price,
an immediately exercisable option under
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our 1996 Stock Option Plan to purchase 2,500 shares of common stock. In
addition, we pay each non-employee director $2,500 per board meeting attended.
All directors are entitled to reimbursement for expenses incurred in traveling
to and from meetings of our board of directors.
Executive officers' compensation. During the fiscal year ended September
30, 1999, and prior to the closing this offering, Mr. Eller was not paid a
salary. Brent Mills, our former chief executive officer, received a salary of
$55,000 during the fiscal year ended September 30, 1998, and a salary of $23,163
during the fiscal year ended September 30, 1999 prior to the termination of his
employment with us in March 1999. None of our other executive officers received
total annual salary and bonus during the fiscal year ended September 30, 1999 in
excess of $100,000. To date, we have not granted Mr. Eller any stock options or
other equity-based compensation. Effective October 1, 1999, Mr. Eller entered
into an employment agreement with us with an initial three-year term. This
employment agreement entitles Mr. Eller to an annual salary of $95,000 for the
first year, which will be increased by 10% during each of the two subsequent
years. Mr. Eller is also entitled to receive options under our 1996 Stock Option
Plan to purchase 30,000 shares of our common stock vesting over five years at an
exercise price equal to the initial public offering price and an annual bonus to
be determined by our compensation committee on an annual basis.
KEY MAN INSURANCE
We have obtained a $1,000,000 key man life insurance policy on the life of
Mr. Eller.
STOCK OPTION PLAN
Our board of directors adopted our 1996 Stock Option Plan in June 1996, and
our shareholders approved it in June 1996. There are currently 17,932 options to
purchase common stock outstanding as of September 30, 1999. We have reserved a
total of 303,526 shares of common stock for issuance under the plan, of which
266,210 shares were available for issuance as of September 30, 1999. The plan
provides for the granting to employees, including officers and directors, of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 and for the granting to employees, consultants and
nonemployee directors of nonstatutory stock options. Unless terminated earlier,
the plan will terminate in June 2006. Generally, options granted under the plan
vest over five years and have a term of ten years and are nontransferable.
After this offering, the plan will be administered by our compensation
committee, known as the "administrator." The administrator determines the terms
of options granted under the plan, including the number of shares subject to an
option, the vesting terms, the exercise price, and the term and exercisability
of options. The exercise price of all incentive stock options granted under the
plan generally must be at least equal to the fair market value of our common
stock on the date of grant, and the exercise price of non-statutory options
granted under the plan must be at least equal to 85% of the fair market value of
our common stock on the date of grant. Payment of the purchase price of options
may be made in cash or other consideration as determined by the administrator.
If an optionee would have the right in any calendar year to exercise for the
first time incentive stock options for shares having an aggregate fair market
value in excess of $100,000, determined for each share as of the date the option
to purchase the shares was granted, any such excess options shall be treated as
nonstatutory stock options.
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<PAGE> 47
In the event that we are acquired by another company, we expect that awards
outstanding under the plan will be assumed or equivalent awards substituted by
our acquiror. If an acquiror did not agree to assume or substitute awards, the
vesting of outstanding options will accelerate prior to consummation of the
transaction.
The board of directors has the authority to amend or terminate the plan as
long as such action does not materially and adversely affect any outstanding
options and provided that shareholder approval for any amendments to the plan
shall be obtained to the extent required by applicable law.
RELATED-PARTY TRANSACTIONS
On March 31, 1999, the Eller and McConney 1995 Family Living Trust
converted $3,568,406 of debt owed to it by Sunhawk.com into 267,968 shares of
our common stock at a price per share of $13.31. On this same date, the Eller
and McConney 1995 Family Living Trust forgave $1,000,000 of long-term debt owed
to it by Sunhawk.com and purchased an additional 112,659 shares of our common
stock for $1,500,000, at a price per share of $13.31.
We currently receive for review approximately 4,100 pages of digital sheet
music per month from Avtograf, a Russian joint stock company in which Eller
McConney LLC holds a 94% ownership interest, under a five-year agreement, and
accrue and expect to pay to Eller McConney LLC $7.00 per page upon acceptance.
Mr. Eller and Ms. McConney are the sole members of Eller McConney LLC. This
sheet music is sold to us under an agreement between us and Eller McConney LLC,
which has an agreement with Avtograf to receive production services for digital
sheet music. Upon the closing of this offering, we will enter into an assignment
and assumption agreement with Avtograf, Eller McConney LLC and an independent
Russian production company, Music Production International, which will require
that Eller McConney LLC assign to us all of its rights to receive from Avtograf
its services for the production of digital sheet music in exchange for a letter
agreement between Sunhawk.com and Eller McConney LLC whereby Sunhawk.com will
agree to 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 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 transfer 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 to us at a rate of a minimum of
4,500 pages per month totaling 270,000 pages over a period of five years, for a
cost of $3.70 per page, at no additional cost to us. The letter agreement
reflecting the payment of $1,000,000 to Eller McConney LLC is expected to be
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 will have an interest in the new Russian
production company.
On May 18, 1998, we entered into a distribution agreement with Warner. As
part of the consideration paid by us for the rights granted to us under the
distribution agreement, we agreed to issue 99,073 shares of our common stock to
Warner, contingent upon the
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<PAGE> 48
occurrence of an initial public offering or the sale of a specified percentage
of our common stock. Consequently, on March 31, 1999, as a result of the sale of
shares of our common stock to the Eller McConney 1995 Family Living Trust, we
issued Warner 99,073 shares of our common stock. Further, under the terms of the
Warner distribution agreement, Mr. Eller and Brent Mills, one of our former
directors, officers and employees, agreed to vote any shares of our common stock
held or controlled by them for the election of an individual to be designated by
Warner to our board of directors. This right will continue for so long as Warner
owns shares representing at least 2% of our outstanding common stock. Warner has
currently designated Fred Anton to serve as its underwriter on our board of
directors. A breach by either party may be cured within thirty days, or ten days
if the breach relates to the payment of money or the rendition of accounting, of
notice from the other party.
Each of the above transactions was entered into on terms that were as
favorable to us and our affiliates as those that were generally available from
unaffiliated parties. At the time these transactions were entered into, our
board lacked sufficient independent directors to ratify them. We currently have
two independent directors. There are no affiliated transactions presently
planned or contemplated. Should there be any future material affiliated
transactions or loans, these transactions will be made or entered into on terms
that are no less favorable to us than those that can be obtained from
unaffiliated third parties. In addition, all affiliated transactions and any
forgiveness of loans must be approved by a majority of our independent directors
who do not have an interest in the transaction and who have access, at our
expense, to our independent legal counsel.
On December 23, 1999, Sunhawk.com's Board of Directors approved a transaction to
give 0.716 shares for every 1 share of common stock, thereby giving effect to a
1.397 to 1 reverse stock split effective December 23, 1999. All outstanding
common and common equivalent shares and per-share amounts in the accompanying
financial statements and related notes to the financial statements have been
retroactively adjusted to give effect to the reverse stock split.
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<PAGE> 49
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of the date of this prospectus, including
options that are immediately exercisable or exercisable within 60 days of the
date of this prospectus under our stock option plan, and as adjusted to reflect
this offering, by:
- each person or group that we know owns 5% or more of our common stock;
- each of the named executive officers and each of our directors; and
- our executive officers and directors as a group.
Unless otherwise noted, we believe that each of the shareholders has sole
investment and voting power with respect to the common stock indicated, except
to the extent shared by spouses under applicable law. Mr. Eller, our chairman of
the board, chief executive officer and president, and Ms. McConney, our
treasurer, are the trustees of the Eller and McConney Family 1995 Living Trust
and, as such, retain voting and investment power with respect to these shares.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED SHARES
-------------------------------------
PRIOR TO OFFERING AFTER OFFERING
------------------- --------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
------------------------------------ --------- ------- --------------
<S> <C> <C> <C>
Eller and McConney 1995 Family Living Trust........ 1,024,284 73.2% 36.6%
c/o Sunhawk.com Corporation
223 Taylor Avenue North, Suite 200
Seattle, Washington 98109
Marlin Eller....................................... 1,024,284 73.2% 36.6%
Mary E. McConney, Ph.D............................. 1,024,284 73.2% 36.6%
Brent R. Mills(1).................................. 266,658 19.1% 9.5%
7720 39th Avenue N.E.
Seattle, Washington 98105
Judy E. McOstrich(2)............................... 266,658 19.1% 9.5%
7720 39th Avenue N.E.
Seattle, Washington 98105
Warner Bros. Publications U.S., Inc. .............. 99,073 7.1% 3.5%
15800 N.W. 48th Avenue
P.O. Box 4340
Miami, Florida 33014
Fred Anton(3)...................................... 99,073 7.1% 3.5%
Gary Martin(4)..................................... 2,384 * *
Patricia Tangora................................... -- -- --
Luis F. Talavera................................... -- -- --
Jill Ohara......................................... -- -- --
All directors and executive officers as a group (7
persons)......................................... 1,125,741 80.3% 40.2%
</TABLE>
- -------------------------
* Less than 1%
(1) Includes 36,780 shares of common stock held by Mr. Mills' spouse, Judy E.
McOstrich.
(2) Includes 229,878 shares of common stock held by Ms. McOstrich's spouse,
Brent R. Mills.
(3) Includes 99,073 shares of our common stock owned by Warner, of which Mr.
Anton is president and chief operating officer. Mr. Anton disclaims
beneficial ownership of these shares.
(4) Represents options to purchase shares of common stock issued under our stock
option plan that are immediately exercisable.
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<PAGE> 50
LOCK-UP AGREEMENT
Under the underwriting agreement between us and the underwriter of this
offering, shareholders who hold shares of our common stock issued prior to the
date of the closing or have been granted options to purchase shares of our
common stock prior to such date will not be able to, directly or indirectly,
offer, sell, announce an intention to sell, contract to sell, pledge,
hypothecate, grant any option to purchase or otherwise dispose of any shares of
our common stock or any securities convertible into or exchangeable or
exercisable for shares of our common stock for a period of 24 months following
the closing of this offering without the prior written consent of the
underwriter.
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<PAGE> 51
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is not intended to
be complete and is subject to and qualified in its entirety by reference to our
amended and restated articles of incorporation and our amended and restated
bylaws, copies of each of which are filed as exhibits to the registration
statement of which this prospectus forms a part.
On March 30, 1999 our board of directors approved a transaction to issue
one share for every 6.007 shares of our common stock then outstanding, giving
effect to a 1-for-6.007 reverse stock split effective March 31, 1999.
On December 23, 1999, Sunhawk.com's board of directors approved a
transaction to give 0.716 shares for every 1 share of common stock thereby
giving effect to a 1.397 to 1 reverse stock split effective December 23, 1999.
All outstanding common and common equivalent shares and per-share amount in the
accompanying financial statements and related notes to the financial statement
have been retroactively adjusted to give effect to the reverse stock split.
GENERAL
Immediately prior to the date of this prospectus, we had authorized capital
stock consisting of 10,000,000 shares of common stock, no par value, of which
1,399,380 shares were issued and outstanding. Immediately prior to the date of
this prospectus, there were six holders of record of our common stock.
We have reserved 303,526 shares of common stock for issuance under our 1996
Stock Option Plan, of which 266,210 shares were available for issuance as of
September 30, 1999.
COMMON STOCK
Holders of outstanding shares of our common stock are entitled to one vote
per share on all matters submitted to a vote of our shareholders. Except as may
be required by applicable law, holders of outstanding shares of our common stock
vote together as a single class. Holders of a majority of the outstanding shares
of our common stock constitute a quorum at any meeting of our shareholders, and
the vote by the holders of a majority of our common stock is required to effect
specific fundamental corporate changes, including liquidation, merger or sale of
substantially all of our assets.
Holders of our common stock are entitled to receive dividends if and when
declared by our board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities. Holders of our common stock have no preemptive rights or
other rights to subscribe for unissued or treasury shares or securities
convertible into or exercisable or exchangeable for shares of our common stock.
The outstanding shares of common stock are, and the shares of common stock being
offered in this prospectus when issued will be, duly authorized and validly
issued and, upon payment of the purchase price, fully paid and nonassessable.
SELLING SHAREHOLDERS' WARRANTS
In January, we issued warrants to persons who have provided bridge
financing loans of $1,000,000 to us. The warrants, which are exercisable upon
the closing of this offering, entitle the holders to purchase an aggregate of
41,680 shares of common stock at an
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<PAGE> 52
exercise price equal to the initial public offering price per share for five
years. The shares underlying the warrants are being registered in this offering
and may not be resold prior to six months after the close of this offering.
REGISTRATION RIGHTS
Under the terms of our distribution agreement with Warner, Warner is
entitled to have its shares registered by us under the Securities Act.
Specifically, following the expiration of the "lock-up" period to be agreed to
by existing shareholders, Warner may request that we register all or a part of
its shares. Warner may make this request no more than twice. Under the terms of
Warner's agreement, we will bear all registration expenses other than
underwriting discounts and commissions in connection with any such registration.
ANTI-TAKEOVER LAW
Washington law contains provisions which could make our acquisition by a
third party more difficult. These provisions, summarized below, are expected to
discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Sunhawk.com to negotiate with us
first.
Chapter 19 of the Washington Business Corporation Act generally prohibits a
"target corporation" from engaging in a "significant business transaction" with
an "acquiring person," which is defined as a person or group of persons that
beneficially owns or acquires 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
"significant business transaction" or the acquisition of shares is approved by a
majority of the members of the target corporation's board of directors prior to
the time of acquisition. Prohibited "significant business transactions" include,
among other things:
- a merger or consolidation with, disposition of assets to or issuance or
redemption of stock to or from the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur, as
long as it complies with the "fair price" provisions of the statute. A
corporation may not "opt out" of this statute.
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<PAGE> 53
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Our amended and restated articles of incorporation currently limit the
liability of directors to the fullest extent permitted by the Washington
Business Corporation Act. Consequently, subject to the Washington Business
Corporation Act, no director will be personally liable to us or our shareholders
for monetary damages resulting from his or her conduct as a director of
Sunhawk.com, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our amended and restated bylaws provide for indemnification of our directors,
officers, employees and agents to the maximum extent permitted by Washington
law. Our directors and officers also may be indemnified against liability they
may incur for serving in those capacities pursuant to our liability insurance
policy maintained for such purpose.
To the extent the provisions of our corporate governance documents provide
for indemnification of directors or officers for liabilities arising under the
Securities Act those provisions are, in the opinion or the Securities and
Exchange Commission, against public policy as expressed in the Securities Act
and are therefore unenforceable.
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<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Sales of a substantial amount of common stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the common stock prevailing from time to time in the public market and
could impair our ability to raise additional capital through the sale of our
equity securities in the future.
Upon completion of this offering, there will be 2,799,380 shares of our
common stock outstanding, consisting of 1,400,000 shares of common stock being
offered in this prospectus, and 1,399,380 restricted shares of common stock. In
addition, we have reserved 303,526 shares of common stock for issuance under our
1996 Stock Option Plan, of which 17,932 shares were subject to outstanding
options and 266,210 shares were available for future issuance as of September
30, 1999.
The shares of common stock currently being offered will be freely tradable
without restriction or further registration under the Securities Act by persons
other than our affiliates. The restricted shares will be freely tradable if
subsequently registered under the Securities Act or to the extent permitted by
Rules 144 or 701 or some other exemption from registration under the Securities
Act, subject to the "lock-up" provisions to be agreed to by existing
shareholders.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of restricted shares from Sunhawk.com or an
affiliate of Sunhawk.com, the holder is entitled to sell, in the public market,
within any three-month period, that number of shares of common stock which does
not exceed the greater of 1% of the total number of then outstanding shares of
common stock or the average weekly trading volume of shares of common stock
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to requirements as to the manner of sale, notice and availability of
current public information about Sunhawk.com. If two years have elapsed, a
holder, other than an affiliate of Sunhawk.com, is entitled to sell restricted
shares in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale requirements, public information requirements or
notice requirements.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract to resell such shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell such shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
Of the restricted shares, 8,829 shares of common stock will be eligible for
sale under Rule 144 under the Securities Act 90 days after the date of this
prospectus, subject to the lock-up provisions described below.
Under the underwriting agreement between us and the underwriters of this
offering, shareholders who hold shares of our common stock issued prior to the
date of the closing of this offering or have been granted options to purchase
shares of our common stock prior to such date will not be able to, directly or
indirectly, offer, sell, announce an intention to
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<PAGE> 55
sell, contract to sell, pledge, hypothecate, grant any option to purchase or
otherwise dispose of any shares of our common stock or any securities
convertible into or exchangeable or exercisable for shares of our common stock
for a period of 24 months following the closing of this offering without the
prior written consent of the underwriter. The shares of common stock currently
being offered will not be subject to this "lock-up" provision and will be freely
tradable. We have also agreed not to file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to any of
these shares during this 24-month "lock-up" period. Additionally, in accordance
with the policy statements promulgated by the North American Securities
Administrators Association, Inc., three of our shareholders have agreed to enter
into a promotional share escrow agreement. Under this agreement, these
shareholders agree, with respect to an aggregate of approximately 1,300,000
shares of our common stock owned by them prior to this offering, not to transfer
or dispose of all of those shares for the first two years, and 2 1/2% of those
shares for each of years three and four, after the completion of this offering.
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<PAGE> 56
SELLING SHAREHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned by each of the participants in a bridge loan to the Company,
who have received warrants to purchase our Common Stock ("Selling Shareholders")
as of the date of this prospectus, the number of shares (the "Shares")
purchasable under such warrants and the percentage ownership of the Selling
Shareholders prior to the offering. As of the date of this prospectus, the
Selling Shareholders own no other shares of Common Stock of the Company. None of
the Selling Shareholders has had any position, office or other material
relationship with the Company within the past three years other than as a result
of the ownership of the Shares and the bridge loan notes.
COMMON STOCK OWNED PRIOR TO OFFERING
<TABLE>
<CAPTION>
PERCENTAGE
OF
NAME NUMBER CLASS(1)
- ---- ------ ----------
<S> <C> <C>
</TABLE>
- ---------------
(1) Less than one percent.
54
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between us and the underwriters named below, the underwriter has agreed to
purchase from us, and we have agreed to sell to the underwriters, the number of
shares of common stock set forth below opposite the underwriter's name, at the
initial public offering price per share less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Joseph Gunnar & Co., L.L.C.................................. 1,400,000
</TABLE>
The underwriting agreement sets forth the obligations of the underwriters
to pay for and accept delivery of the shares and provides that the underwriters
will purchase all of the shares, if any of the shares are purchased.
The underwriter initially proposes to offer the shares of common stock
directly to the public at the initial public offering price per share set forth
on the cover page of this prospectus and to selected dealers at such price less
a concession not in excess of $ per share. The underwriter may allow, and
these dealers may reallow, a concession not in excess of $ per share to
other dealers. After this offering, the public offering price, concession and
re-allowance may be changed.
We have granted to the underwriter an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to an aggregate of
210,000 additional shares of common stock at the initial public offering price
per share less the underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriters may exercise this option only to cover
over-allotments, if any, made in connection with the sale of the shares of
common stock offered in this prospectus.
We have agreed to pay the underwriter a non-accountable expense allowance equal
to 2% of the gross proceeds of this offering and to cover the underwriting costs
and due diligence expenses relating to this offering, $25,000 of which has
already been paid. We have also agreed to pay the reasonable expenses of
underwriter's counsel.
We have agreed to permit the underwriter to have an observer attend
meetings of our board of directors for a period of three years from the
effective date of the registration statement of which this prospectus forms a
part. The underwriter's observer will be reimbursed for all out-of-pocket
expenses incurred in connection with the observer's attendance at meetings of
our board of directors and will receive cash compensation equal to the cash
compensation payable by us to our outside directors for attendance at meetings
of our board of directors, provided, however, that the per meeting fees payable
to the underwriter's observer shall not be less than $1,500 and that there shall
be a minimum of four meetings per year. The underwriter shall also receive the
same coverage under our directors and officers insurance policy that is extended
to our officers and directors. Additionally, the underwriter has been retained
as our investment banking advisor for a 18-month period commencing upon the
closing of this offering, and, for such services, we have agreed to pay the
underwriter a fee of $4,000 per month.
In connection with this offering, we have agreed to sell warrants to the
underwriter for a nominal price. The underwriter's warrants entitle the
underwriter to purchase 140,000
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<PAGE> 58
shares, excluding shares subject to the underwriter's over-allotment option. The
shares issuable upon exercise of the underwriter's warrants will be in all
respects identical to the shares offered to you. The underwriter's warrants will
be limited to a term of five years from the date of this prospectus and will
become exercisable commencing one year after the completion of this offering at
a per share exercise price equal to 120% of the initial public offering price
per share set forth on the cover page of this prospectus. The underwriter's
warrants may not be sold, assigned, transferred, pledged or hypothecated except
to the underwriter's officers and employees. In accordance with the terms of the
underwriting agreement, we are registering the shares issuable upon exercise of
the underwriter's warrants under the registration statement of which this
prospectus forms a part, and we have agreed to use our best efforts to permit
the public sale of the shares issued or issuable upon exercise of the
underwriter's warrants and to include all or part of the shares underlying the
underwriter's warrants in future registration statements at our expense. For the
term of the underwriter's warrants, the holders of the warrants are given the
opportunity to profit from a rise in the market price of the common stock, which
may result in a dilution of the interest of other shareholders. As a result, we
may find it more difficult to raise additional equity capital if it should be
needed for our business while the underwriter's warrants are outstanding. The
holders of the underwriter's warrants might be expected to exercise them at a
time when we would, in all likelihood, be able to obtain additional equity
capital on terms more favorable to us than those provided by the underwriter's
warrants. Any profit realized on the sale of the shares issuable upon the
exercise of the underwriter's warrants may be deemed additional underwriting
compensation.
The underwriter has been granted a right of first refusal to act as our
underwriter, placement agent or investment banker in connection with any
financings, acquisitions or dispositions occurring within three years after the
closing, for fees customarily paid in connection with such activities. If the
underwriter declines to act in such capacity and the transaction is not closed
within a fixed period or is modified, such transaction would again have to be
submitted to the underwriter.
We and the underwriter have agreed to indemnify each other against, or to
contribute to losses arising out of, untrue statements or omissions of material
facts contained in this prospectus and the registration statement of which it is
a part in connection with this offering. We and the underwriter are each aware
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
The underwriter, may engage in over-allotment, stabilizing transactions,
syndicate and covering transactions in accordance with Regulation M under the
Securities Exchange Act. Over-allotment involves sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase shares so long as the stabilizing bids do not exceed a
specified maximum. Covering transactions involve purchases of shares in the open
market after the distribution has been completed in order to cover short
positions. Such over-allotment and covering transactions may cause the price of
the common stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq SmallCap(R)
Market or the Pacific Stock Exchange and, if commenced, may be discontinued at
any time.
Application has been made for quotation of the common stock on the Nasdaq
SmallCap(R) Market under the symbol "SNHK," and listing on the Pacific Stock
Exchange
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<PAGE> 59
under the symbol "SHA." It is anticipated that these applications will be
effective at the time of this offering.
Prior to this offering, there has been no public trading market for our
common stock. The public offering price of the shares of common stock offered in
this prospectus will be determined by negotiation between us and the
underwriter. Factors to be considered in determining the initial public offering
price, in addition to prevailing market conditions, include the history of and
prospects for the industry in which we operate, an assessment of our management,
our prospects, our capital structure and such other factors as are deemed
relevant. We cannot assure you that an active trading market will develop and be
sustained upon the completion of this offering or that the market price of our
common stock will not decline below the initial public offering price.
The stock market and Internet stocks specifically have experienced
significant price and volume fluctuations that have affected the market price of
common stock for many companies engaged in industries similar to that of
Sunhawk.com. As a result, investors purchasing in this offering may not be able
to resell their shares at or above the initial public offering price and could
lose all of their investment.
The preceding description includes a summary of the principal terms of the
underwriting agreement and the underwriter's warrant agreement and does not
purport to be complete. The underwriting agreement and the underwriter's warrant
agreement are filed as exhibits to the registration statement of which this
prospectus forms a part and should be referenced for the complete contents of
these documents.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
LEGAL MATTERS
The validity of the shares of common stock being sold in this offering will
be passed on for us by The Otto Law Group, PLLC of Seattle, Washington.
Effective upon the closing of this offering, The Otto Law Group has been
granted, at the initial public offering price, an immediately exercisable
warrant to purchase 27,500 shares of our common stock.
Legal matters related to this offering will be passed on for the
underwriters by Kelley Drye & Warren LLP of New York, New York.
EXPERTS
The financial statements of Sunhawk.com at September 30, 1999 and 1998, and
for each of the three years in the period ended September 30, 1999, appearing in
this prospectus and registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which contain
an explanatory paragraph describing conditions that raise substantial doubt
about the Sunhawk.com's ability to continue as a going concern as described in
Note 1 to the financial statements) appearing elsewhere in this prospectus, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
57
<PAGE> 60
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the common stock
being sold in this offering. This prospectus, filed as a part of such
registration statement, does not contain all the information set forth in the
registration statement, portions of which have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. For further
information with respect to us and our common stock we are offering, reference
is made to the registration statement. Statements made in this prospectus as to
the contents of any contract or document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement and each such statement is
qualified in its entirety by such reference. The registration statement,
including exhibits and schedules, may be inspected without charge at the Public
Reference Room of the Securities and Exchange Commission, Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington D.C. 20549, and the regional
offices of the Securities and Exchange Commission at Seven World Trade Center,
Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained at prescribed rates from the Public Reference Room of the Securities
and Exchange Commission at Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W. Washington D.C. 20549. You may obtain information regarding the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains a web site that
contains registration statements, reports, proxy statements and other
information regarding registrants (including Sunhawk.com) that file
electronically with the Securities and Exchange Commission. The address of the
Securities and Exchange Commission's web site is www.sec.gov.
As a result of this offering, we will be subject to the informational
requirements of the Exchange Act. So long as we are subject to the informational
reporting requirements of the Exchange Act, we will provide our shareholders
with annual reports containing audited financial statements and interim
quarterly reports containing unaudited financial information.
58
<PAGE> 61
SUNHAWK.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst and Young LLP, independent auditors......... F-2
Audited financial statements
Balance sheets as of September 30, 1999 and 1998............ F-3
Statements of operations for the years ended September 30,
1999, 1998, and 1997...................................... F-4
Statements of shareholders' equity (deficit) for the years
ended September 30, 1999, 1998, and 1997.................. F-5
Statements of cash flows for the years ended September 30,
1999, 1998, and 1997...................................... F-6
Notes to financial statements............................... F-7
</TABLE>
F-1
<PAGE> 62
REPORT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Sunhawk.com Corporation
We have audited the accompanying balance sheets of Sunhawk.com Corporation as of
September 30, 1999 and 1998, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are the
responsibility of Sunhawk.com Corporation management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunhawk.com Corporation as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Sunhawk.com will continue as a going concern. As more fully described in Note 1,
Sunhawk.com has recurring net losses and has both a working capital deficiency
and an accumulated deficit at September 30, 1999. These conditions raise
substantial doubt about Sunhawk.com's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Seattle, Washington
November 24, 1999 except for Note 7 (sixth paragraph)
as to which the date is December 23, 1999,
and Note 7 (fourth paragraph) and Note 13 as to which the date is January 12,
2000
F-2
<PAGE> 63
SUNHAWK.COM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 18,300 $ 59,093
Accounts receivable................................... 7,649 --
CD-ROMs and printed sheet music....................... 17,091 16,507
Prepaid expense....................................... 4,569 27,234
----------- -----------
Total current assets.......................... 47,609 102,834
----------- -----------
Property and equipment, net............................. 253,840 195,880
Other assets:
Digital sheet music masters (net of accumulated
amortization of $31,097 and $10,151 in 1999 and
1998, respectively)................................ 396,154 69,868
Patent and trademarks, at cost (net of accumulated
amortization of $9,228 and $3,926, in 1999 and
1998, respectively)................................ 98,456 77,240
Music catalog distribution rights (net of accumulated
amortization of $75,378 in 1999)................... 1,243,740 --
Deferred offering costs............................... 1,063,095 --
Deposits.............................................. 27,234 62,694
----------- -----------
Total other assets............................ 2,828,679 209,802
----------- -----------
Total assets.................................. $ 3,130,128 $ 508,516
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit........................................ $ 100,000 $ --
Accounts payable and accrued expenses................. 709,267 92,162
Payable to Eller McConney LLC......................... 169,957 10,850
Notes payable to shareholder.......................... 290,000 2,927,367
Accrued interest to shareholder....................... 115,394 286,039
----------- -----------
Total current liabilities..................... 1,384,618 3,316,418
----------- -----------
Shareholders' equity (deficit):
Preferred stock, no par value:........................ -- --
Authorized shares -- 10,000,000
Outstanding shares -- none
Common stock, no par value:
Authorized shares -- 30,000,000
Outstanding shares -- 1,399,380 and 891,559 at
September 30, 1999 and 1998, respectively........ 3,345,219 197,221
Accumulated deficit................................... (1,599,709) (3,005,123)
----------- -----------
Total shareholders' equity (deficit).......... 1,745,510 (2,807,902)
----------- -----------
Total liabilities and shareholders' equity
(deficit)................................... $ 3,130,128 $ 508,516
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 64
SUNHAWK.COM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Sales................................... $ 100,575 $ 27,263 $ 15,066
Cost of goods sold:
Royalties, materials, shipping, and
credit card processing fees........ 75,401 14,170 3,210
Amortization of digital sheet music
and music catalog distribution
rights............................. 96,324 8,347 1,804
----------- ----------- ---------
171,725 22,517 5,014
----------- ----------- ---------
Gross profit (loss)..................... (71,150) 4,746 10,052
Selling, general and administrative..... 2,660,933 1,353,871 854,458
----------- ----------- ---------
Loss from operations.................... (2,732,083) (1,349,125) (844,406)
Interest income......................... 13,140 -- --
Interest expense on notes payable to
shareholders.......................... (115,394) (126,454) (66,577)
----------- ----------- ---------
Net loss................................ (2,834,337) $(1,475,579) $(910,983)
=========== =========== =========
Net loss per share:
Basic and diluted..................... (2.46) $ (1.66) $ (1.04)
=========== =========== =========
Weighted average common shares for net
loss per share computations:
Basic and diluted.................. 1,154,214 887,689 875,424
=========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 65
SUNHAWK.COM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK SHAREHOLDERS'
----------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, October 1, 1996....... 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
========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 66
SUNHAWK.COM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $ (2,834,337) $(1,475,579) $(910,983)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................. 79,780 79,683 42,944
Amortization................................. 101,626 11,182 2,895
Stock compensation........................... -- -- 96,316
Loss on disposal of property and equipment... -- 4,061 16,270
Changes in operating assets and liabilities:
Increase in accounts receivable............ (7,649)
Decrease (increase) in CD-ROMs and printed
sheet music............................. (584) 2,315 (2,424)
Decrease (increase) in prepaid expense..... 22,665 (27,234) --
Decrease (increase) in deposits............ 35,460 (62,694) --
Increase in accounts payable and accrued
expenses................................ 617,105 47,960 33,940
Increase in payable to Eller McConney
LLC..................................... 159,107 10,850 --
Increase (decrease) in accrued interest on
notes payable to shareholder............ 115,394 198,552 66,577
------------ ----------- ---------
Net cash used in operating activities.......... (1,711,433) (1,210,904) (654,465)
INVESTING ACTIVITIES
Purchases of property and equipment............ (137,740) (153,014) (97,216)
Purchase of digital sheet music masters........ (347,232) (60,830) (19,189)
Cost of patents and trademarks................. (26,518) (53,689) (27,301)
------------ ----------- ---------
Net cash used in investing activities.......... (511,490) (267,533) (143,706)
FINANCING ACTIVITIES
Proceeds from line of credit................... 100,000
Proceeds from notes payable issued to
shareholders................................. 1,645,000 1,413,902 794,377
Increase in deferred offering costs............ (1,063,095) -- --
Proceeds from sale of common stock to existing
shareholders................................. 1,500,000 100,000 4
Exercise of options............................ 225
------------ ----------- ---------
Net cash provided by financing activities...... 2,182,130 1,513,902 794,381
------------ ----------- ---------
Net increase (decrease) in cash................ (40,793) 35,465 (3,790)
Cash at beginning of period.................... 59,093 23,628 27,418
------------ ----------- ---------
Cash at end of period.......................... $ 18,300 $ 59,093 $ 23,628
============ =========== =========
NON-CASH 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 of common stock..... (3,568,406) -- --
Forgiveness of notes payable to shareholder.... (1,000,000)
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 67
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND LIQUIDITY
BUSINESS AND ORGANIZATION
Sunhawk.com Corporation (Sunhawk.com) was incorporated in the state of
Washington on August 20, 1992. Sunhawk.com sells interactive digital sheet music
in its proprietary format, traditional printed sheet music, and CD-ROMs on their
internet retail site at www.sunhawk.com. Sunhawk.com's internally developed
proprietary technology, Solero(R), allows customers to view, play, print and
store the encrypted digital sheet music files.
NAME CHANGE
On June 10, 1999, Sunhawk.com's Articles of Incorporation were amended to change
the company's name to Sunhawk.com Corporation.
LIQUIDITY
At September 30, 1999, Sunhawk.com had cash of $18,300 available to fund
operations. For the year ended September 30, 1999, Sunhawk.com recorded a net
loss of $2,834,337, had a working capital deficiency of $1,337,009 and an
accumulated deficit of $1,599,709. These factors raise substantial doubt about
Sunhawk.com's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Since inception, Sunhawk.com has financed its operations and capital
expenditures through sales of common stock, borrowings from the Eller and
McConney 1995 Family Living Trust, and more recently through borrowing from the
line of credit of $500,000 of which $100,000 was outstanding at September 30,
1999. Sunhawk.com's business will require additional equity or debt financing to
continue operations. Sunhawk.com has entered into bridge-financing loan
agreements "the Loans" to allow it to operate until it is able to raise
additional equity financing through an initial public offering or a private
equity investor. Currently, Sunhawk.com plans to file a registration statement
to obtain such funding, or part thereof, during the second quarter of fiscal
year 2000.
Management believes that proceeds from the loans, initial public offering,
and/or a private equity investor will provide Sunhawk.com with the necessary
cash proceeds to allow Sunhawk.com to have the wherewithal to continue
operations through at least September 30, 2000. However, if Sunhawk.com is not
otherwise able to raise sufficient capital in order to continue its current
operations, it may be unable to meet its obligations as they become due. As a
result, Sunhawk.com might be unable to continue as a going concern, and it would
then be necessary to consider other alternatives, such as substantially
curtailing its operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets, which range from three to seven years.
F-7
<PAGE> 68
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CD-ROMS
CD-ROMs are stated at the lower of cost, determined by the first-in, first-out
method, or market.
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 $20,946, $8,347 and $1,804 for the years ended September 30,
1999, 1998, and 1997, respectively. Sunhawk.com periodically evaluates the
digital sheet music masters for impairment.
PATENTS AND TRADEMARKS
Patents and trademarks are stated at cost less accumulated amortization.
Amortization is calculated on a straight-line basis over fifteen years.
Amortization expense is included in selling, general and administrative expense
and was $5,302, $2,835, and $1,091 for the years ended September 30, 1999, 1998
and 1997, respectively. Sunhawk.com periodically evaluates these intangible
assets for impairment.
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 $75,400 for the year ended September 30, 1999. Sunhawk.com
periodically evaluates these music catalog distribution rights for impairment.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred in conjunction with
Sunhawk.com's proposed initial public offering. Deferred offering costs will be
applied against the proceeds of the offering, if successful, or expensed if the
initial public offering is unsuccessful.
REVENUE RECOGNITION
Revenue from product sales is recorded when products are purchased and
downloaded by customers via Sunhawk.com's web site or shipped via regular mail
or overnight courier. Shipping charges are separately charged to the customers
and are included in sales.
ROYALTIES
In conjunction with the various distribution agreements, Sunhawk.com is required
to pay royalties ranging from 10% to 70% on gross receipts less credit card
processing fees to the
F-8
<PAGE> 69
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respective music publishers on each digital music title sold. Total royalty
expense incurred during the years ended September 30, 1999, 1998 and 1997
amounted to $38,159, $4,183 and $0, respectively, and is recorded in cost of
goods sold.
ADVERTISING COSTS
Advertising costs, including promotional materials, are expensed as incurred.
Costs for placement of advertising are prepaid and charged to expense at the
time the advertisement is initially publicized. Advertising expense totaled
$218,043, $36,005, and $21,557 during the years ended September 30, 1999, 1998
and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expenses totaled $0, $93,529, and $126,017 during the years ended
September 30, 1999, 1998, and 1997, respectively.
INCOME TAXES
The shareholders of Sunhawk.com changed their election from an "S" corporation
to a "C" corporation effective April 1, 1999. As an "S" corporation, any tax
liability or benefit is passed directly to the shareholders. Accordingly,
Sunhawk.com did not realize any tax provision or benefit prior to April 1, 1999.
Subsequent to March 31, 1999, Sunhawk.com accounts for income taxes under the
liability method. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to be
recovered. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized.
STOCK-BASED COMPENSATION
Sunhawk.com accounts for stock-based compensation using the intrinsic value
method and provides pro forma footnote disclosure of the impact of the fair
value method.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed based on the weighted-average
number of common shares outstanding during each period.
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.
F-9
<PAGE> 70
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Computers and equipment................................ $ 398,728 $ 302,574
Furniture.............................................. 55,051 39,295
Software............................................... 41,446 15,649
Other.................................................. 1,854 1,820
--------- ---------
497,079 359,338
Less accumulated depreciation.......................... (243,239) (163,458)
--------- ---------
$ 253,840 $ 195,880
========= =========
</TABLE>
4. DISTRIBUTION AGREEMENTS
In May and June 1998, Sunhawk.com entered into distribution agreements with
Warner Bros. Publications U.S. Inc. (Warner) and EMI Christian Music Publishing
(EMIC), respectively. These agreements provide Sunhawk.com with nonexclusive
rights to distribute selected digital sheet music from the respective music
catalogs maintained by Warner and EMIC. The terms of the agreements are
approximately ten and five years, respectively.
The Warner agreement provides Sunhawk.com with nonexclusive right to distribute
selected digital sheet music from the Warner music catalog. As a nonforfeitable
part of the consideration and as inducement to enter into the agreement,
Sunhawk.com agreed to issue 99,073 shares of its common stock to Warner,
contingent upon either the closing of a firmly underwritten public offering or
the private sale or other disposition of 15% or more of Sunhawk.com's common
stock then authorized and outstanding.
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 and became fully
vested and non-forfeitable under the terms of the agreement. The value of the
shares of common stock issued to Warner were measured at the fair value of
common stock on issuance date and capitalized as a long-term asset, which will
be amortized over the remaining life of the distribution agreement.
5. NOTES PAYABLE TO SHAREHOLDER
On September 30, 1998, Sunhawk.com entered into two demand note payable
agreements with a shareholder. On March 31, 1999, the shareholder exchanged
these notes, including interest accrued through September 30, 1998 for 267,968
shares of common stock. Interest accrued during the six-month period ended March
31, 1999 of $113,928 was not converted to shares of common stock and is included
in accrued interest on notes payable to shareholder. On August 17, 1999 and
September 21, 1999, Sunhawk.com entered into note payable agreements in the
amount of $80,000 and $210,000, respectively, with a shareholder. The notes are
due on February 1, 2000, and carry interest at the federal applicable short-term
rate, or approximately 5%.
F-10
<PAGE> 71
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE-OF-CREDIT
On September 29, 1999, Sunhawk.com entered into a $500,000 line-of-credit
agreement with a financial institution. As of September 30, 1999, borrowings
totaling $100,000 were outstanding. Borrowings under the line of credit bear
interest at 5.64% and are due on demand, or if no demand is made, on December
29, 1999. On November 1, 1999, the line-of-credit was increased to $1,000,000
with an applicable interest rate of 6.35%. The line-of-credit remains due on
demand, or if no demand is made, on April 29, 2000. A shareholder of Sunhawk.com
has guaranteed payment on the line-of-credit.
7. SHAREHOLDERS' EQUITY
In October 1996, in conjunction with the sale of 229,878 shares of common stock
to an employee for past services for $4.00, Sunhawk.com recorded compensation
expense of $96,316. The compensation expense represented the difference between
the value of consideration paid for the common stock and the fair market value
at the date of issuance.
On March 30, 1999, the Board of Directors of Sunhawk.com approved the sale of
380,627 shares of common stock to the Eller and McConney 1995 Family Living
Trust in exchange for cash of $1,500,000 and the exchange of outstanding notes
payable to a shareholder of $3,568,406 outstanding at March 31, 1999,
($2,213,406 of notes payable to shareholder, including accrued interest, as of
September 30, 1998 plus additional borrowings provided to Sunhawk.com during the
six months ended March 31, 1999 of $1,355,000). In addition, on March 31, 1999,
the Eller and McConney 1995 Family Living Trust contributed capital of
$1,000,000 by forgiving the remaining notes payable to shareholder outstanding
at that date.
On August 25, 1999, Sunhawk.com's Board of Directors and its shareholders
amended its Articles of Incorporation to decrease the total number of shares of
common stock which Sunhawk.com has the authority to issue from 20,000,000 to
10,000,000.
On January 12, 2000, Sunhawk.com's Board of Directors and its shareholders
amended it Articles of Incorporation to increase the total number of shares of
common stock which Sunhawk.com has the authority to issue from 10,000,000 to
30,000,000. This amendment also granted Sunhawk.com the authority to issue
10,000,000 in preferred stock.
REVERSE STOCK SPLIT
On March 30, 1999, Sunhawk.com's Board of Directors approved a transaction to
give one share for every 6.007 shares of common stock, thereby giving effect to
a 1-for-6.007 reverse stock split effective March 31, 1999.
On December 23, 1999, Sunhawk.com's Board of Directors approved a transaction to
give 0.716 shares for every 1 share of common stock, thereby giving effect to a
1.397 to 1 reverse stock split effective December 23, 1999. All outstanding
common and common equivalent shares and per-share amounts in the accompanying
financial statements and related notes to the financial statements have been
retroactively adjusted to give effect to the reverse stock splits.
F-11
<PAGE> 72
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS
STOCK OPTION PLAN
Under the terms of Sunhawk.com's 1996 Stock Option Plan, the Board of Directors
(the "Board") was authorized to issue 513,374 shares of common stock through
incentive and nonqualified stock options to any former, current, or future
employees, officers, directors, agents or consultants, including members of
technical advisory boards, and any independent contractors of Sunhawk.com. On
March 30, 1999, the Board amended the 1996 Stock Option Plan to reduce the
number of shares the Board is authorized to issue to 303,526. Generally, stock
compensation, if any, is measured as the difference between the exercise price
of a stock option and the fair market value of Sunhawk.com's stock at the date
of grant, which is then amortized over the related service period. Options are
granted with exercise prices equal to the fair market value of the common stock
on the date of the grant, as determined by Sunhawk.com's Board. Options vest
over a five-year period and expire ten years from the date of grant.
A summary of the status of Sunhawk.com's stock option plan is presented
below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------- ------------
<S> <C> <C>
Balance at October 1, 1996............................ 0 $--
Options granted, at estimated fair value.............. 65,286 1.52
Options exercised................................... (9,195) 0.00001341
-------
Balance at September 30, 1997......................... 56,091 1.77
Options granted, at estimated fair value............ 12,984 17.66
Options canceled.................................... (8,224) 9.32
-------
Balance at September 30, 1998......................... 60,851 4.14
Options exercised................................... (28,121) 0.0080186
Options canceled.................................... (14,798) 3.95
-------
Balance at September 30, 1999......................... 17,932 10.77
=======
</TABLE>
At September 30, 1999 options to acquire 246,847 shares of common stock were
available for future grant.
F-12
<PAGE> 73
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING
NUMBER OF WEIGHTED-AVERAGE CONTRACTED LIFE
EXERCISE PRICE SHARES EXERCISE PRICE (YEARS)
--------------- --------- ---------------- --------------------
<S> <C> <C> <C>
$0.42 7,153 $ .42 7.02
$0.42 - $11.33 4,765 $11.33 8.20
$11.33 - $22.65 6,014 $22.65 8.79
------
17,932
======
</TABLE>
As of September 30, 1999, in connection with the stock option plan, 266,210
shares of common stock were available for future issuance. At September 30,
1999, 3,159 options were exercisable at an exercise price of $2.07 per share.
Sunhawk.com applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock options issued to employees
in the accompanying financial statements because the fair value of the
underlying common stock equals the exercise price of the stock options granted.
Had the stock compensation expense for Sunhawk.com's stock option plan been
determined based on the fair value at the grant dates for options granted in
1999, 1998, and 1997, consistent with the fair value method of Statement of
Financial Accounting Standards No. 123, Sunhawk.com's net loss for the years
ended September 30, 1999, 1998, and 1997 would have been increased to the
following pro forma amount:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Net loss:
As reported........................ $2,834,337 $1,475,579 $910,983
Pro forma........................ 2,859,040 $1,486,649 $911,609
Net loss per share, basic and
diluted:
As reported...................... $ 2.46 $ 1.66 $ 1.04
Pro forma........................ 2.48 1.67 1.04
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Minimum Value Option Pricing model using the following weighted-average
assumptions: risk-free interest rate of 4.77%, 5.49%, and 6.11% for 1999, 1998,
and 1997, respectively; expected life of five years; and dividend yield of 0%.
F-13
<PAGE> 74
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS
Sunhawk.com leases office space and equipment under operating lease agreements
expiring in 2001 and 2002, respectively. Future minimum lease payments under
noncancelable operating leases at September 30, 1999 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
2000........................................................ $343,749
2001........................................................ 344,436
2002........................................................ 686
--------
Total minimum lease payments................................ $688,871
========
</TABLE>
Total rent expense paid during the years ended September 30, 1999, 1998, and
1997 amounted to $334,494, $54,686 and $9,216, respectively.
10. FEDERAL INCOME TAXES
Sunhawk.com, with the consent of its shareholders, elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code from August 20, 1992
(date of inception) through March 31, 1999, when it became no longer eligible to
be taxed as such. Accordingly, through March 31, 1999, the shareholders of
Sunhawk.com were entitled to report on their personal income tax returns their
proportionate share of Sunhawk.com's operating losses. Effective April 1, 1999,
Sunhawk.com became subject to federal corporate income taxes and therefore began
to account for income taxes in accordance with Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes." There was no income tax
provision in 1999 due to the net loss.
A reconciliation of the income tax provision is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
------------------
<S> <C>
Income tax benefit based on federal statutory rate of
34%.................................................. $(964,000)
Loss allocated to shareholders under the provision of
subchapter S........................................... 482,000
Unrealized net operating loss benefits................. 533,000
Other.................................................. (51,000)
---------
Income tax provision................................. $ 0
=========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts
F-14
<PAGE> 75
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. FEDERAL INCOME TAXES (CONTINUED)
used for income tax purposes. Significant components of Sunhawk.com's deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 533,000
Payable to Eller McConney LLC............................ 58,000
Accrued interest......................................... 39,000
Accrued expense.......................................... 16,000
---------
Total deferred tax assets.................................. 646,000
Valuation allowance for deferred tax assets.............. (639,000)
---------
Total deferred tax asset less valuation allowance.......... 7,000
---------
Deferred tax liabilities:
Depreciation and amortization............................ (5,000)
Prepaid expense.......................................... (2,000)
---------
Total deferred tax liability............................... (7,000)
---------
Net deferred tax asset..................................... $ 0
=========
</TABLE>
At September 30, 1999, Sunhawk.com had net operating loss carryforwards (NOLs)
of approximately $1,567,000, which, if not utilized, will expire in the year
2019. Utilization of NOLs may be limited in any given year by alternative
minimum tax (AMT) restrictions, depending upon each year's AMT calculation.
11. 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 September 30, 1999,
Sunhawk.com owed $169,957 to Eller McConney LLC for these services. The digital
sheet music masters for which production services were provided represented
approximately 64% and 10% of the digital sheet music acquired by Sunhawk.com
during the year ended September 30, 1999 and 1998, respectively.
During the year ended September 30, 1999, Sunhawk.com's Board of Directors
approved entering into a ten-year assignment and assumption agreement with
Avtograf, Eller McConney LLC, Music Production International. The assumption and
assignment agreement will require that Eller McConney LLC assign to Sunhawk.com
all of its rights to receive from Avtograf its services for the production of
digital sheet music in exchange for a promissory note payable to Eller McConney
LLC in 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
F-15
<PAGE> 76
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RELATED-PARTY TRANSACTIONS (CONTINUED)
quarterly in arrears with a maximum principal payment of $200,000 per annum. The
promissory note payable will bear interest at the applicable federal short-term
rate, which was approximately 5% at September 30, 1999. The promissory note
payable of $1,000,000 to Eller McConney LLC is expected to be accounted for as a
prepayment for services to be provided for the production of digital sheet music
from Music Production International, with recourse to Eller McConney LLC in the
event of non-performance. 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.
Neither Eller McConney LLC, Mr. Eller, Ms. McConney nor Sunhawk.com will have an
ownership interest in Music Production International. This agreement is
contingent upon Sunhawk.com's initial public offering becoming effective.
Marlin Eller, Chairman of the Board, Chief Executive Officer, and President, and
Mary McConney, Treasurer (Chief Financial Officer until June 10, 1999), of
Sunhawk.com provided services to Sunhawk.com as officers of Sunhawk.com. They
have received no compensation for these services from inception of Sunhawk.com
through to September 30, 1999.
12. OTHER
INITIAL PUBLIC OFFERING
On June 10, 1999, Sunhawk.com's Board of Directors authorized Sunhawk.com to
file a Registration Statement under the Securities Act of 1933, as amended, to
permit Sunhawk.com to proceed with an initial public offering of its common
stock.
13. SUBSEQUENT EVENTS
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 will bear interest at a rate of 8.5% per annum and will be
due at the earlier of the closing of the initial public offering or 8 months.
The loans will hold a first security on Sunhawk.com's assets as collateral. The
Loans will have a 50% warrant coverage, which equates to 1,042 warrants per
$25,000 of loan proceeds for a total of 41,680 warrants at the initial public
offering price, which is assumed to be $12.00 per share. The warrants may be
adjusted for stock splits, recapitalization, or reorganization of Sunhawk.com.
The warrants will be exercisable commencing six months following the closing
date of the offering. Sunhawk.com will, at the Closing, pay to 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 are expected to
close on or about January 26, 2000.
F-16
<PAGE> 77
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS,
"SUNHAWK.COM," "WE," "US" AND "OUR" REFER TO SUNHAWK.COM CORPORATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus summary................... 3
Risk factors......................... 6
Forward-looking statements........... 16
Use of proceeds...................... 17
Capitalization....................... 18
Dilution............................. 19
Dividend policy...................... 19
Selected financial data.............. 20
Management's discussion and analysis
of financial condition and results
of operations...................... 21
Business............................. 27
Management........................... 41
Related-party transactions........... 45
Principal shareholders............... 47
Description of securities............ 49
Shares eligible for future sale...... 52
Selling shareholders................. 54
Underwriting......................... 55
Transfer agent and registrar......... 57
Legal matters........................ 57
Experts.............................. 57
Where you can find more
information........................ 58
Index to financial statements........ F-1
</TABLE>
UNTIL , 2000 ALL DEALERS THAT BUY, SELL OR TRADE SHARES OF OUR
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,400,000 Shares
LOGO
Common Stock
-----------------
PROSPECTUS
-----------------
JOSEPH GUNNAR & CO., LLC
February , 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Amended and Restated Bylaws
(Exhibit 3.3 hereto) provides for indemnification of the registrant's directors,
officers, employees and agents to the maximum extent permitted by Washington
law. The directors and officers of the registrant also may be indemnified
against liability they may incur for serving in those capacities pursuant to a
liability insurance policy maintained by the registrant for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article VII of the registrant's Amended and Restated Articles of
Incorporation (Exhibit 3.1 hereto) contains provisions implementing, to the
fullest extent permitted by Washington law, such limitations on a director's
liability to the registrant and its shareholders.
The underwriting agreement (Exhibit 1.1 hereto) provides for reciprocal
indemnification between the underwriters and the registrant from and against
certain liabilities arising in connection with the offering which is the subject
of this registration statement.
II-1
<PAGE> 79
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the registrant in connection with the sale of
the securities being registered. All amounts are estimates except the Securities
and Exchange Commission registration fee, the NASD filing fee, the Nasdaq
SmallCap(R) listing fee and the Pacific Stock Exchange listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........ $ 6,006
NASD Filing Fee............................................ 1,604
Nasdaq SmallCap(R) Listing Fee............................. 17,500
Pacific Stock Exchange Listing Fee......................... 19,500
Printing Costs............................................. 200,000
Legal Fees and Expenses.................................... 324,500
Accounting Fees and Expenses............................... 350,000
Blue Sky Fees and Expenses (including legal fees).......... 50,000
Transfer Agent and Registrar Fees.......................... 20,000
Miscellaneous.............................................. 95,890
----------
Total............................................ $1,085,000
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:
1. On October 9, 1996, the registrant sold 229,878 shares of the
registrant's common stock at a price of $0.00001566 per share for an
aggregate purchase price of $3.60 to one accredited investor in a private
transaction which was exempt from registration pursuant to Section 4(2) of
the Securities Act.
2. On December 4, 1996 and October 5, 1998, 9,195 and 18,390 shares of
the registrant's common stock, respectively, were issued to one individual
upon the exercise of stock options granted pursuant to the registrant's
1996 Stock Option Plan at a per share exercise price of $0.00001341 for
total exercise prices of $0.12 and $0.25, respectively. Such issuances were
exempt from registration pursuant to Rule 701 under the Securities Act.
3. On March 10, 1998, the registrant sold 8,829 shares of the
registrant's common stock at a price of $11.33 per share for an aggregate
purchase price of $100,000 to one accredited investor in a private
transaction which was exempt from registration pursuant to Section 4(2) of
the Securities Act.
4. On April 1, 1999, the registrant issued 99,073 shares of the
registrant's common stock at a price per share of $13.31 pursuant to the
distribution agreement by and between the registrant and Warner Bros.
Publications U.S. Inc. in consideration for music catalog distribution
rights provided by Warner to the registrant. The transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act.
5. On March 31, 1999, the Eller and McConney 1995 Family Living Trust,
an accredited investor, converted $3,568,406 of debt owed to it by the
registrant into 267,968 shares of the registrant's common stock at a price
per share of $13.31. On this same date, the Eller and McConney 1995 Family
Living Trust forgave $1,000,000 of long-term debt owed to it by the
registrant and purchased an additional 112,659 shares of the registrant's
common stock for an aggregate of $1,500,000, at a price per
II-2
<PAGE> 80
share of $13.31 per share. Such issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
6. On June 18, 1999, 9,195 shares of the registrant's common stock
were issued to one individual upon the exercise of stock options granted
pursuant to the registrant's 1996 Stock Option Plan at a per share exercise
price of $0.00001341 for a total exercise price of $0.12. Such issuance was
exempt from registration pursuant to Rule 701 under the Securities Act.
7. On July 6, 1999, 536 shares of the registrant's common stock were
issued to one individual upon the exercise of stock options granted
pursuant to the registrant's 1996 Stock Option Plan at a per share exercise
price of $0.42 for a total exercise price of $224.70. Such issuance was
exempt from registration pursuant to Rule 701 under the Securities Act.
On December 23, 1999, Sunhawk.com's Board of Directors approved a transaction to
give 0.716 shares for every 1 share of common stock, thereby giving effect to a
1.397 to 1 reverse stock split effective December 23, 1999. All outstanding
common and common equivalent shares and per-share amounts in the accompanying
financial statements and related notes to the financial statements have been
retroactively adjusted to give effect to the reverse stock splits.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
1.2++ Form of Underwriter's Warrant Agreement.
3.1# Amended and Restated Articles of Incorporation.
3.3# Amended and Restated Bylaws.
3.5++ Amendment to Articles of Incorporation.
4.1++ Specimen Stock Certificate.
4.2 See Exhibits 3.1 and 3.3 for provisions defining the rights
of the holders of common stock.
5.1++ Opinion of The Otto Law Group, PLLC (including the consent
of such firm)regarding legality of the securities being
issued.
10.1# 1996 Stock Option Plan.
10.2*# Distribution Agreement dated May 18, 1998 by and between
Sunhawk.com Corporation and Warner Bros. Publications U.S.
Inc., as amended.
10.3*# Distribution Agreement dated as of June 12, 1998 by and
between EMI Christian Music Publishing and Sunhawk.com
Corporation.
10.4*# Music Conversion Agreement dated as of April 1, 1998 by and
between Sunhawk.com Corporation and International Music
Engraving Company, as amended.
10.5# Lease dated August 10, 1998 by and between 223 Taylor Corp.
and Sunhawk.com Corporation.
10.6# Form of Employment Agreement between Sunhawk.com and Marlin
Eller.
10.7++ Form of Lock-Up Agreement.
10.8++ Form of Agreement Regarding the Assignment and Assumption of
the Right to Receive Sheet Music.
10.9++ Distribution Agreement dated January 5, 2000 between Mel Bay
Publications, Inc. and Sunhawk.com Corporation.
</TABLE>
II-3
<PAGE> 81
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.10++ Promotional Share Lock-In Agreement.
10.11++ Form of Agreement Regarding the Assignment and Assumption of
Sheet Music Production.
23.1++ Consent of Ernst & Young LLP, Independent Auditors.
23.2++ Consent of The Otto Law Group, PLLC (contained in Exhibit
5.1).
24.1 Power of Attorney (See Page II-5).
27.1# Financial Data Schedule.
</TABLE>
- -------------------------
* Confidential treatment requested.
++ Filed herewith.
# Previously filed.
ITEM 28. UNDERTAKINGS
The registrant will provide to the underwriters at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The registrant will:
For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of the registration statement as of
the time the Securities and Exchange Commission declared it effective.
For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial
bona fide offering of those securities.
II-4
<PAGE> 82
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 5
to the registration statement to be signed on its behalf by the undersigned, in
the City of Seattle, State of Washington, on the 26th day of January, 2000.
SUNHAWK.COM CORPORATION
By: /s/ MARLIN ELLER
-----------------------------------
Marlin Eller,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 4 to the registration statement has been signed by the following
persons in the capacities indicated below on the 26th day of January, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MARLIN ELLER Chairman of the Board, Chief Executive
- ------------------------------------------------ Officer and President (Principal
Marlin Eller Executive Officer)
/*/ TRICIA PARKS-HOLBROOK Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting Officer)
Tricia Parks-Holbrook
/*/ FRED ANTON Director
- ------------------------------------------------
Fred Anton
/*/ PATRICIA TANGORA Director
- ------------------------------------------------
Patricia Tangora
/*/ LUIS F. TALAVERA Director
- ------------------------------------------------
Luis F. Talavera
*By /s/ MARLIN ELLER
-----------------------------------------------
As Attorney-In-Fact
</TABLE>
II-5
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
1.2++ Form of Underwriter's Warrant Agreement.
3.1# Amended and Restated Articles of Incorporation.
3.3# Amended and Restated Bylaws.
3.5++ Amendment to Articles of Incorporation
4.1++ Specimen Stock Certificate.
4.2 See Exhibits 3.1 and 3.3 for provisions defining the rights
of the holders of common stock.
5.1++ Opinion of The Otto Law Group, PLLC (including the consent
of such firm) regarding legality of the securities being
issued.
10.1# 1996 Stock Option Plan.
10.2*# Distribution Agreement dated May 18, 1998 by and between
Sunhawk.com Corporation and Warner Bros. Publications U.S.
Inc., as amended.
10.3*# Distribution Agreement dated as of June 12, 1998 by and
between EMI Christian Music Publishing and Sunhawk.com
Corporation.
10.4*# Music Conversion Agreement dated as of April 1, 1998 by and
between Sunhawk.com Corporation and International Music
Engraving Company, as amended.
10.5# Lease dated August 10, 1998 by and between 223 Taylor Corp.
and Sunhawk.com Corporation.
10.6# Form of Employment Agreement between Sunhawk.com and Marlin
Eller.
10.7++ Form of Lock-Up Agreement.
10.8++ Form of Agreement Regarding the Assignment and Assumption of
the Right to Receive Sheet Music.
10.9++ Distribution Agreement dated January 5, 2000 by and between
Sunhawk.com Corporation and Mel Bay Publications, Inc.
10.10++ Promotional Share Lock-In Agreement.
10.11++ Form of Agreement Regarding the Assignment and Assumption of
Sheet Music Production.
23.1++ Consent of Ernst & Young LLP, Independent Auditors.
23.2++ Consent of The Otto Law Group, PLLC (contained in Exhibit
5.1).
24.1 Power of Attorney (See Page II-5).
27.1# Financial Data Schedule.
</TABLE>
- -------------------------
* Confidential treatment requested.
++ Filed herewith.
# Previously filed.
<PAGE> 1
Exhibit 1.1
1,400,000 SHARES OF COMMON STOCK
SUNHAWK.COM CORPORATION
UNDERWRITING AGREEMENT
New York, New York
February __, 2000
JOSEPH GUNNAR & CO., LLC
30 Broad Street, 12th Fl.
New York, NY 10004
Ladies and Gentlemen:
Sunhawk.com Corporation, a Washington corporation (the "Company"),
hereby confirms its agreement with Joseph Gunnar & Co., LLC (the "Underwriter"),
with respect to the sale by the Company and the purchase by the Underwriter, of
the numbers of shares of the Company's common stock, no par value ("Common
Stock"), set forth in Schedule I hereto (the "Offering"). Such shares are
hereinafter referred to as the "Firm Securities." Upon your request, as provided
in Section 2(b) of this Agreement, the Company shall also issue and sell to the
Underwriter, up to an additional 210,000 shares of Common Stock for the purpose
of covering over-allotments, if any. Such additional shares of Common Stock are
hereinafter referred to as the "Option Securities." The Firm Securities and
Option Securities, if purchased, are hereinafter referred to as the
"Underwritten Securities."
The Company also proposes to sell to the Underwriter for nominal
consideration, warrants (the "Warrants") pursuant to a warrant agreement (the
"Warrant Agreement") for the purchase, during a period commencing one year after
the date hereof and expiring on the fifth anniversary of the date hereof, of
140,000 shares of Common Stock, subject to adjustment as provided in the Warrant
Agreement (the "Warrant Shares"), at an initial exercise price of $_______ per
share, subject to adjustment as provided in the Warrant Agreement. The
Underwritten Securities, the Warrants and the Warrant Shares (collectively, the
"Securities") are more fully described in the Registration Statement and the
Prospectus referred to below.
<PAGE> 2
1. Representations and Warranties of the Company. The Company
represents and warrants to the Underwriter as of the date hereof, and as of the
Closing Date (as defined in Section 2(c) hereof) and the Option Closing Date (as
defined in Section 2(b) hereof), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (File No. 333-80849), including
the related preliminary prospectus dated June 17, 1999 and any subsequent
preliminary prospectus subject to completion ("Preliminary Prospectus"), for the
registration of the Securities, under the Securities Act of 1933, as amended
(the "Securities Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Securities Act, and the rules and regulations (the "Regulations") of the
Commission under the Securities Act. The Company has complied with the
conditions for the use of Form SB-2. The Company will promptly file a further
amendment to said registration statement in the form heretofore delivered to the
Underwriter and will not file any other amendment thereto to which the
Underwriter shall have objected in writing after having been furnished with a
copy thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial statements,
schedules, exhibits and all other documents filed as a part thereof and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the
"Prospectus." The Company may also file a related registration statement with
the Commission pursuant to Rule 462(b) of the Regulations for the purpose of
registering certain additional securities, which registration shall be effective
upon filing with the Commission. For purposes hereof, the "Rule 462 Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) of the Regulations including the Registration Statement and any
prospectus incorporated therein at the time such Registration Statement becomes
effective. For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor, to the Company's knowledge, any
state regulatory authority has issued any order preventing or suspending the use
of any Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof and no proceedings for a stop order suspending the
effectiveness of the Registration Statement has been instituted or are pending
or, to the best of the Company's knowledge, threatened. Each of any Preliminary
Prospectus, the Registration Statement and Prospectus at the time of filing
thereof contained all statements required to be stated therein and complied in
all material respects with the requirements of the Securities Act and the Rules
and Regulations, and none of any Preliminary Prospectus, the Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in strict conformity with information
furnished to the Company in writing by or on behalf of the Underwriter expressly
for use in any Preliminary Prospectus, Registration Statement or Prospectus or
any
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<PAGE> 3
amendment thereof or supplement thereto (the "Underwriter's Information").
The Company acknowledges that the Underwriter's Information shall include only
such written information that is contained under the caption "Underwriting."
(c) When the Registration Statement or any amendment thereto
becomes effective and through the last to occur of the Closing Date, Option
Closing Date, if any, or the last date the Prospectus may be required to be
delivered in connection with sales by the Underwriter or a dealer, the
Registration Statement and the Prospectus will contain all statements required
to be stated therein, and will comply in all material respects with the
requirements of the Securities Act and the Rules and Regulations. Neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
strict conformity with the Underwriter's Information.
(d) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Securities Act or the Commission has received payment of such filing
fee.
(e) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Washington. The
Company has no subsidiaries. Except as set forth in the Prospectus, the Company
does not, directly or indirectly, own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the conduct
of its business requires such qualification or licensing, except where the
failure to be so qualified or licensed would not have a material adverse effect
on the condition, financial or otherwise, earnings, stockholders' equity, value,
operations, business, prospects or results of operations of the Company (a
"Material Adverse Effect.")
(f) The Company has all requisite corporate power and authority and
has obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits (collectively, the "Approvals") of and from
all governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar matters), to
own or lease its properties and conduct its business as described in the
Prospectus, except where the failure to have such Approval would not have a
Material Adverse Effect; the Company is and has been doing business in
compliance with all such Approvals and all federal, state and local laws, rules
and regulations, except where the failure to comply would not have a Material
Adverse Effect; and the Company has not received any notice of proceedings
relating to the revocation or modification of any Approval. The disclosures in
the Registration Statement concerning the effects of federal, state and local
laws, rules and regulations on the Company's business as currently conducted and
as contemplated are
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<PAGE> 4
correct in all respects and do not omit to state a material fact necessary to
make the statements contained therein not misleading in light of the
circumstances in which they were made.
(g) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus and will have the adjusted
capitalization set forth therein on the Closing Date and each Option Closing
Date, if any, based upon the assumptions set forth therein. The Company is not a
party to or bound by any instrument, agreement or other arrangement, including,
but not limited to, any voting trust agreement, stockholders' agreement or other
agreement or instrument, affecting the securities or rights or obligations of
securityholders of the Company or providing for any of them to issue, sell,
transfer or acquire any capital stock, rights, warrants, options or other
securities of the Company, except for this Agreement, the Warrant Agreement, the
Licensing and Distribution Agreement dated May 18, 1998, between the Company and
Warner Bros. Publications U.S. Inc., as amended, and as described in the
Registration Statement. The Securities and all other securities issued or
issuable pursuant to existing plans, agreements or arrangements relating to the
issuance of securities or currently outstanding options, warrants, rights or
other securities of the Company by the Company conform or, when issued and paid
for, will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been offered and sold by the Company
in compliance with or pursuant to an exemption from registration under the
Securities Act and applicable state securities law, have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any securityholders of the
Company or similar contractual rights granted by the Company. The Underwritten
Securities have been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof, will be validly issued, fully paid and
non-assessable. The Warrants have been duly authorized and when issued, paid for
and delivered in the manner contemplated by the Warrant Agreement, will be
validly issued and outstanding obligations of the Company entitled to the
benefits of the Warrant Agreement. The Warrant Shares issuable upon exercise of
the Warrants will, assuming payment therefore as set forth in the Warrant
Agreement, upon such issuance be duly authorized, validly issued, fully paid and
non-assessable, and the Company has duly authorized and reserved for issuance of
the Warrant Shares. The Securities are not and will not be subject to any
preemptive or other similar rights of any stockholder of the Company, all
corporate action required to be taken for the authorization, issue and sale of
the Securities and, in the case of Warrant Shares, reservation, has been duly
and validly taken; and the certificates representing the Securities will be in
due and proper form. Upon the issuance and delivery pursuant to the terms of
this Agreement of the Underwritten Securities to be sold by the Company
hereunder, the Underwriters will acquire good and marketable title to the
Underwritten Securities free and clear of any liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever (collectively, the "Liens"), except for Liens
created by the Underwriter. Upon the issuance and delivery pursuant to the terms
of the Warrant Agreement, of the Warrants to be sold by the Company thereunder,
the Underwriter will acquire good and marketable title to the Warrants free and
clear of any Liens, except for Liens created by the Underwriter.
(h) The financial statements, including the related notes and
schedules of the Company, included in the Registration Statement, each
Preliminary Prospectus and the
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<PAGE> 5
Prospectus fairly present in accordance with generally accepted accounting
principles the financial position, income, changes in cash flow, changes in
stockholder's equity and the results of operations of the Company at the
respective dates and for the respective periods to which they apply and the as
adjusted financial information included in the Registration Statement, the
Preliminary Prospectus and the Prospectus presents fairly on a basis consistent
with that of the audited financial statements included therein, what the
Company's as adjusted capitalization would have been for the respective periods
and as of the respective dates to which they apply after giving effect to the
adjustments described therein. Such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved. Except as
disclosed in the Prospectus, there has been no adverse change or development
involving an adverse change, or the prospect of an adverse change, in the
condition, financial or otherwise, or in the earnings, position, prospects,
value, operation, properties, business or results of operations of the Company
taken as a whole, whether or not arising in the ordinary course of business,
since the date of the financial statements included in the Registration
Statement, the Preliminary Prospectus and the Prospectus, and the outstanding
debt, the property, both tangible and intangible, and the business of the
Company conforms in all material respects to the descriptions thereof contained
in the Registration Statement, the Preliminary Prospectus and the Prospectus.
Financial information set forth in the Preliminary Prospectus and Prospectus
under the headings "Summary Financial Information," "Selected Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly presents, in all respects, on the
basis stated in the Preliminary Prospectus and Prospectus, the information set
forth therein and has been derived from or compiled on a basis consistent with
that of the audited financial statements included in the Preliminary Prospectus
and Prospectus.
(i) The Company (i) has timely filed all federal, state, local and
foreign tax returns that it is required to file through the date hereof or has
timely requested extensions thereof, other than those filings being contested in
good faith, and has timely paid all federal, state, local and foreign taxes
shown to be due on such returns for which it is liable and has timely furnished
all information returns it is required to furnish; (ii) has established adequate
reserves for such taxes which are not due and payable or which are being
contested in good faith; and (iii) does not have any tax deficiency or claims
outstanding, proposed or assessed against it.
(j) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase from the Company of the
Underwritten Securities by the Underwriter, (iii) the purchase from the Company
of the Warrants by the Underwriter, (iv) the consummation by the Company of any
of its obligations under this Agreement or the Warrant Agreement or (v) resales
of the Underwritten Securities in connection with the distribution contemplated
hereby.
(k) The Company maintains with insurers of recognized financial
responsibility insurance policies and surety bonds, including, but not limited
to, general liability and property insurance, which insures the Company and its
employees, against such losses and, to the best knowledge of the Company, risks
generally insured against by comparable businesses in amounts which are prudent
and customary in its business. The Company has not (i) failed to give notice or
present any insurance claim with respect to any matter, including, but not
limited to, the Company's business, property or employees, under the insurance
policy or surety bond in a due and timely manner; (ii) had any disputes or
claims against any underwriter of such
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<PAGE> 6
insurance policies or surety bonds or has failed to pay any premiums due and
payable thereunder; or (iii) failed to comply with all conditions contained in
such insurance policies and surety bonds wherein such failure or dispute would
have a Material Adverse Effect. To the best knowledge of the Company, there are
no facts or circumstances under any such insurance policy or surety bond which
would relieve any insurer of its obligation to satisfy in full any valid claim
of the Company.
(l) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or, to the Company's best knowledge, threatened
against (or circumstances that may give rise to the same), or involving the
Company, its properties or its business which (i) questions the validity of the
capital stock of the Company, this Agreement, the Warrant Agreement or of any
action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Warrant Agreement; (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately and completely
summarized in all respects); or (iii) except as disclosed in the Prospectus,
might reasonably be expected to have a Material Adverse Effect.
(m) The Company has full legal right, corporate power and authority
to authorize, issue, deliver and sell the Securities, enter into this Agreement
and the Warrant Agreement and to consummate the transactions provided for in
such agreements. This Agreement has been duly and properly authorized, executed
and delivered by the Company. This Agreement constitutes, and when the Company
has duly executed and delivered the Warrant Agreement (assuming the due
execution and delivery thereof by the Representative), the Warrant Agreement
will constitute a legal, valid and binding agreement and obligation of the
Company enforceable against the Company in accordance with its respective terms,
except (i) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
affecting creditors' rights generally; (ii) as enforceability of any
indemnification or contribution provisions may be limited under applicable laws
or the public policies underlying such laws; and (iii) that the remedies of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceedings therefor may be brought. None of the Company's issue and sale of
the Securities, execution or delivery of this Agreement or the Warrant
Agreement, its performance hereunder and thereunder, its consummation of the
transactions contemplated herein and therein, or the conduct of its business as
described in the Registration Statement, any Preliminary Prospectus, the
Prospectus, and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of any of the
terms or provisions of, or constitutes or will constitute a default under, or
result in the creation or imposition of any Lien upon any property or assets
(tangible or intangible) of the Company pursuant to the terms of, (i) the
certificate of incorporation or by-laws of the Company; (ii) any license,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or is or may be bound or to which its
properties or assets (tangible or intangible) is or may be subject, or any
indebtedness; or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body
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<PAGE> 7
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.
(n) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for performance by the Company of this Agreement and the
Warrant Agreement and the transactions contemplated hereby and thereby, except
such as (i) have been obtained or (ii) may be required under state securities or
blue sky laws or the Rules of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with the Underwriter's purchase and distribution
of the Underwritten Securities and the Underwriter's purchase of the Warrants or
with respect to listing of the Underwritten Securities or Warrant Shares on the
Nasdaq SmallCap Market and the Pacific Stock Exchange.
(o) All agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which the Company
may be currently bound or to which the Company's assets, properties or
businesses may be subject are in full force and effect, have been executed and
delivered by the Company and constitute legal, valid and binding agreements of
the Company, enforceable against the Company in accordance with their respective
terms. The descriptions in the Registration Statement of agreements, contracts
and other documents are accurate and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Securities Act to be described in the
Registration Statement or filed as exhibits to the Registration Statement which
are not described or filed as required, and the exhibits which have been filed
are complete and correct copies of the documents of which they purport to be
copies.
(p) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; (ii) entered into any transaction other than in
the ordinary course of business; or (iii) declared or paid any dividend or made
any other distribution on or with respect to its capital stock of any class, and
there has not been any change in the capital stock, or any change in the debt
(long or short term) or liabilities or material adverse change in or affecting
the general affairs, management, financial operations, prospects, stockholders'
equity or results of operations of the Company.
(q) The Company is not in violation of its certificate of
incorporation or its by-laws, and except as disclosed in the Prospectus, to the
Company's knowledge, no default exists, and no event has occurred which with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any material term, covenant or condition of any
license, contract, indenture, mortgage, installment sale agreement, lease, deed
of trust, voting trust agreement, stockholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other material agreement
or instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the Company
or any of its properties is or may be bound or which may affect the property
(tangible or intangible) of the Company.
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<PAGE> 8
(r) The Company is in compliance with all federal, state, local and
foreign laws and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours. There are no pending
investigations involving the Company, by the U.S. Department of Labor or any
other governmental agency responsible for the enforcement of such federal,
state, local or foreign laws and regulations. There is no unfair labor practice
charge or complaint against either the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or, to the Company's knowledge, threatened against or involving the
Company or any predecessor entity, and none has ever occurred. To the Company's
knowledge, no representation question exists respecting the employees of the
Company, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. To the Company's knowledge, no
grievance or arbitration proceeding is pending or threatened under any expired
or existing collective bargaining agreements of the Company. No labor dispute
with the employees of the Company exists, or, is imminent.
(s) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No "accumulated funding deficiency" (as defined in Section 302 of
ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than
events with respect to which the 30-day notice under Section 4043 of ERISA has
been waived) has occurred with respect to any employee benefit plan which could
reasonably be expected to have a Material Adverse Effect. No ERISA Plan (or any
trust created thereunder) has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code,
which could subject the Company to any tax penalty on prohibited transactions
and which has not adequately been corrected. Each ERISA Plan is in compliance
with all material reporting, disclosure and other requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401(a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
(t) Neither the Company nor any of its employees, directors,
stockholders, partners or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing, has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(u) The Company owns or has sufficient right to use, free and clear
of all Liens, all patents, trademarks, service marks, trade secrets, trade names
and copyrights, technology and licenses and rights used in the conduct of its
business as now conducted or proposed to be conducted without infringement upon
or otherwise acting adversely to the right or claimed right of any person,
corporation or other entity under or with respect to any of the
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<PAGE> 9
foregoing and, except as set forth in each of the Preliminary Prospectus and the
Prospectus, is not obligated or under any liability whatsoever to make any
payment by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(v) The Company has taken reasonable security measures to protect
the secrecy, confidentiality and value of all its intellectual property in all
material aspects.
(w) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in each Preliminary Prospectus and the Prospectus, as owned or leased by it free
and clear of all Liens, other than those referred to in each Preliminary
Prospectus and the Prospectus and Liens for taxes not yet due and payable.
(x) Ernst & Young LLP, whose report is filed with the Commission as
a part of the Registration Statement, are independent certified public
accountants of the Company as required by the Securities Act and the Rules and
Regulations.
(y) The Company has caused to be duly executed and delivered
agreements, in such form as the Company and Underwriter have heretofore mutually
agreed (collectively, the "Lock-up Agreements"), pursuant to which each of the
Company's officers, directors, stockholders and persons holding options,
warrants, rights or other securities of the Company has agreed not to, directly
or indirectly, offer to sell, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of
Common Stock or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein for a period of 24 months following
date hereof without the prior written consent of the Underwriter.
(z) Except: (i) for payments in the aggregate amount of $25,000
which have been made by the Company to the Underwriter prior to the date hereof
and (ii) as set forth in the Prospectus and herein, there are no claims,
payments, issuances, arrangements or understandings, whether oral or written,
for services in the nature of a finder's or origination fee with respect to the
sale of the Securities hereunder or any other arrangements, agreements,
understandings, payments or issuance with respect to the Company, or any of its
officers, directors, stockholders, partners, employees or affiliates that may
affect the Underwriter's compensation. Except as contemplated hereby, since the
inception of the Company, no compensation has been paid to or on behalf of any
member of the NASD, or any affiliate or employee thereof, in connection with any
offering by the Company of the Company's securities.
(aa) The Underwritten Securities and Warrant Shares have been
approved for trading, subject to official notice of issuance, on the Nasdaq
SmallCap Market and the Pacific Stock Exchange, and the Company has received no
notice of any delisting procedures.
(bb) Neither the Company, nor any of its respective officers,
employees, agents or any other person acting on behalf of the Company has,
directly or
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indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (i) might subject the
Company or any other such person to any damage or penalty in any civil, criminal
or governmental litigation or proceeding (domestic or foreign); (ii) if not
given in the past, might have had a Material Adverse Effect; or (c) if not
continued in the future, might adversely affect the assets, business, operations
or prospects of the Company. The Company's internal accounting controls are
sufficient to enable the Company to comply with the Foreign Corrupt Practices
Act of 1977, as amended.
(cc) Except as set forth in each Preliminary Prospectus and the
Prospectus, no officer, director, stockholder or partner of the Company, or any
"affiliate" or "associate" (as these terms are defined in Rule 405 promulgated
under the Rules and Regulations) of any of the foregoing persons or entities has
or has had, either directly or indirectly, (i) an interest in any person or
entity which (A) furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by the Company, or (B) purchases
from or sells or furnishes to the Company any goods or services; or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which it may be bound or affected. Except as set forth in each Preliminary
Prospectus and the Prospectus under "Certain Transactions," there are no
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, and any officer, director or stockholder of the Company, or any
partner, affiliate or associate of any of the foregoing persons or entities
required to be disclosed therein that have not been thus disclosed.
(dd) Any certificate signed by the President, any Vice President or
the Secretary of the Company, and delivered to the Underwriter or its counsel
(to the "Underwriter's Counsel") shall be deemed a representation and warranty
by the Company to the Underwriter as to the matters covered thereby.
(ee) The minute books of the Company have been made available to
the Underwriter and the Underwriter's Counsel, contain a complete summary of all
meetings and actions of the directors and stockholders of the Company since the
time of its incorporation, and reflect all transactions referred to in such
minutes accurately in all respects.
(ff) Except and to the extent described in each Preliminary
Prospectus and the Prospectus, no holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the Company
or to require the Company to file a registration statement under the Securities
Act and no person or entity holds any anti-dilution rights with respect to any
securities of the Company.
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(gg) Except as described in the Prospectus, the Company is not
aware of any bankruptcy, labor disturbance or other event affecting any of its
trademark licensees, principal suppliers or customers which is reasonably likely
to have a Material Adverse Effect.
(hh) The Company has not been notified nor is otherwise aware that
it is potentially liable, or is considered potentially liable, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law ("Environmental Laws"). To the Company's knowledge,
the Company is in compliance with all applicable existing Environmental Laws,
except for such instances of non-compliance which would not have a Material
Adverse Effect. The term "Hazardous Material" means (i) any "hazardous
substance" as defined by the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended; (ii) any "hazardous waste" as defined by
the Resource Conservation and Recovery Act, as amended; (iii) any petroleum or
petroleum product; (iv) any polychlorinated biphenyl; and (v) any pollutant or
contaminant or hazardous, dangerous or toxic chemical, material, waste or
substance regulation under or within the meaning of any other Environmental
Laws. To the Company's knowledge, no disposal, release or discharge of Hazardous
Material has occurred on, in, at or about any of the facilities or properties of
the Company, except for those instances which are in compliance with
Environmental Laws or in the aggregate would not have a Material Adverse Effect.
Except as described in the Prospectus, to the Company's knowledge: (i) there has
been no storage, disposal, generation, transportation, handling or treatment of
Hazardous Material by the Company (or to the knowledge of the Company, any of
its predecessors in interest) at, upon or from any of the property now or
previously owned or leased by the Company in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action which has not been taken, under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for such
violations and failures to take remedial action which would not result in,
singularly or in the aggregate, a Material Adverse Effect; and (ii) there has
been no material spill, discharge, leak, emission, injection, escape, dumping or
release of any kind onto such property or into the environment surrounding such
property by the Company of any Hazardous Materials, except for such spills,
discharges, leaks, emissions, injections, escapes, dumping or releases which are
in compliance with Environmental Laws or would not result in, singularly or in
the aggregate, a Material Adverse Effect.
(ii) The Company is not an "investment company," a company
controlled by an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
(jj) None of the proceeds of the sale of the Underwritten
Securities or Warrants will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
margin security or for any other purpose which might cause any of the
Underwritten Securities or Warrants to be considered a "purpose credit" within
the meanings of Regulation G, T, U or X of the Board of Governors of the Federal
Reserve Board.
2. Purchase by the Underwriters; Delivery and Payment.
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<PAGE> 12
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to the Underwriter, and the
Underwriter agrees to purchase from the Company, at a price of $_________ per
share, that number of Firm Securities set forth in Schedule I opposite the name
of the Underwriter.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of an additional 210,000 shares of
Common Stock at a price of $______ per share. The option granted hereby will
expire 30 days after (i) the date the Registration Statement becomes effective,
if the Company has elected not to rely on Rule 430A under the Rules and
Regulations, or (ii) the date of this Agreement if the Company has elected to
rely upon Rule 430A under the Rules and Regulations (or if such 30th day shall
be a Saturday, Sunday or holiday, on the next business day thereafter when the
Nasdaq SmallCap Market is open for trading), and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Firm
Securities upon notice in writing or by telephone (confirmed in writing) by the
Underwriter to the Company setting forth the number of Option Securities as to
which the Underwriter is then exercising the option and the time and date of
payment and delivery for any such Option Securities. Upon exercise of the option
as provided herein, the Company shall become obligated to sell to the
Underwriter and subject to the terms and conditions herein set forth, the
Underwriter shall become obligated to purchase from the Company that number of
Option Securities then being purchased. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Underwriter, but shall not be
earlier than two nor later than five full business days after the exercise of
said option, nor in any event prior to the Closing Date, as hereinafter defined,
unless otherwise agreed upon by the Underwriter and the Company. The Underwriter
shall not be under any obligation to purchase any of the Option Securities prior
to the exercise of such option. No Option Securities shall be delivered unless
the Firm Securities shall be simultaneously delivered or shall theretofore have
been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of the Underwriter, 30
Broad Street, 12th Floor, New York, New York, or at such other place as shall be
agreed upon by the Underwriter and the Company. Such delivery and payment shall
be made at 10:00 a.m. (New York City time) on February __, 2000 or at such other
time and date as shall be agreed upon by the Underwriter and the Company (such
time and date of payment and delivery being herein called the "Closing Date").
In addition, in the event that any or all of the Option Securities are purchased
by the Underwriter, payment of the purchase price for, and delivery of
certificates for, such Option Securities shall be made at the above mentioned
office of the Underwriter or at such other place as shall be agreed upon by the
Underwriter and the Company on each Option Closing Date as specified in the
notice from the Underwriter to the Company. Delivery of the certificates for the
Firm Securities and Option Securities, if any, shall be made to the Underwriter
against payment by or on behalf of the Underwriter of the purchase price for the
Firm Securities and the Option Securities, if any, by wire transfer, certified
or official bank check or checks drawn upon or by a New York Clearing House Bank
and payable in same-day funds to the order of the Company, such payment to be
net of all amounts owed to the Underwriter under the terms of this Agreement
upon such date of payment including the underwriting discount, net
non-accountable
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<PAGE> 13
expenses and additional amounts owed under Section 5 of this Agreement and such
other amounts as the Company and Underwriter may agree. Certificates for the
Underwritten Securities shall be in definitive, fully registered form, shall
bear no restrictive legends and shall be in such denominations and registered in
such names as the Underwriter may request in writing at least 48 hours prior to
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Underwritten Securities shall be made available to the
Underwriter at such office or such other place as the Underwriter may designate
for inspection, checking and packaging at least 24 hours prior to Closing Date
or the relevant Option Closing Date, as the case may be. Notwithstanding the
foregoing, the Underwritten Securities may be delivered via electronic transfer
by the Depository Trust Company or an affiliate thereof.
(d) On the Closing Date, the Company shall issue and sell to the
Underwriter, or to bona fide officers of the Underwriter, Warrants to purchase
an aggregate of 140,000 shares of Common Stock at a purchase price of $.001 per
warrant. The Warrants shall be exercisable for a period of five years commencing
one year from the date hereof at a price equal to 120% of the initial public
offering price of the Underwritten Securities. The Warrant Agreement and form of
Warrant shall be substantially in the form filed as Exhibit 1.2 to the
Registration Statement. Payment for the Warrants shall be made by the
Underwriter to or upon the order of the Company on the Closing Date.
3. Public Offering of the Underwritten Securities. As soon after the
effective time of the Registration Statement as the Underwriter deems advisable,
the Underwriter shall make a public offering of the Underwritten Securities
(other than to residents of any jurisdiction in which the qualification of the
Underwritten Securities is required and has not become effective) at the price
and upon the other terms set forth in the Prospectus. The Underwriter may from
time to time increase or decrease the public offering price after the
distribution of the Underwritten Securities has been completed to such extent as
the Underwriter in its sole discretion deems advisable. The Underwriter may
enter into one or more agreements as the Underwriter, in its sole discretion,
deem advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto, if not effective at the time
of execution of this Agreement, to become effective as promptly as practicable
and will not at any time, whether before or after the effective date of the
Registration Statement, file any amendment to the Registration Statement or
supplement to the Prospectus or file any document under the Securities Act or
Exchange Act during any time that a prospectus relating to the securities is
required to be delivered under the Securities Act of which the Underwriter and
Underwriter's Counsel shall not previously have been advised and furnished with
a copy a reasonable period of time prior to the proposed filing, or to which the
Underwriter shall have reasonably objected or which is not in compliance with
the Securities Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriter and confirm the notice in writing, (i)
when the Registration Statement, as amended, becomes effective and, if the
provisions of Rule 430A
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<PAGE> 14
promulgated under the Securities Act will be relied upon, when the Prospectus
has been filed in accordance with said Rule 430A and when any post-effective
amendment to the Registration Statement becomes effective; (ii) of the issuance
by the Commission of any stop order or of the initiation, or the threatening, of
any proceeding, suspending the effectiveness of the Registration Statement or
any order preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution of
proceedings for that purpose; (iii) of the issuance by the Commission or by any
state securities commission of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose;
(iv) of the receipt of any comments from the Commission; and (v) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. The
Company will use its best efforts to prevent the issuance of any stop or
suspension order and if the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will make every effort to obtain promptly the lifting or withdrawal
of such order or suspension.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriter) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) on or before the date it is required to be filed under the
Securities Act and the Rules and Regulations.
(d) The Company shall, in cooperation with the Underwriter, at or
prior to the time the Registration Statement becomes effective, arrange for the
qualification of the Securities for offering and sale under the securities or
Blue Sky laws of such jurisdictions as the Underwriter may designate to permit
the continuance of sales and dealings therein for as long as may be reasonably
necessary to complete the distribution contemplated hereby and shall make such
applications, file such documents and furnish such information as may be
required for such purpose; provided, however, the Company shall not be required
to qualify as a foreign corporation, subject itself to taxation or file a
general consent to service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the Company will,
unless the Underwriter agrees that such action is not at the time necessary or
advisable, use all reasonable efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(e) During the time when a Prospectus is required to be delivered
under the Securities Act, the Company shall comply with all requirements imposed
upon it by the Securities Act and the Exchange Act, as now and hereafter amended
and by the Rules and Regulations, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the Securities
is required to be delivered under the Securities Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Underwriter's Counsel, the Prospectus, as then amended or supplemented, would
include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend the Prospectus to comply with the
14
<PAGE> 15
Securities Act or the Rules and Regulations, the Company will notify the
Representative promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Securities Act that
corrects such statement or omission or effects such compliance, each such
amendment or supplement to be satisfactory to Underwriter's Counsel, and the
Company will furnish to, or at the direction of, the Underwriter copies of such
amendment or supplement as soon as available and in such quantities as the
Underwriter may request.
(f) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the first day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year) the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Underwriter, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Securities Act and Rule 158(a) of
the Rules and Regulations, which statement need not be audited unless required
by the Securities Act.
(g) During the three-year period commencing on the date hereof, the
Company will furnish to its stockholders (i) as soon as practicable, but in any
event not later than 120 days after the last day of each annual fiscal period,
its audited statements of income, stockholders' equity and cash flows for such
period and its audited balance sheet as of the end of such period as to which
the Company's independent accountants have rendered an opinion; and (ii) as soon
as practicable, but in any event not later than 45 days after each of the first
three quarterly fiscal periods, its unaudited statements of income,
stockholders' equity and cash flows, for such period and its unaudited balance
sheet as of the end of such period. In addition, during the three-year period
commencing on the date hereof, the Company will deliver to the Underwriter:
(1) concurrently with furnishing such quarterly reports to its
stockholders, summary financial information of the Company, together
with a letter from the Company's President or Chief Executive Officer,
for each quarter in the form furnished to the Company's stockholders
and certified by the Company's principal financial or accounting
officer;
(2) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company at the end of the
preceding fiscal year, together with statements of income,
stockholders' equity and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of the Company's
independent certified public accountants;
(3) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(4) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
NASD or any securities exchange;
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<PAGE> 16
(5) within a reasonable amount of time prior to its release,
every press release and every material news item or article of interest
to the financial community with respect to the Company or its affairs
which was released or prepared by or on behalf of the Company; and
(6) any additional information of a public nature concerning
the Company (and any future subsidiaries) or its businesses which the
Representative may reasonably request.
During such three-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are required to be
consolidated under GAAP, and will be accompanied by similar financial statements
for any significant subsidiary which is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
(j) On or before the effective date of the Registration Statement,
the Company shall provide the Underwriter with true copies of the Lock-up
Agreements duly executed and delivered by each of the Company's officers,
directors, stockholders and persons holding warrants, options, rights or other
securities of the Company. For a period of 24 months following the effective
date of the Registration Statement, without the prior written consent of the
Underwriter, the Company shall not, directly or indirectly, issue, offer to
sell, sell, grant any option for the purchase or sale of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any securities of the
Company, including shares of capital stock of the Company, or securities or
other rights convertible into, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of capital stock of the Company
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein except for (i) shares of Common Stock
issued pursuant to this Agreement, (ii) the Warrants and (iii) the Warrant
Shares, provided, however, that the grant of options during the lock-up period
shall be conditioned upon receipt from the person to whom such options have been
granted of a duly executed Lock-up Agreement. For a period of three years after
the effective date of the Registration Statement, the Company shall give the
Underwriter written notice at least five business days, or as soon as
practicable, prior to any sales of the Company's securities to take place
pursuant to Rule 144 of the Rules and Regulations. Notwithstanding anything to
the contrary in this Agreement, for a period of 24 months following the
effective date of the Registration Statement, the Company will not file any
Registration Statement relating to any securities of the Company, without the
prior consent of the Underwriter.
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<PAGE> 17
(k) Neither the Company, nor any of its officers, directors, nor
any of their respective affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(l) The Company shall apply the net proceeds from the sale of the
Shares in substantially the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will
be used, directly or indirectly, to acquire any securities issued by the
Company. In addition, pending ultimate application, the Company shall invest all
unused proceeds in short and medium term interest-bearing securities guaranteed
by the U.S. Government or its agencies.
(m) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Securities Act, the
Exchange Act and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Securities Act, the Exchange Act, and the Rules and
Regulations.
(n) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two full business days prior thereto, a
copy of the latest available unaudited interim financial statements of the
Company (which in no event shall be as of a date more than 30 days prior to the
date of the Registration Statement) which have been read by the Company's
independent public accountants, as stated in their letters to be furnished
pursuant to Section 6(j) hereof.
(o) The Company shall use its best efforts to cause the Common
Stock to be traded on the Nasdaq SmallCap Market and the Pacific Stock Exchange
and for a period of five years from the date hereof, use its best efforts to
maintain the Nasdaq SmallCap Market and the Pacific Stock Exchange listing of
the Common Stock to the extent outstanding.
(p) For a period of two years from the Closing Date, the Company
shall cause to be furnished to the Representative directly from the Company's
transfer agent, at the Company's sole expense, daily consolidated transfer
sheets relating to the Common Stock.
(q) Within 30 days from the effective date of the Registration
Statement, take all necessary and appropriate actions to be included in Standard
and Poor's Corporation descriptions and to continue such inclusion for a period
of not less than five years from the effective date of the Registration
Statement.
(r) Except as contemplated by the Warrant Agreement, the Company
hereby agrees that it will not for a period of 24 months from the effective date
of the Registration Statement, adopt, propose to adopt or otherwise permit to
exist any employee, officer, director, consultant or compensation plan or
arrangement permitting (i) the grant, issue, sale or entry into any agreement to
grant, issue or sell any option, warrant or other contract right at an exercise
price that is less than the greater of the initial public offering price of the
Shares set forth herein and the fair market value on the date of grant or sale
except for ________ shares of Common
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<PAGE> 18
Stock issuable upon exercise of stock options granted pursuant to the Company's
_____ Stock Option Plan as of the effective date of the Registration Statement
which have an exercise price below the initial public offering price; (ii) the
maximum number of shares of Common Stock or other securities of the Company
purchasable at any time pursuant to options or warrants issued by the Company to
exceed _________ shares; (iii) the payment for such securities with any form of
consideration other than cash; or (iv) the existence of stock appreciation
rights, phantom options or similar arrangements.
(s) Until the completion of the distribution of the Underwritten
Securities, if any, the Company shall not without the prior written consent of
the Underwriter and Underwriter's Counsel, issue, directly or indirectly, any
press release or other communication or hold any press conference with respect
to the Company or its activities or the offering contemplated hereby, other than
trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations which
have been approved by Underwriter's Counsel.
(t) For a period equal to the lesser of (i) seven years from the
date hereof, and (ii) the sale to the public of the Warrant Shares, the Company
will not take any action or actions which may prevent or disqualify the use by
the Company of Form S-1, Form SB-2 or Form S-3 (or other appropriate form) for
the registration under the Securities Act of the Warrant Shares.
(u) For a period of three years following the Closing Date, the
Company will permit a designee of the Underwriter to observe meetings of the
Company's board of directors and shall provide to such designee, at the same
time provided to the members of the Company's board of directors, all notices,
minutes, documents, information and other materials generally provided to the
members of the Company's board of directors. The Company will reimburse the
designee directly for reasonable out-of-pocket expenses incurred in attending
board meetings, including, but not limited to, expenses for food, transportation
and lodging, and shall pay that designee the greater of (i) $1,500 per meeting
attended or (ii) the same cash attendance fee the Company pays to its outside
directors. During such three-year period, the Company will hold no less than
four formal in person meetings of its board of directors each year.
(v) Prior to the 90th day after the Closing Date, the Company will
provide the Underwriter and its designees with five sets of bound volumes of the
transaction documents relating to the Offering, in form and substance reasonably
satisfactory to the Underwriter.
(w) For a period of 18 months subsequent to the Closing Date, the
Company will retain the Underwriter in an investment banking advisory capacity
and the Company will pay the Representative as consideration for such advisory
services a fee of $4,000 per month.
(x) Prior to the Closing Date, the Company will deliver to the
Representative a reasonably detailed budget covering the period from the Closing
Date to the end of the Company's first fiscal year following the Closing Date.
In addition, during each of the next two succeeding fiscal years, the Company
will provide to the Representative, not less than
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<PAGE> 19
45 days prior to the beginning of such fiscal year, a reasonably detailed budget
covering such fiscal year approved by the Board of Directors. For each budget
period, the Company will also provide to the Representative financial statements
prepared in sufficient detail so as to allow comparison to the budgets.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date
and the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriter's Counsel, except as provided
in clause (iv) below) incident to the performance of the obligations of the
Company under this Agreement and the Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company; (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement, each Preliminary Prospectus, the
Prospectus and any amendments and supplements thereto, and the printing, mailing
(including the payment of postage with respect thereto) and delivery of this
Agreement, the Selected Dealer Agreements, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriter and such
dealers as the Underwriter may request; (iii) the printing, engraving, issuance
and delivery of the Securities, including, but not limited to, (A) the purchase
from the Company of the Underwritten Securities by the Underwriters, (B) the
purchase from the Company of the Warrants by the Underwriter, (C) the
consummation by the Company of any of its obligations under this Agreement and
the Warrant Agreement and (D) the resale of the Underwritten Securities by the
Underwriters in connection with the distribution contemplated hereby; (iv) the
qualification of the Securities under state or foreign securities or "Blue Sky"
laws and determination of the status of such securities under legal investment
laws, including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum" and the "Supplemental Blue Sky Memorandum," and fees and
disbursements of counsel incurred in connection therewith, which fees of counsel
shall not exceed $30,000; (v) advertising costs and expenses, including, but not
limited to, costs and expenses in connection with the "road show," information
meetings and presentations (including travel and hotel expenses of the
Underwriter), up to six copies of bound volumes, prospectus memorabilia and
expenses relating to "tomb-stone" advertisements which expenses shall not exceed
$15,000; (vi) costs and expenses in connection with due diligence
investigations, including, but not limited to, the reasonable fees of any
independent counsel or consultant retained; (vii) fees and expenses of the
transfer agent and registrar; (viii) the fees payable to the Commission and the
NASD; and (x) the fees and expenses incurred in connection with the inclusion of
the Underwritten Securities and Warrant Shares on the Nasdaq SmallCap Market,
any other over-the-counter market or any exchange. The Underwriter has received
$25,000 on account thereof.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 10(a) or Section 12, the Company shall
reimburse and indemnify the Underwriter for all of its actual out-of-pocket
expenses, including the fees and disbursements of Underwriter's Counsel, less
any amounts already paid pursuant to Section 5(c) hereof, provided, however,
that the maximum reimbursement for which the Company shall be liable pursuant to
this Section 5(b) shall not exceed $150,000, and provided, further, that if the
Agreement is terminated in accordance to Section 10(a)(v) due to the outbreak of
hostilities
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<PAGE> 20
between the United States and any foreign power (or in the case of any ongoing
hostilities, a material escalation thereof) or an outbreak of any other
insurrection or armed conflict involving the United States, the Company shall
reimburse and indemnify the Underwriter for an amount equal to 50% of the
Representative's actual out-of-pocket expenses subject to the maximum
reimbursement of $150,000.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to Section 5(a), it will pay to the Underwriter on the Closing
Date by certified or bank cashier's check or, at the Underwriter's election, by
deduction from the proceeds of the Offering, a non-accountable expense allowance
equal to 2% of the gross proceeds received by the Company from the sale of the
Firm Securities. In the event the Underwriters elect to exercise the
over-allotment option described in Section 2(b) hereof, the Company further
agrees to pay to the Underwriter, on each Option Closing Date, by certified or
bank cashier's check or, at the Underwriter's election, by deduction from the
proceeds of the Offering, a non-accountable expense allowance equal to 2% of the
gross proceeds received by the Company from the sale of the Option Securities on
such Option Closing Date.
(d) The Company warrants, represents and agrees that all payments
and reimbursements due pursuant to this Section 5 will be promptly and fully
made. If the Company shall fail to promptly and fully pay all amounts due
pursuant to this Section 5, the Company shall be liable to the Representative
for all attorneys' fees and costs incurred in connection with the collection of
such amounts.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York time, on the date hereof or such later date and
time as shall be approved in writing by the Underwriter, and, at the Closing
Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriter's Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Representative of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
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<PAGE> 21
(b) The Underwriter shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriter's opinion, is material, or omits to state a
fact which, in the Underwriter's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Underwriter's opinion, is material, or omits to state a fact
which, in the Underwriter's opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. No order suspending
the sale of the Securities in any jurisdiction shall have been issued on either
the Closing Date or the relevant Option Closing Date, if any, and no proceedings
for that purpose shall have been instituted or shall, to the knowledge of the
Underwriter, be threatened.
(c) On or prior to the Closing Date, the Underwriter shall have
received from Underwriter's Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Underwritten Securities,
Warrants, Warrant Shares, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriter's Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Underwriter shall have received the
opinion of The Otto Law Group, PLLC, counsel to the Company, dated the Closing
Date, addressed to the Underwriter and in form and substance satisfactory to
Underwriter's Counsel, to the effect that:
(1) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Washington; (B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations requires
such qualification or licensing; and (C) has all requisite corporate
power and authority, and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus, except where the
failure to hold such authorizations, approvals, orders, licenses,
certificates, franchises and permits would not cause a Material Adverse
Effect; the Company is and has been doing business in material
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state and local
laws, rules and regulations; the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely
affect the business, operations, condition, financial or otherwise, or
the earnings, business affairs, position, prospects, value, operation,
properties, business or results of operations of the Company;
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(2) the Company does not have any subsidiaries and does not
own any interest in any corporation, partnership, joint venture, trust
or other business entity;
(3) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under the caption "Capitalization," and the Company
is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and
the Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company
conform, or when issued and paid for, will conform in all respects to
all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of
the Company have been duly authorized and validly issued and are fully
paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto, and are not subject to personal
liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any
security of the Company. The Securities to be sold by the Company
hereunder and under the Warrant Agreement are not and will not be
subject to any preemptive or other similar rights of any stockholder,
have been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof and thereof, will be validly issued,
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to
any liability solely by reason of being such holders; all corporate
action required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Securities are in due and proper form. The Warrants
have been duly authorized and when validly issued, delivered and paid
for in the manner contemplated by the Warrant Agreement will constitute
valid and binding obligations of the Company entitled to the benefits
of the Warrant Agreement. The Warrant Shares will, upon exercise and
payment therefor in accordance with the Warrant Agreement, be duly
authorized, validly issued, fully paid and non-assessable, the Company
has duly authorized and reserved the Warrant Shares for issuance upon
exercise of the Warrants. Upon the issuance and delivery pursuant to
this Agreement and the Warrant Agreement of the Underwritten Securities
and Warrants, and assuming that the Underwriters are acquiring the
Underwritten Securities and the Underwriter is acquiring the Warrants
in good faith without notice of any adverse claim (within the meaning
of the Uniform Commercial Code as in effect in the State of New York),
the Underwriter, will acquire good and marketable title to the
Underwritten Securities and the Warrants, free and clear of any pledge,
lien, charge, claim, encumbrance, pledge, security interest or other
restriction or equity of any kind whatsoever. No transfer tax is
payable by or on behalf of the Underwriter in connection with (A) the
issuance by the Company of the Underwritten Securities, (B) the
purchase from the Company of the Underwritten Securities by the
Underwriter, (C) the purchase from the Company of the Warrants by the
Underwriter, (D) the consummation by the Company of any of its
obligations under this Agreement or the Warrant Agreement or (E) the
resales of the Underwritten Securities in connection with the
distribution contemplated hereby;
(4) the Registration Statement is effective under the
Securities Act, and, if applicable, filing of all pricing information
has been timely made in the
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<PAGE> 23
appropriate form under Rule 430A, and no stop order suspending the use
of the Preliminary Prospectus, the Registration Statement or Prospectus
or any part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or, to the best of such
counsel's knowledge after due inquiry, threatened or contemplated under
the Securities Act;
(5) each of any Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto
(other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
(6) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Securities Act
to be described in the Registration Statement and the Prospectus and
filed as exhibits to the Registration Statement other than those
described in the Registration Statement and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form SB-2; (C) there
is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give
rise to the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in
all respects), (y) questions the validity of the capital stock of the
Company or this Agreement and the Warrant Agreement or of any action
taken or to be taken by the Company pursuant to or in connection with
any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus that
is not described as required; and (E) except as disclosed in the
Prospectus, there is no action, suit or proceeding pending, or
threatened, against or affecting the Company before any court or
arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which there is a reasonable
possibility of an adverse decision which may result in a material
adverse change in the condition, financial or otherwise, earnings,
prospects, stockholders' equity, value, operations, properties,
business or results of operations of the Company;
(7) the Company has all necessary, corporate power and
authority to enter into each of this Agreement and the Warrant
Agreement and to consummate the transactions provided for herein and
therein; and each of this Agreement and the Warrant Agreement has been
duly authorized, executed and delivered by the Company. Each of this
Agreement and the Warrant Agreement, constitutes a legal, valid
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<PAGE> 24
and binding agreement of the Company enforceable against the Company in
accordance with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and
except as to those provisions relating to indemnity or contribution for
liabilities arising under the Act, as to which no opinion need be
expressed; and none of the Company's execution or delivery of this
Agreement and the Warrant Agreement, its performance hereunder or
thereunder, its consummation of the transactions contemplated herein or
therein, or the conduct of its businesses as described in the
Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or
will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or
result in the creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company, except as disclosed in the Prospectus,
pursuant to the terms of, (A) the certificate of incorporation or
by-laws of the Company; (B) any license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders agreement, note,
loan or credit agreement or any other agreement or instrument to which
the Company is a party or by which it is or may be currently bound or
to which any of its properties or assets (tangible or intangible) is or
may be subject, or any indebtedness; or (C) any statute, judgment,
decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any of its respective
activities or properties except with respect to clauses (B) or (C) for
conflicts, breaches, violations, defaults, creations or impositions
which do not and would not have a material adverse effect on the
condition, financial or otherwise, prospects, stockholders' equity,
value, operations, properties, business or results of operation of the
Company;
(8) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or other
body (other than such as may be required under Blue Sky laws or Rules
of the NASD, as to which no opinion need be rendered) is required in
connection with the issuance of the Underwritten Securities, the
issuance of the Warrants and the Warrant Shares, and the Registration
Statement, the performance of this Agreement and the Warrant Agreement,
and the transactions contemplated hereby and thereby (except consents,
approvals, authorizations or orders, and filings which have been
properly made or obtained);
(9) to the best of such counsel's knowledge, the properties
and business of the Company conform in all material respects to the
description thereof contained in the Registration Statement and the
Prospectus; and the Company has good and marketable title to (in all
material respects), or valid and enforceable leasehold estates in, all
items of real and personal property stated in the Prospectus to be
owned or leased by it, in each case free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and
payable;
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<PAGE> 25
(10) to the best of such counsel's knowledge, the Company is
not in breach of, or in default under, any term or provision of any
material license, contract, indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, partnership agreement, note, loan or credit agreement or any
other material agreement or instrument evidencing an obligation for
borrowed money, or any other material agreement or instrument to which
the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is
subject or affected, the effect of which could materially and adversely
affect the condition, financial or otherwise, earnings, prospects,
stockholders' equity, value, operations, properties, business or
results of operation of the Company; the Company is not in violation of
any term or provision of its certificate of incorporation, or by-laws
or in violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation;
(11) the statements in the Prospectus under "Business,"
"Management," "Certain Transactions," "Principal Shareholders" and
"Description of Securities," have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all
material respects;
(12) the Underwritten Securities and Warrant Shares have been
accepted for quotation, subject to official notice of issuance, on the
Nasdaq SmallCap Market and the Pacific Stock Exchange (for which
purpose counsel may rely on the opinion of Kelley, Drye & Warren, P.C.;
(13) to the best of such counsel's knowledge after due
inquiry, the persons listed under the caption "Principal Shareholders"
in the Prospectus are the respective "beneficial owners" (as such
phrase is defined in Regulation 13d-3 under the Exchange Act) of the
securities set forth opposite their respective names thereunder as and
to the extent set forth therein;
(14) to the best of such counsel's knowledge after due
inquiry, except as described in the Prospectus, no person, corporation,
trust, partnership, association or other entity has the right to
include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
(15) neither the execution and delivery by the Company of, nor
the performance of its obligations under this Agreement and the Warrant
Agreement nor the sale, issuance, execution or delivery by the Company
of the Underwritten Securities or Warrants will violate Regulation G,
T, U or X of the Federal Reserve Board; and
(16) the Company is not an "investment company," a company
controlled by, under common control with, or controlling an "investment
company" or a "promoter" or "principal underwriter" for an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended.
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<PAGE> 26
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted and to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriter's Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriter's Counsel. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Underwriters and they are justified in
relying thereon.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, and
representatives of the independent public accountants for the Company, at which
conferences the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus and related matters were discussed and, although such
counsel is not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement, on the basis of the foregoing, no facts have come to the
attention of such counsel which has lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Prospectus or amendment or
supplement thereto as of the date of such opinion contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial, statistical and
accounting data included in the Registration Statement or Prospectus or excluded
therefrom).
At each Option Closing Date, if any, the Representative shall have
received the favorable opinion of The Otto Law Group, PLLC, counsel to the
Company, dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of Option
Closing Date the statements made by The Otto Law Group, PLLC, in its opinion
delivered on the Closing Date.
(e) At Closing Date, the Representative shall have received the
opinion of Perkins Coie, patent and trademark counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriter's Counsel, to the effect that:
(1) any patents, trademarks, and patent or trademark searches
conducted with respect to any patent and/or trademark applications of the
Company are identified in such opinion;
(2) the descriptions in the Registration Statement with
respect to the status of such patents, trademarks and patent or trademark
applications are accurate;
(3) the Company owns the entire right, title and interest in
and to such patents, trademarks and patent or trademark applications as
described in the Prospectus
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<PAGE> 27
and has not received any notice of conflict with the asserted rights of others
in respect thereof; and
(4) the statements in the Prospectus relating to patents and
intellectual property (as specifically identified by such counsel), are true and
correct.
At each Option Closing Date, if any, the Representative shall have
received the favorable opinion of Perkins Coie, patent and trademark counsel to
the Company, dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of Option
Closing Date the statements made by ________________________ in its opinion
delivered on the Closing Date.
(f) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriter's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require and have requested
reasonably in advance for the purpose of enabling them to review or pass upon
the matters referred to in Section 6(c), or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company, or herein contained.
(g) On and as of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective material adverse change in the condition, financial or
otherwise, prospects, stockholders' equity or the business activities of the
Company, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is materially adverse to the Company; (iii) the
Company shall not be in default under any provision of any instrument relating
to any material outstanding indebtedness of the Company; (iv) the Company shall
not have issued any securities (other than the Underwritten Securities and
Warrants) or declared or paid any dividend or made any distribution with respect
to its capital stock of any class and there has not been any change in the
capital stock or any change in the debt (long or short term), except in the
ordinary course of business, or liabilities or obligations of the Company
(contingent or otherwise); (v) no material amount of the assets of the Company
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; (vi) no action, suit or proceeding, at law or in
equity, shall have been pending or threatened (or circumstances giving rise to
same) against the Company, or affecting any of its properties or business before
or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the condition, financial or otherwise, results of
operations, business or prospects of the Company, except as set forth in the
Registration Statement and Prospectus; and (vii) no stop order shall have been
issued under the Securities Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission or any state regulatory
authority.
(h) At each of the Closing Date and each Option Closing Date, if
any, the Underwriter shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the
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<PAGE> 28
Closing Date or Option Closing Date, as the case may be, to the effect that each
of such person has carefully examined the Registration Statement, the Prospectus
and this Agreement, and that:
(1) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing
Date or the Option Closing Date, as the case may be, and the Company
has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as
the case may be;
(2) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or, to
the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Securities Act;
(3) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, nor any amendment or supplement thereto
includes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Prospectus or any
amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(4) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus through the
Closing Date or the Option Closing Date, as the case may be: (a) the
Company has not incurred other than in the ordinary course of its
business, any material liabilities or obligations, direct or
contingent, except as disclosed in the Prospectus; (b) the Company has
not paid or declared any dividends or other distributions on its
capital stock, except as disclosed in the Prospectus; (c) the Company
has not entered into any transactions not in the ordinary course of
business, except as disclosed in the Prospectus; (d) there has not been
any change in the capital stock or long-term debt or any increase in
the short-term borrowings (other than any increase in the short-term
borrowings in the ordinary course of business) of the Company; (e) the
Company has not sustained any loss or damage to its property or assets,
whether or not insured; (f) there is no litigation which is pending or
threatened (or circumstances giving rise to same) against the Company
or any affiliated party of any of the foregoing which is required to be
set forth in an amended or supplemented Prospectus which has not been
set forth; and (g) there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(h) are to such documents as amended and supplemented at the date of such
certificate.
(i) On or prior to the date hereof, the Representative shall have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Underwriters, as described in the Registration Statement.
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<PAGE> 29
(j) At the time this Agreement is executed, the Underwriter shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the nature of the changes or decreases, if
any, referred to in clause (iii) below) in all respects to the Underwriter and
Underwriter's Counsel, from Ernst & Young LLP:
(1) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the
Securities Act and the applicable Rules and Regulations;
(2) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Securities Act and the
Rules and Regulations thereunder and that the Underwriters may rely
upon the opinion of Ernst & Young LLP with respect to the financial
statements and supporting schedules included in the Registration
Statement;
(3) stating that, on the basis of procedures which included a
reading of the latest available unaudited interim financial statements
of the Company (with an indication of the date of the latest available
unaudited interim financial statements), a reading of the latest
available minutes of meetings and actions of the stockholders, the
board of directors and the Audit Committee of the board of directors of
the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the financial information
contained in the Registration Statement and Prospectus does not comply
as to form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules and Regulations or is
not fairly presented in conformity with generally accepted accounting
principles applied on a basis consistent with that of the audited
financial statements of the Company; or (B) at a specified date not
more than five days prior to the date of delivery of such letter, there
has been any change in the capital stock or long-term debt of the
Company, or any decrease in the shareholders' equity or net current
assets or net assets of the Company as compared with amounts shown in
the September 30, 1999 balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during the
period from September 30, 1999 to a specified date not more than five
days prior to the date of delivery of such letter, there was any
decrease in gross revenue, gross profit, operating income, net income
or net income per share of the Company, in each case as compared with
the corresponding period beginning October 1, 1999 other than as set
forth in or contemplated by the Registration Statement, or, if there
was any such decrease, setting forth the amount of such decrease;
(4) setting forth, at a date not later than five days prior to
the date of delivery of such letter, the amount of liabilities of the
Company (including a break-down of commercial paper and notes payable
to banks);
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<PAGE> 30
(5) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth (in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel), with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letter and found them to be in agreement;
(6) stating that they have never brought to the attention of
any of the Company's management any "weakness," as defined in Statement
of Auditing Standard No. 60 "Communication of Internal Control
Structure Related Matters Noted in an Audit," in any of the Company's
internal controls; and
(7) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriter may reasonable
request.
(k) At Closing Date and each Option Closing Date, if any, the
Representative shall have received from Ernst & Young LLP, a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm that statements made in the letter furnished pursuant to
Section 6(j) hereof, except that the specified date referred to shall be a date
not more than five days prior to Closing Date or the Option Closing Date, as the
case may be, and, if the Company has elected to rely on Rule 430A of the Rules
and Regulations, to the further effect that they have carried out procedures as
specified in clause (v) of Section 6(j) with respect to certain amounts,
percentages and financial information as specified by the Representative and
deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and
have found such amounts, percentages and financial information to be in
agreement with the records specified in such clause (v).
(l) On each of the Closing Date and Option Closing Date, if any,
there shall have been duly tendered to, or at the direction of, the Underwriter
the appropriate number of Underwritten Securities.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative shall have been issued on either
the Closing Date or the Option Closing Date, if any, and no proceedings for that
purpose shall have been instituted or shall be contemplated.
(n) On or before the Closing Date, the Company shall have executed
and delivered to the Representative, (i) the Warrant Agreement substantially in
the form filed as Exhibit 1.2 to the Registration Statement in final form and
substance satisfactory to the Representative, and (ii) the Warrants in such
denominations and to such designees as shall have been provided by the
Underwriter to the Company.
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(o) On or before Closing Date, the Underwritten Securities and
Warrant Shares shall have been duly approved for quotation on the Nasdaq Small
Cap Market and Pacific Stock Exchange, subject to official notice of issuance.
(p) On or before Closing Date, there shall have been delivered to
the Representative, Lock-up Agreements from each of the Company's directors,
officers, stockholders, and persons holding warrants, options, rights or other
securities of the Company, in form and substance satisfactory to Underwriters'
Counsel.
(q) Trading in the Common Stock shall not have been suspended by
the Nasdaq SmallCap Market or the Pacific Stock Exchange at any time after the
date hereof.
(r) Prior to the Closing Date, the Underwriter shall have received
from the Company a reasonably detailed budget covering the period from the
Closing Date to the end of the Company's first fiscal year following the Closing
Date together with financial statements of the Company prepared in sufficient
detail so as to allow comparison to the budget.
(s) All relevant terms, conditions and circumstances relating to
the Offering shall be reasonably satisfactory to the Underwriter.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to the Representative.
If any condition to the Underwriter's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Underwriter may terminate this
Agreement or, if the Underwriter so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter (for purposes of this Section 7, "Underwriter" shall include the
officers, directors, partners and employees of the Underwriter), and each
person, if any, who controls the Underwriter ("controlling person") within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions, proceedings, suits and litigation
with respect thereto), whatsoever (including, but not limited to, any and all
expenses whatsoever reasonably incurred in investigating, preparing or defending
against any action, suit, proceeding or litigation, commenced or threatened, or
any claim whatsoever), as such are incurred, to which any Underwriter or any
such controlling person may become subject under the Securities Act, the
Exchange Act or any other statute or at common law or otherwise, insofar as such
losses, claims, damages, expenses or liabilities arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new registration statement and prospectus in
which is included securities of the Company issued or issuable upon exercise of
the Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively
31
<PAGE> 32
called "application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Securities
under the securities laws thereof or filed with the Commission, any state
securities commission or agency, Nasdaq or any other securities exchange; or
arise out of or are based upon the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Preliminary Prospectus and
Prospectus, in the light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon and in conformity
with the Underwriter's Information and provided, further, that with respect to
any untrue statement or omission or alleged untrue statement or omission made in
any Preliminary Prospectus or the Prospectus, the indemnification provided for
herein shall not apply to any loss, liability, claim, damage or expense to the
extent the same results from the sale of Securities to a person to whom there
was not sent or given, at or prior to the written confirmation of such sale, a
copy of the Prospectus, or in the case of an untrue statement or omission or
alleged untrue statement or omission in the Prospectus, a copy of the amended
Prospectus or supplement thereto, if the Company has previously furnished
sufficient copies thereof, based upon the number of copies requested by the
Underwriters, to the Underwriters a reasonable time in advance and the claim,
damage or expense of such person results from an untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
a Preliminary Prospectus or Prospectus that was corrected in the Prospectus or
amendment or supplement thereto.
The indemnity agreement in this Section 7(a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement and each other person, if any, who controls the Company
within the meaning of the Securities Act, to the same extent as the foregoing
indemnity from the Company to the Underwriter but only with respect to
statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with the Underwriter's Information.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim with respect thereto is to be made against
one or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from: (i)
any liability which it may have under this Section 7(a) or (b) hereof unless and
to the extent that it has been prejudiced in any material respect by such
failure or from the forfeiture of substantial rights and defenses or (ii) any
liability which it may have otherwise). In case any such action, suit or
proceeding is brought against any indemnified party, and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall
32
<PAGE> 33
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld or delayed.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case; or (ii) contribution under the Securities Act may be required on the part
of any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or liabilities
(or actions, suits, proceedings or litigation with respect thereto) (A) in such
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties, on the one hand, and the party to be indemnified on
the other hand, from the offering of the Securities; or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by of the Company on
the one hand, and the Underwriter, on the other, shall be deemed to be in the
same proportion as the total net proceeds from the offering of the Securities
(before deducting expenses) bear to the total underwriting discounts received by
the Underwriter hereunder, in each case as set forth in the table on the cover
page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by the Underwriter, 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 with respect thereto)
referred to above in this Section 7(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action, claim, suit, proceeding or
litigation. Notwithstanding the provisions of this Section 7(d), the Underwriter
shall not be required to contribute any amount in excess of the underwriting
33
<PAGE> 34
discount applicable to the Securities purchased by the Underwriter hereunder. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning of
the Securities Act, each officer of the Company who has signed the Registration
Statement, and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to this Section 7(d). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party with respect
to which a claim for contribution may be made against another party or parties
under this Section 7(d), notify such party or parties from whom contribution may
be sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this Section 7(d), or to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company, as the case may be, and the respective
indemnity agreements contained in Section 7 hereof, shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
the Underwriter, the Company, any controlling person of the Underwriter or the
Company, and shall survive termination of this Agreement or the issuance and
delivery of the Underwritten Securities and Warrants to the Underwriter.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Underwritten Securities for
the sale to the public; provided, however, that the provisions of this Section 9
and Sections 5, 7 and 10 of this Agreement shall at all times be effective. For
purposes of this Section 9, the Securities to be purchased hereunder shall be
deemed to have been so released upon the earlier of dispatch by the Underwriter
of electronic communications (facsimile or e-mail) to securities dealers
releasing such shares for offering or the release by the Underwriter for
publication of the first newspaper advertisement which is subsequently published
relating to the Underwritten Securities.
10. Termination.
(a) This agreement may be terminated with respect to the Firm
Securities or Option Securities, if any, in the sole discretion of the
Underwriter by notice to the Company given prior to the Closing Date or the
relevant Option Closing Date, respectively, in the event that all obligations
set forth in Section 6 have not been performed or satisfied or the Company shall
have failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at or prior
thereto or if at or prior to the Closing Date or such Option Closing Date,
respectively:
34
<PAGE> 35
(1) the Company sustains a loss by reason of explosion, fire,
flood, accident or other calamity, which, in the reasonable opinion of
the Representative, substantially affects the value of the properties
of the Company or which materially interferes with the operation of the
business of the Company regardless of whether such loss shall have been
insured; there shall have been a Material Adverse Effect, or any
development involving a prospective Material Adverse Effect (including,
without limitation, a change in management or control of the Company),
in the business, operations, condition, financial or otherwise,
earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company, except in
each case as described in or contemplated by the Prospectus (exclusive
of any amendment or supplement thereto); or Mr. Marlin Eller shall have
suffered any injury or disability of a nature that could materially
adversely affect his ability to function as President and Chief
Executive Officer of the Company;
(2) any material action, suit or proceeding shall be
threatened, instituted or pending, at law or in equity, against the
Company or any of its directors or executive officers, by any person or
by any federal, state or other governmental or regulatory commission,
board or agency;
(3) trading in the Common Stock shall have been suspended by
the Commission, the NASD or Pacific Stock Exchange or trading in
securities generally on the New York Stock Exchange, American Stock
Exchange or the over-the-counter market shall have been suspended or
minimum or maximum prices shall have been established on either such
exchange or quotation system;
(4) a moratorium on banking activities shall have been
declared by New York or United States authorities; or
(5) there shall have been (A) an outbreak of hostilities
between the United States and any foreign power (or, in the case of any
ongoing hostilities, a material escalation thereof); (B) an outbreak of
any other insurrection or armed conflict involving the United States;
or (C) any other calamity or crisis or material change in financial,
political or economic conditions, having an effect on the financial
markets that, in the reasonable judgment of the Underwriter, makes it
impracticable or inadvisable to proceed with the Offering or the
delivery of the Securities as contemplated by the Registration
Statement, as amended, as of the date hereof.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 10(a) or Section 12, or if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Underwriter, by reason of any failure on the
part of the Company to perform any undertaking or satisfy any condition of this
Agreement by it to be performed or satisfied (including, without limitation,
pursuant to Section 6, Section 10(a) or Section 12), the Company shall promptly
reimburse and indemnify the Underwriter for all of its out-of-pocket expenses,
including the fees and disbursements of Underwriter's Counsel (less amounts
previously paid pursuant to Section 5(c) above). In addition, the Company shall
remain liable for all Blue Sky counsel fees and expenses and Blue Sky filing
fees. Notwithstanding any contrary provision contained in this Agreement, any
35
<PAGE> 36
election hereunder or any termination of this Agreement (including, without
limitation, pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not
this Agreement is otherwise carried out, the provisions of Section 5 and Section
7 shall not be in any way affected by such election or termination or failure to
carry out the terms of this Agreement or any part hereof.
11. [Intentionally Omitted]
12. Default by the Company. If the Company shall fail at the Closing
Date or any Option Closing Date, as applicable, to sell and deliver the number
of Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriter may
at its option, by notice from the Underwriter to the Company, terminate the
Underwriter's obligation to purchase Option Securities from the Company on such
date) without any liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant
to this Section 12 shall relieve the Company from liability, if any, with
respect to such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given when delivered in person, by facsimile or recognized courier.
Notices to the Underwriter shall be directed to it at Joseph Gunnar & Co., LLC,
30 Broad Street, 12th Floor, New York, New York 10004, Attention: Joseph A.
Alagna, Jr., with a copy to Kelley Drye & Warren LLP, Two Stamford Plaza, 281
Tresser Boulevard, Stamford, Connecticut 06901, Attention: M. Ridgway Barker,
Esq. and Ruskin, Moscou, Evans & Faltischek, P.C., 170 Old Country Road,
Mineola, New York 11501, Attention: Stuart M. Sieger, Esq. Notices to the
Company shall be directed to the Company at 223 Taylor Avenue North, Suite 200,
Seattle, Washington 98109-5017, Attention: Chief Executive Officer, with a copy
to The Otto Law Group, PLLC, 999 Third Avenue, Suite 3210, Seattle, Washington
98104, Attention: David M. Otto, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or with respect to or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to be
a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the Warrant
Agreement constitute the entire agreement of the parties hereto and supersede
all prior written or oral agreements, understandings and negotiations with
respect to the subject matter hereof. This
36
<PAGE> 37
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
SUNHAWK.COM CORPORATION
By:
------------------------------------
Name:
Title:
Confirmed and accepted as of
the date first above written.
JOSEPH GUNNAR & CO., LLC
By:
---------------------------------
Name: Joseph A. Alagna, Jr.
Title: A Member
37
<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
Securities to
Name of Underwriter be Purchased
- ------------------- ------------
<S> <C>
Joseph Gunnar & Co., LLC 1,400,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 1.2
UNDERWRITER'S WARRANT AGREEMENT
This UNDERWRITER'S WARRANT AGREEMENT has been made and entered into as
of February ___, 2000, by and between SUNHAWK.COM CORPORATION, a Washington
corporation (the "Company"), and JOSEPH GUNNAR & CO., LLC, a New York limited
liability company (the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter, warrants
(the "Warrants") to purchase up to an aggregate of 140,000 shares of common
stock, $.0001 par value per share, of the Company (the "Common Stock");
WHEREAS, the Underwriter has agreed pursuant to the Underwriting
Agreement (the "Underwriting Agreement") dated as of February ___, 2000, by and
between the Company and the Underwriter, to act as Underwriter in connection
with the Company's proposed public offering (the "Offering") of 1,400,000 shares
of Common Stock at an initial public offering price of $_________ per share of
Common Stock; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriter, or its designees, in consideration
for, and as part of the Underwriter's compensation in connection with, the
Representative acting as such pursuant to the terms of the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises hereof, the payment by
the Underwriter to the Company of an aggregate of $140, the agreements herein
set forth and other good and valuable consideration, hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Underwriter is hereby granted the right to purchase, at
any time from ____________, 2001, until 5:30 P.M., New York time, on
_____________, 2005 (the "Expiration Date"), up to an aggregate of 140,000
shares of Common Stock (the "Shares" or "Warrant Securities") (subject to
adjustment as provided in Section 8 hereof) at the initial Exercise Price (as
hereinafter defined) (subject to the terms and conditions of this Agreement).
Except as set forth herein, the Shares issuable upon exercise of the Warrants
will be in all respects identical to the shares of Common Stock being purchased
by the Underwriter for resale to the public pursuant to the terms and provisions
of the Underwriting Agreement. Any Warrant that is not exercised on or prior to
the Expiration Date shall be void and all rights hereunder shall cease.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
<PAGE> 2
3. Exercise of Warrant.
3.1 Method of Exercise. The Warrants are exercisable at the
Exercise Price payable by certified or official bank check in New York Clearing
House funds. Upon surrender of a Warrant Certificate with a duly executed
Election to Purchase (in the form of Annex A to the Warrant Certificate),
together with payment at the Company's principal offices (presently located at
223 Taylor Avenue North, Suite 200, Seattle, Washington 98109) of the aggregate
Exercise Price of the Warrants being exercised, the registered holder of a
Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of the Common Stock underlying the Warrants). In the case of the purchase
of less than all the shares of Common Stock purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrants exercisable thereunder.
3.2 Exercise by Surrender of Warrants. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, Holders shall have the right, at any time, and from time to
time, to exercise the Warrants in full or in part by surrendering Warrant
Certificates representing a certain number of additional Warrants as payment of
the aggregate Exercise Price for the shares of Common Stock being acquired upon
exercise of the Warrants. The Warrants are exercisable pursuant to this Section
3.2 by surrender of the Warrant Certificate with a duly executed Election to
Purchase (in the form of Annex B to the Warrant Certificate) and surrender of a
certain number of Warrants in addition to those being exercised. The number of
additional Warrants to be surrendered in payment of the aggregate Exercise Price
for the Warrants being exercised shall be determined by multiplying the number
of Warrants to be exercised by the Exercise Price, and then dividing the product
thereof by an amount equal to the Market Price (as defined below). Solely for
the purposes of this Section 3.2, Market Price shall be calculated either (i) on
the date which the Election to Purchase (in the form of Annex B to the Warrant
Certificate) is deemed to have been sent to the Company pursuant to Section 13
hereof ("Notice Date") or (ii) as the average of the Market Prices for each of
the five trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported bid prices for the last three trading days, in either case as
officially reported by the Nasdaq SmallCap Market or the principal securities
exchange on which the Common Stock is listed or admitted to trading or by the
Nasdaq National Market (collectively, "NASDAQ"), or, if the Common Stock is not
quoted by the Nasdaq SmallCap Market listed or admitted to trading on any
national securities exchange or quoted by NASDAQ, the average closing bid price
as furnished by the NASD or similar organization, or if the Common Stock is not
quoted on the Nasdaq SmallCap Market, as determined in good faith by resolution
of the Board of Directors of the Company, based on the best information
available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the total number of whole shares of Common Stock
for which such Warrants
2
<PAGE> 3
were exercised shall be made promptly (and in any event within five business
days thereafter) without charge to the Holder thereof including, without
limitation, any stock transfer or similar tax which may be payable with respect
to the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable with respect to any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares underlying the Warrants shall be executed on behalf of the Company by the
manual or facsimile signature of the then present Chairman of the Board of
Directors or President of the Company under its corporate seal reproduced
thereon and by the then present Treasurer or Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer. Certificates
representing the shares of Common Stock issuable upon exercise of the Warrants
shall be dated the date on which the Company receives the Election to Purchase,
Warrant Certificate and payment of the Exercise Price.
5. Restriction on Transfer of Warrants. The Warrants may not be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, except that the Warrants may be (i) assigned in whole or part to any
officer or partner of the Underwriter and (ii) transferred by operation of law
as a result of the death or divorce of any transferee to whom the Warrants may
have been transferred. Any assignment shall be effected by a duly executed
assignment in the form of Annex C to the Warrant Certificate.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise
price of each Warrant shall be $[________] per share of Common Stock. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, as the case may
be.
7. Registration Rights.
7.1 Piggyback Registration. If, at any time commencing after
February ____, 2001 and expiring five years thereafter, the Company proposes to
register any of its securities under the Securities Act of 1933, as amended (the
"Securities Act") (other than pursuant to a Form S-4, Form S-8 or any other
successor form of limited purpose), it will give written notice by registered
mail at least 30 days prior to the filing of each such registration statement,
to the Underwriter and to all other Holders of Warrants and Warrant Securities
of its intention to do so. If the Underwriter or other Holders of Warrants and
Warrant Securities notify the Company
3
<PAGE> 4
within 20 business days after receipt of any such notice of its or their desire
to include any of their respective Warrant Securities in such proposed
registration statement, the Company shall afford the Underwriter and such
Holders of Warrants and Warrant Securities the opportunity to have any such
Warrant Securities registered under such registration statement, provided,
however, that if the managing underwriter advises the Company in writing that
the inclusion of all Warrant Securities that Holders have proposed be included
in such registration statement would interfere with the successful marketing of
the securities proposed to be registered by the Company, then the securities to
be included in such registration statement shall be included in the following
order:
(a) first, the securities proposed to be included in
such registration by the Company or, if such registration is for securities of
specified security holders of the Company, by such holders;
(b) second, the Warrant Securities held by the
Holders requested to be included in such registration; and
(c) third, all other holders of Common Stock entitled
to be included in such registration statement (pro rata among the holders
requesting such registration based upon the number of shares of Common Stock
requested by each such holder to be registered).
Notwithstanding the provisions of this Section 7.1, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.1 (irrespective of whether a written request
for inclusion of any such Warrant Securities shall have been made) to elect not
to file any such proposed registration statement or to withdraw the same after
the filing but prior to the effective date thereof.
7.2 Demand Registration.
(a) At any time commencing on February ____, 2001 and
expiring four years thereafter (which date is the fifth anniversary of the
effective date of the Registration Statement on Form SB-2 (File No. 333-80849))
(or such earlier time as the Warrant Securities are eligible for sale under Rule
144(k), the Holders of the Warrants and/or Warrant Securities representing at
least 50% of such securities (assuming the exercise of all of the Warrants)
shall have the right (which right is in addition to the registration rights
under Section 7.1 hereof), exercisable by written notice to the Company, on one
occasion only to request to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), a registration statement
and such other documents, including a prospectus, as may be necessary in the
opinion of counsel for the Company and, if either the Underwriter or a majority
of the Holders electing to participate in the registration requested pursuant to
this Section 7.2(a) have retained counsel in connection with such registration,
counsel for each of the Underwriter and a majority of the Holders electing to
participate in such registration, in order to comply with the provisions of the
Securities Act, so as to permit a public offering and sale of their respective
Warrant Securities for nine consecutive months by such Holders and any other
Holders of the Warrants and/or Warrant Securities who notify the Company of
their decision to join within 15 days after receiving notice from the Company
pursuant to Section 7.2(b).
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(b) The Company covenants and agrees to give written
notice of any registration request under this Section 7.2 by any Holder or
Holders to all other registered Holders of Warrants and Warrant Securities
within ten days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under
Section 7.1 and Section 7.2(a), at any time commencing after February ____, 2001
and expiring four years thereafter (or such earlier time as the Warrant
Securities are eligible for sale under Rule 144(k)), any Holder(s) of Warrants
and/or Warrant Securities shall have the right, exercisable by written request
to the Company, to require the Company to prepare and file, with the Commission
a registration statement and such other documents, including a prospectus, as
may be necessary in the opinion of counsel for the Company and, if either the
Underwriter or a majority of the Holders electing to participate in the
registration requested pursuant to this Section 7.2(c) have retained counsel in
connection with such registration, counsel for each of the Underwriter and the
majority of the Holders electing to participate in such registration, so as to
permit a public offering and sale for nine consecutive months by any such
Holder(s) of their respective Warrant Securities, provided, however, that (i) a
minimum of 50% of the Warrant Securities issuable upon exercise of the Warrants
issued on the date hereof must be registered under such registration statement,
and (ii) the provisions of Section 7.3(b) hereof shall not apply to any such
registration request and all reasonable costs, fees and expenses in connection
therewith, including, without limitation, registration fees, legal and
accounting fees, printing fees, blue sky fees and expenses, that have been
approved in advance by a majority of the Holders participating in such
registration, shall be at the expense of the Holder or Holders making such
request.
(d) Notwithstanding the provisions of Sections 7.2(a)
and 7.2(c), if the Company shall not have filed a registration statement
relating to the Warrant Securities within the time period specified in Section
7.3(a) hereof, the Company shall have the obligation, upon the written notice of
election of at least 50% of the Holders of the Warrants and/or Warrant
Securities, to repurchase (i) any and all Warrant Securities held by such
persons at the higher of the Market Price per share of Common Stock on (x) the
date of the notice sent pursuant to Section 7.2(a) or (y) the expiration of the
period specified in Section 7.3(a) and (ii) any and all Warrants at such Market
Price less the Exercise Price of such Warrant. Such repurchase shall be in
immediately available funds and shall close within two days after the later of
(i) the expiration of the period specified in Section 7.3(a) or (ii) the
delivery of the written notice of election specified in this Section 7.2(d).
(e) Notwithstanding the provisions of Sections 7.2(a)
and (c), if at any time during which the Company is obligated to maintain the
effectiveness of a registration statement pursuant to such Sections 7.2(a) and
(c), the Company's Board of Directors, after the consultation with counsel to
the Company (which counsel shall be experienced in securities matters) has
determined in good faith that the filing of such registration statement or the
compliance by the Company with its disclosure obligations thereunder would
require the disclosure of material information which the Company has a bona fide
business purpose for preserving as confidential, then the Company may delay the
filing or the effectiveness of such registration statement (if not then filed or
effective, as appropriate) and shall not be required to maintain the
effectiveness thereof for a period expiring upon the earlier to occur of (i) the
date on which such information is disclosed to the public or ceases to be
material or the Company is so
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<PAGE> 6
able to comply with its disclosure obligations or (ii) 30 days after the
Company's Board of Directors makes such good faith determination. There shall
not be more than one such delay period with respect to any registration pursuant
to Section 7.2(a) or (c). Notice of any such delay period and of the termination
thereof will be promptly delivered by the Company to each Holder and shall be
maintained in confidence by each such Holder.
7.3 Covenants of the Company with Respect to Registration. In
connection with any registration under Section 7.1 or 7.2 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement, as soon as practicable, but in any event within 60 days
of receipt of any demand therefor, shall use its best efforts to have any
registration statement declared effective at the earliest possible time and
shall furnish each Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested; provided, however, that the
Company shall not be obligated to effect such registration under the Securities
Act except in accordance with the following provisions:
(i) the Company shall not be obligated to
use its best efforts to file and cause to become effective any
registration statement for a period of up to 90 days if at the
time of such request any other registration statement pursuant
to which shares of Common Stock of the Company are to be or
were sold has been filed with the Commission and not withdrawn
or has been declared effective within the prior 60 days; and
(ii) the Company may delay the filing or
effectiveness of the registration statement for a period of up
to 90 days after the date of a request for registration if at
the time of such request the Company is engaged in a firm
commitment underwritten public offering of Common Stock in
which the Holders may include their Warrant Securities
pursuant to Section 7.1 hereof.
(b) The Company shall pay all costs, fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.1 and 7.2(a) hereof (excluding fees and expenses of the Underwriter's
and Holders' counsel and accountants and any underwriting or selling
commissions) including, without limitation, the Company's legal and accounting
fees, printing expenses, blue sky fees and expenses. The Holder(s) whose Warrant
Securities are the subject of a Registration Statement filed pursuant to Section
7.2(c) will pay all reasonable costs, fees and expenses in connection therewith,
including, without limitation, registration fees, legal and accounting fees,
printing fees, blue sky fees and expenses that have been approved in advance by
a majority of the Holders participating in such registration. If the Company
shall fail to comply with the provisions of Section 7.3(a) hereof, the Company
shall, in addition to any other equitable or other relief available to such
Holders, extend the Expiration Date by such number of days as shall equal the
delay caused by the Company's failure and be liable for any or all incidental,
special and consequential damages sustained by such Holders.
(c) The Company will take all necessary action which
may be required in qualifying or registering the Warrant Securities included in
a registration statement for
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<PAGE> 7
offering and sale under the securities or blue sky laws of such states as
reasonably are requested by the Holder(s), provided, that, the Company shall not
be obligated to qualify generally to do business in any jurisdiction where it is
not then so qualified or to take any action which would subject it to general
service of process or to taxation in any jurisdiction where it is not then so
subject.
(d) The Company shall furnish without charge to each
Holder of Warrant Securities, promptly after filing thereof with the Commission,
at least one copy of the registration statement filed pursuant to Section 7.1 or
7.2 (a "Registration Statement") and each amendment thereto or each amendment or
supplement to the prospectus included therein (the "Prospectus") including all
financial statements and schedules, documents incorporated by reference therein
and if the Holder so requests in writing, all exhibits thereto.
(e) The Company shall take such action as may be
reasonably necessary so that (i) the Registration Statement and any amendment
thereto and any Prospectus forming a part thereof and any supplement or
amendment thereto complies in all material respects with the Securities Act and
the rules and regulations thereunder, (ii) the Registration Statement and any
amendment thereto (in either case, other than with respect to written
information furnished to the Company by or on behalf of any Holder specifically
for inclusion therein) does not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make any statement therein not misleading and (iii) the Prospectus and any
supplement thereto (in either case, other than with respect to such information
from Holders), does not include an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(f) The Company shall promptly advise the Holders of
Warrant Securities registered under the Registration Statement (which advice
pursuant to clauses (ii) - (iv) shall be accompanied by an instruction to
suspend the use of the Prospectus until the requisite changes have been made)
and, if requested by such persons, shall confirm such advice in writing:
(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
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<PAGE> 8
(iv) of the happening of any event that
requires the making of any changes in the Prospectus so that,
as of such date, the Prospectus does not contain an untrue
statement of a material fact and does not omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading.
(g) If at any time the Commission shall issue any
stop order suspending the effectiveness of the Registration Statement, or any
state securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the Warrant
Securities under state securities or Blue Sky laws, the Company shall use its
reasonable best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(h) The Company shall, during the period the Company
is obligated to maintain the effectiveness of a Registration Statement under
Section 7.2 hereof, deliver to each Holder of Warrant Securities included under
the Registration Statement, without charge, such reasonable number of copies of
the Prospectus (including each preliminary prospectus) included in the
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request to facilitate the public sale or other disposition of the
Warrant Securities by the selling Holder.
(i) The Company shall cooperate with the Holders and
the underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Warrant Securities to be sold under the Registration
Statement, free of any restrictive legends and in such denominations and
registered in such names as the Holders or the underwriter(s), if any, may
reasonably request in connection with the sales of Warrant Securities pursuant
to the Registration Statement.
(j) Upon the occurrence of any event contemplated by
Section 7.3(f)(ii) - (iv) hereof or any request by the Commission for any
amendments to the Registration Statement or for additional information relating
thereto or the happening of any event that requires the making of any changes in
the Registration Statement, the Company shall file (and use its reasonable best
efforts to have declared effective as soon as possible) a post-effective
amendment to the Registration Statement or an amendment or supplement to the
Prospectus or file any other required document so that, as thereafter delivered
to the purchasers of Warrant Securities registered under the Registration
Statement, the Prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
in light of the circumstances under which they were made not misleading. Each
Holder of Warrant Securities registered under the Registration Statement agrees
by acquisition of such Warrant Securities that, upon receipt of any notice from
the Company of the existence of any fact of the kind described in Section
7.3(f)(ii) - (iv) hereof, such Holder will forthwith discontinue disposition of
Warrant Securities pursuant to the Registration Statement until such Holder
receives copies of the supplemented or amended Prospectus contemplated by this
Section 7.3(j), or until such Holder is advised in writing by the Company that
the use of the Prospectus may be resumed, and such Holder has received copies of
any additional or supplemental filings which are incorporated by reference in
the Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent
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<PAGE> 9
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.
(l) The Company shall not permit the inclusion of any
securities other than Warrant Securities to be included in any Registration
Statement filed pursuant to Section 7.2(a) or 7.2(c) hereof without the prior
written consent of the Holders representing a majority of the Holders then
requesting registration under such Section 7.2(a) or Section 7.2(c),
respectively.
(m) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such Registration Statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) if and
to the extent permitted by Statement of Auditing Standards No. 72, a "cold
comfort" letter dated the effective date of such Registration Statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such Registration Statement, in each case covering
substantially the same matters with respect to such Registration Statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(n) The Company shall as soon as practicable after
the effective date of the Registration Statement, and in any event within 15
months thereafter, make "generally available to its security holders" (within
the meaning of Rule 158 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.
(o) The Company shall deliver promptly to each Holder
participating in the offering upon request, and to the managing underwriters, if
any, copies of all correspondence between the Commission and the Company, its
counsel or accountants and all memoranda relating to discussions with the
Commission or its staff with respect to the Registration Statement and shall
permit each Holder and such underwriters to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the Registration Statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent accountants, all to
such reasonable extent and at such reasonable times and as often as any Holder
or underwriter shall reasonably request.
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(p) With respect to the registration of Warrant
Securities pursuant to Section 7.2 to be sold to an underwriter for reoffering
to the public, the Company shall negotiate in good faith with respect to
entering into an underwriting agreement with the managing underwriters selected
for such underwriting by Holders holding a majority of the Warrant Securities
requested to be included in such underwriting, which may include the
Underwriter. Such agreement shall be satisfactory in form and substance to the
Company, each Holder and such managing underwriter and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Warrant Securities and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company except as they
may relate to such Holders and their intended methods of distribution and shall
not be requested by the Company to provide indemnification except as provided in
Section 7.3(s) hereof.
(q) In addition to Warrant Securities, and except as
otherwise provided in Section 7.3(l) hereof, upon the written request therefor
by any Holders, the Company shall include in the Registration Statement any
other securities of the Company held by such Holders as of the date of filing of
such Registration Statement, including, without limitation, restricted shares of
Common Stock, options, warrants or securities convertible into shares of Common
Stock and shall not be requested by the Company to provide indemnification
except as provided in Section 7.3(s) hereof.
(r) For purposes of this Agreement, wherever a
specified percent of Holders is required to take action, such percentage shall
be calculated: (i) assuming the immediate exercise of all of the outstanding
Warrants for Common Stock and (ii) excluding the shares of Common Stock then
issued or issuable pursuant to Warrants that (x) are held by the Company, an
affiliate or officer thereof or any of their respective affiliates, members of
their family or persons acting as their nominees or in conjunction therewith or
(y) have been resold to the public pursuant to a Registration Statement filed
with the Commission under the Securities Act.
(s) Indemnification and Contribution.
(1) The Company agrees to indemnify and hold
harmless each Holder (for purposes of this Section 7.3(s), "Holder" shall
include the officers, directors, partners, employees and agents, and each
person, if any, who controls any Holder ("controlling person") within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions, proceedings, suits and litigation in
respect thereof), whatsoever, as the same are incurred, to which such Holder or
any such controlling person may become subject, under the Securities Act, the
Exchange Act or any other statute or at common law or otherwise insofar as such
losses, claims, damages, expenses or liabilities arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, or any preliminary Prospectus or Prospectus (as from
time to time amended and supplemented)
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<PAGE> 11
or arise out of or are based upon the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to make the
statements therein (with respect to any preliminary Prospectus or Prospectus, in
the light of the circumstances under which they were made), not misleading;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, expense or liability arises out of or
is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, or any preliminary
Prospectus or Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Holder specifically for inclusion therein and provided, further,
that the Company shall not be liable to any such Holder under the indemnity
agreement in this subsection (1): (i) with respect to any preliminary Prospectus
or Prospectus (if such Prospectus has then been amended or supplemented) to the
extent that any such loss, liability, claim, damage or expense of such Holder
arises out of a sale of Warrant Securities by such Holder to a person to whom
(a) there was not sent or given, at or prior to the written confirmation of such
sale, a copy of the Prospectus (or of the Prospectus as then amended or
supplemented) if the Company has previously furnished copies thereof to such
Holder a reasonable time in advance or (b) prior to written confirmation of such
sale, such Holder received notice from the Company pursuant to Section 7.3(j) to
discontinue disposition pursuant to such Prospectus and, in either case, the
loss, liability, claim, damage or expense of such Holder results from an untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in the preliminary Prospectus (or the Prospectus) which
was corrected in the Prospectus (or the Prospectus as amended or supplemented)
or (ii) to the extent that any such loss, claim, damage, expense or liability
arises out of or is based upon any action or failure to act by such Holder that
is found in a final judicial determination (or a settlement tantamount thereto)
to constitute bad faith, willful misconduct or gross negligence on the part of
such Holder. The indemnity agreement in this subsection (1) shall be in addition
to any liability which the Company may have at common law or otherwise, to the
extent not inconsistent therewith.
The Company also agrees to indemnify or
contribute to losses of any underwriters of Warrant Securities registered under
the Registration Statement, their officers and directors and each person, if
any, who controls any such underwriter (within the meaning of the Securities
Act) on substantially the same basis as that of the indemnification of the
Holders provided in this Section 7.3(s)(1) and shall, if requested by Holders
holding a majority of the Warrant Securities sought to be registered pursuant to
Section 7.2 hereof, enter into an underwriting agreement reflecting such
agreement, as provided in Section 7.3(p) hereof.
(2) Each Holder agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers and each other
person, if any, who controls the Company within the meaning of the Securities
Act, to the same extent as the foregoing indemnity from the Company to the
Holders, but only with respect to (i) statements or omissions, if any, made in
conformity with information relating to such Holder furnished in writing by 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.
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(3) Promptly after receipt by an indemnified
party under this Section 7.3(s) of notice of the commencement of any action,
suit or proceeding, such indemnified party shall, if a claim in respect thereof
is to be made against one or more indemnifying parties under this Section
7.3(s), notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure to notify an indemnifying
party shall not relieve it from any liability which it may have under Sections
7.3(s)(1) or (2) unless and to the extent that it has been prejudiced in a
material respect by such failure or from the forfeiture of substantial rights
and defenses). In case any such action, suit or proceeding is brought against
any indemnified party, and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, which may be the same counsel as counsel
to the indemnifying party. Notwithstanding the foregoing, the indemnified party
or parties shall have the right to employ its or their own counsel in any such
case but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to take charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded, after consultation
with counsel to such indemnified party or parties, that a conflict of interest
exists which makes representation by counsel chosen by the indemnifying party
not advisable (in which case the indemnifying parties shall not have the right
to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses of one additional
counsel shall be borne by the indemnifying parties. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. Anything in this Section 7.3(s) to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent, 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 7.3(s), but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Section 7.3(s)
provide for indemnification in such case, or (ii) contribution under the
Securities Act may be required, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid as a
result of such losses, claims, damages, expenses or liabilities (or actions,
suits, proceedings or litigation in respect thereof) in such proportion as is
appropriate to reflect the relative fault of each of the contributing parties,
on the one hand, and the party to be indemnified, on the other hand, in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. Relative fault shall
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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 7.3(s), each person, if any, who
controls the Company within the meaning of the Securities Act, each executive
officer of the Company and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to this subsection
(4). Any party entitled to contribution will, promptly after receipt of notice
of commencement of any action, suit, proceeding or litigation against such party
in respect to which a claim for contribution may be made against another party
or parties under this subsection (4), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
subsection (4), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
(t) Notwithstanding the foregoing provisions of this
Section 7.3, no registration rights shall be extended pursuant to this Section 7
with respect to any Warrant Securities (i) which have been sold pursuant to and
in accordance with an effective Registration Statement, (ii) sold in accordance
with Rule 144 under the Securities Act or (iii) eligible for sale under Rule
144(k) under the Securities Act.
8. Adjustments.
8.1 Adjustments of Number of Shares. The number of shares of
Common Stock that the holder of any Warrants shall be entitled to receive upon
each exercise thereof shall be determined by multiplying:
(a) the number of shares of Common Stock that would
otherwise (but for the provisions of this Section 8) be issuable upon such
exercise, as designated by the holder hereof pursuant to Section 4; by
(b) a fraction of which the numerator is $______ and
the denominator is the Exercise Price in effect on the date of such exercise;
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<PAGE> 14
provided, however that no adjustment pursuant to this Section 8 shall occur as a
result of (i) shares of Common Stock issued pursuant to the Underwriting
Agreement, (ii) shares of Common Stock issued upon the exercise of other
Warrants or (iii) shares of Common Stock issued upon the exercise of outstanding
options and warrants granted prior to the date hereof and which are described in
the Registration Statement (collectively, the "Excluded Issuances").
8.2 Adjustment of Exercise Price.
8.2.1 Initial Exercise Price. The Exercise Price,
which will initially be 120% of the public offering price with respect to the
Offering, shall be adjusted and readjusted from time to time as provided in this
Section 8 and, as so adjusted or readjusted, shall remain in effect until a
further adjustment or readjustment thereof is required by this Section 8;
provided, however, that there shall be no adjustment of the Exercise Price due
to Excluded Issuances.
8.2.2 Issuance of Additional Shares of Common Stock.
In case the Company, at any time or from time to time after the date on which
the Registration Statement becomes effective under the Securities Act (the
"Effective Date"), shall issue or sell Additional Shares of Common Stock (as
defined below), including Additional Shares of Common Stock deemed to be issued
pursuant to Section 8.3 or Section 8.4, without consideration or for a
consideration per share less than either the Exercise Price or the Fair Market
Value (as defined below) of the shares of Common Stock outstanding immediately
prior to such issue or sale, then, and in each such case, the Exercise Price
shall be reduced, subject to Section 8.9, concurrently with such issue or sale,
to a price (calculated to the nearest cent) determined by multiplying such
Exercise Price by a fraction of which
(a) the numerator shall be (i) the number of
shares of Common Stock outstanding immediately prior to such issue or sale plus
(ii) the number of shares of Common Stock which the aggregate consideration
received by the Company for the total number of Additional Shares of Common
Stock so issued or sold would purchase at the lesser of such Exercise Price or
Fair Market Value immediately prior to such issue or sale, and
(b) the denominator shall be the number of
shares of Common Stock outstanding immediately after such issue or sale.
For the purposes of this Section 8.2.2, (x) immediately after any Additional
Shares of Common Stock shall be deemed to be issued pursuant to Section 8.3 or
Section 8.4, such Additional Shares of Common Stock shall be deemed to be
outstanding, and (y) treasury shares shall not be deemed to be outstanding.
"Additional Shares of Common Stock" shall mean all shares (including treasury
shares) of Common Stock issued or sold (or pursuant to Sections 8.3 or 8.4,
deemed to be issued) by the Company after the Effective Date, whether or not
subsequently reacquired or retired by the Company, other than shares of Common
Stock issued upon the exercise of the Warrants. "Fair Market Value," with
respect to shares of Common Stock outstanding at any time shall be determined as
follows:
(a) If a public market exists for the Common
Stock, the Fair Market Value of the Common Stock shall be (i) the closing price
of the Common Stock on the Business Day (as defined below) immediately prior to
such issuance on the principal national
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securities exchange on which the Common Stock is at the time traded or, if none,
the Nasdaq Stock Market ("Nasdaq") or (ii) if there is not such a sale on such
day or if Common Stock is not at that time traded on the Nasdaq or on a national
securities exchange, the average of the lowest closing bid and highest closing
asked prices on such day as reported by the National Association of Securities
Dealers (or any successor organization); or
(b) If a public market for the Common Stock
does not exist, the Fair Market Value of the Common Stock shall be determined in
good faith by the Board of Directors promptly after the issuance of any
Additional Shares of Common Stock or the occurrence of any other event or the
existence of any other circumstance as a result of which the Fair Market Value
of the Common Stock would be required for any provision of this agreement, and
the Company shall promptly deliver to each Holder a certificate of the Secretary
of the Company setting forth the amount of the Fair Market Value of the Common
Stock and certifying that the amount was determined by the Board of Directors of
the Company. If any Holder disagrees with the Fair Market Value set forth in
that certificate, such Holder may, together with any other Holders who so
disagree, engage an independent investment bank or firm of independent public
accountants to act as appraiser, the expense of which shall be borne by such
Holder or Holders, to determine the Fair Market Value of the Common Stock, and
such Holder shall deliver such appraisal to the Company within 30 days after the
date of delivery of the certificate referenced to above. Within five days after
delivery to the Company of such appraisal, the appraiser engaged by the Holder
and a person designated by the Board (the expense of which shall be borne by the
Company) shall meet in order to resolve any questions or differences with
respect to the Fair Market Value of the Common Stock. If such persons agree on a
Fair Market Value of the Common Stock, such Fair Market Value shall be the Fair
Market Value. If no such agreement is reached, the Fair Market Value shall be
determined within ten days after such meeting by an appraiser who shall be
selected by the appraiser engaged by the Holder and the person designated by the
Board (or, if they do not agree on an appraiser within ten days, another
independent investment bank or firm of independent public accountants to act as
appraiser selected by the American Arbitration Association), the expense of
which shall be shared equally by such Holder or Holders, on the one hand, and
the Company, on the other hand, and the determination of that third appraiser
shall be conclusive and binding on both the Company and the Holder. In
determining the Fair Market Value of any share of Common Stock, all Warrants
shall be treated as if they had been exercised for the number of shares of
Common Stock issuable upon their exercise, and the Fair Market Value of any
Warrants shall be equal to the Fair Market Value of the Shares of Common Stock
issuable upon the exercise of such Warrants less the exercise price of such
Warrants.
8.2.3 Dividends and Distributions. In case the
Company at any time or from time to time after the Effective Date shall declare,
order, pay or make a dividend or other distribution on Common Stock (including,
without limitation, any distribution of stock or other securities, property or
options by way of dividend, spin-off, reclassification, corporate rearrangement,
or any redemption or acquisition of stock or options or other securities), then,
and in each such case, the Exercise Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders of
any class of securities entitled to receive such dividend or other distribution
shall be reduced, subject to Section 8.9, effective as of the close of business
on such record date, to a price (calculated to the nearest cent) determined by
multiplying such Exercise Price by a fraction of which
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(a) the numerator shall be the Exercise
Price in effect immediately prior to the close of business on such record date
minus the value of such dividends or other distributions (as determined in good
faith by the Board of Directors of the Company) applicable to one share of
Common Stock, and
(b) the denominator shall be such Exercise
Price in effect immediately prior to the close of business on such record date;
provided, however, that no such reduction shall be made pursuant to this Section
8.2.3 for a dividend payable in Additional Shares of Common Stock or in Options
(as defined below) for Common Stock, or a dividend payable in cash or other
property and declared out of the earned surplus (i.e., retained earnings, when
and if the Company has any) of the Company (excluding any portion thereof
resulting from a revaluation of property). For purposes of the foregoing, a
dividend payable other than in cash shall be considered payable out of earned
surplus only to the extent that such earned surplus is charged an amount equal
to the fair value of such dividend at the time of declaration as determined in
good faith by the Board of Directors of the Company. "Options" shall mean
rights, options or warrants to subscribe for, purchase or otherwise acquire
either Additional Shares of Common Stock or Convertible Securities. "Convertible
Securities" shall mean any shares (other than Common Stock), evidences of
indebtedness or other securities directly or indirectly convertible into or
exchangeable for Additional Shares of Common Stock.
8.3 Treatment of Options and Convertible Securities. In case
the Company, at any time or from time to time after the Effective Date shall
issue, sell, grant or assume, or fix a record date for the determination of
holders of any class of securities entitled to receive, any Options or
Convertible Securities, then, and in each such case, the maximum number of
Additional Shares of Common Stock issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities shall be deemed to be
issued for purposes of Section 8.2.2 as of the time of such issue, sale, grant
or assumption, or, in case such a record date shall have been fixed, as of the
close of business on such record date; provided, however, that such Additional
Shares of Common Stock shall not be deemed to be issued if the consideration per
share of such shares, as determined pursuant to Section 8.5, would be equal to
or greater than the greater of the Exercise Price and the Fair Market Value of
the shares of Common Stock on the Business Day on which such Additional Shares
of Common Stock shall be deemed to be issued; and provided further, however,
that in each such case in which Additional Shares of Common Stock would have
been deemed to be issued,
(a) no further Additional Shares of Common
Stock shall be deemed to be issued upon the subsequent issue or sale of Common
Stock or any other securities of the Company pursuant to the exercise of such
Options or the conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible
Securities by their terms shall provide in any manner for any increase in the
consideration payable to the Company, or decrease in the number of Additional
Shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Exercise Price computed upon the original issue, sale, grant or
assumption of such Options or Convertible Securities (or upon the fixing of the
record date with respect thereto), and any subsequent adjustments in such
Exercise Price, shall, upon any
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<PAGE> 17
such increase in consideration or decrease in the number of Additional Shares of
Common Stock issuable becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options, or the rights of conversion or
exchange under such Convertible Securities, as are outstanding at the time such
increase or decrease becomes effective;
(c) upon the expiration of any such Options
or of the rights of conversion or exchange under any such Convertible Securities
which shall not have been exercised, or upon purchase by the Company and
cancellation or retirement of any such Options which shall not have been
exercised or of any such Convertible Securities the rights of conversion or
exchange under which shall not have been exercised, the Exercise Price computed
upon the original issue, sale, grant or assumption of such Options or
Convertible Securities (or upon the fixing of the record date with respect
thereto), and any subsequent adjustments in such Exercise Price, shall, upon
such expiration, cancellation or retirement, be recomputed as if:
(i) in the case of Options for
Common Stock or of Convertible Securities, the only Additional
Shares of Common Stock issued or sold were the Additional
Shares of Common Stock, if any, actually issued or sold upon
the exercise of such Options or the conversion or exchange of
such Convertible Securities and the consideration received
thereupon was
(A) in the case of Options,
an amount equal to (x) the consideration actually received by
the Company for the issue, sale, grant or assumption of all
such Options, plus (y) the consideration actually received by
the Company upon exercise of any such Options, minus (z) the
consideration paid by the Company for any purchase of such
Options which were not exercised; or
(B) in the case of
Convertible Securities, an amount equal to (x) the
consideration actually received by the Company for the issue,
sale, grant or assumption of all such Convertible Securities
(unless theretofore taken into account pursuant to clause (ii)
below) which were actually converted or exchanged, plus (y)
the consideration actually received by the Company upon such
conversion or exchange, minus (z) the consideration paid by
the Company for any purchase of such Convertible Securities
the rights of conversion or exchange under which were not
exercised; and
(ii) in the case of Options for
Convertible Securities, only the Convertible Securities, if
any, actually issued or sold upon the exercise of such Options
were issued at the time of the issue, sale, grant or
assumption of such Options, and the consideration received by
the Company for the Additional Shares of Common Stock deemed
to have then been issued was an amount equal to (x) the
consideration actually received by the Company for the issue,
sale or grant of all such Options, plus (y) the consideration
deemed to be received by the Company (pursuant to Section 8.5)
upon the issue or sale of the Convertible Securities with
respect to which such Options were actually exercised, minus
(z) the consideration paid by the Company for any purchase of
such Options that were not exercised; and
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<PAGE> 18
(d) no readjustment pursuant to subdivision
(b) or (c) above shall have the effect of increasing the
Exercise Price by an amount in excess of the amount of the
adjustment thereof originally made pursuant to the issue,
sale, grant or assumption of such Options or Convertible
Securities.
"Business Day" shall mean any day of the year which is not a
Saturday, Sunday or a day on which banks are required or authorized to close in
the State of New York.
8.4 Treatment of Stock Dividends, Stock Splits, etc. In case
the Company at any time or from time to time after the Effective Date shall fix
a record date for the determination of holders of any class of securities
entitled to receive any dividend or other distribution on any class of stock of
the Company payable in Common Stock, or shall otherwise effect any subdivision
of the outstanding shares of Common Stock into a greater number of shares of
Common Stock, then, and in each such case, Additional Shares of Common Stock
shall be deemed to be issued (a) in the case of any such dividend or other
distribution, immediately after the close of business on such record date, or
(b) in the case of any such subdivision, at the close of business on the day
immediately prior to the day upon which such corporate action shall have become
effective.
8.5 Computation of Consideration. For the purposes of this
Section 8:
(a) The consideration for any Additional Shares of
Common Stock actually issued or sold or for the issue, sale, grant or assumption
of any Options or Convertible Securities, irrespective of the accounting
treatment of such consideration, shall
(i) insofar as it consists of cash, be
computed as the amount of cash actually received by the
Company, 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
underwriters, dealers or others performing similar services in
connection with any such issue or sale;
(ii) insofar as it consists of consideration
(including securities as defined in the Securities Act) other
than cash, be computed as the market value thereof at the time
of any such issue, sale, grant or assumption as determined in
good faith by the Board of Directors of the Company (which
determination shall be evidenced in a certificate delivered
promptly to each Holder and which determination shall be
subject to the procedures for disagreement as provided in item
(b) of the definition of "Fair Market Value" in Section
8.2.2), 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
underwriters, 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
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<PAGE> 19
consideration that covers both, be the proportion of such
consideration (computed as provided in clauses (i) and (ii)
above) allocable to such Additional Shares of Common Stock or
Convertible Securities as determined in good faith by the
Board of Directors of the Company (which determination shall
be evidenced in a certificate delivered promptly to each
Holder and which determination shall be subject to the
procedures for disagreement as provided in item (b) of the
definition of "Fair Market Value" in Section 8.2.2).
(b) The following shall be deemed to be issued
without consideration: (i) all Additional Shares of Common Stock, Options or
Convertible Securities issued in payment of any dividend or other distribution
on any class of stock of the Company; and (ii) all Additional Shares of Common
Stock issued to effect a subdivision of the outstanding shares of Common Stock
into a greater number of shares of Common Stock otherwise than by payment of a
dividend in Common Stock. Additional Shares of Common Stock, Options or
Convertible Securities issued to directors, management, employees and related
parties shall be deemed to be issued (i) without consideration if not issued for
cash or property and (ii) for less than either the Exercise Price or the Fair
Market Value to the extent that any cash or the fair value of property, as
determined in good faith by the Board of Directors, received for such securities
is less than either the Exercise Price or the Fair Market Value of such
securities.
(c) Additional Shares of Common Stock deemed to have
been issued for consideration pursuant to Section 8.3 shall be deemed to have
been issued for a consideration per share determined by dividing
(i) the total amount, if any, actually
received by the Company as consideration for the issue, sale,
grant or assumption of the Options or Convertible Securities
in question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration) payable to the
Company upon the exercise of all such Options or the
conversion or exchange of all such Convertible Securities or,
in the case of Options for Convertible Securities, the
exercise of all such Options for Convertible Securities and
the conversion or exchange of all such Convertible Securities,
in each instance computing such consideration as provided in
the foregoing subdivision (a), by
(ii) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options and the
conversion or exchange of such Convertible Securities.
8.6 Adjustments for Combinations, etc. In case the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Exercise Price in
effect immediately prior to such
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combination or consolidation shall, concurrently with the effectiveness of such
combination or consolidation, be increased proportionately.
8.7 Merger or Consolidation. In the event of (i) any
reclassification (including, without limitation, a reclassification effected by
means of an exchange or tender offer by the Company or any Subsidiary) or change
of outstanding Common Stock (other than a change relating to par value, or as a
result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which holders
of Common Stock shall be entitled to receive securities or other assets
(including cash) with respect to or in exchange for Common Stock or (iii) any
sale or conveyance of the assets of the Company as, or substantially as, an
entirety to any other corporation as a result of which holders of Common Stock
shall be entitled to receive securities or other assets (including cash) with
respect to or in exchange for Common Stock, then the Company or the successor or
purchasing corporation, as the case may be, shall execute and deliver to the
Holder upon surrender of the Warrant Certificate held by such Holder a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon full exercise of such Warrant, the
kind and amount of shares of stock and/or other securities and/or property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock for which such Warrant might have been exercised
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance. Such supplemental warrant agreement shall
provide for adjustments which shall be as nearly equivalent as practicable to
the adjustments provided for in this Section 8. The above provision of this
subsection shall similarly apply to successive events of the type described in
this Section 8.7.
8.8 Dilution in Case of Other Securities. In case any Other
Securities (as defined below) shall be issued or sold, or shall become subject
to issue or sale upon the conversion or exchange of any Common Stock or Other
Securities of the Company (or any issuer of Other Securities or any other person
referred to in Section 8.7), or shall become subject to subscription, purchase
or other acquisition pursuant to any Options issued, sold, granted or assumed by
the Company (or any such other issuer or person) for a consideration that
dilutes, in accordance with the standards established in the other provisions of
this Section 8 or otherwise, the purchase rights granted by the Warrants, then,
and in each such case, the computations, adjustments and readjustments provided
for in this Section 8 with respect to the Exercise Price shall be made and
applied as nearly as possible in the manner so provided, to determine the amount
of Other Securities that the Holder of such Warrants shall be entitled to
receive upon the exercise of such Warrants, in order to protect such Holder
against such dilution of purchase rights. "Other Securities" shall mean any
stock (other than Common Stock) of the Company or of any other person that the
Holders of the Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Warrants, in lieu of or in addition to Common
Stock, or that at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
this Section 8 or otherwise.
8.9 Minimum Adjustment of Exercise Price. If the amount of any
adjustment of the Exercise Price required pursuant to this Section 8 would be
less than $0.01, such amount shall be carried forward, and adjustment with
respect thereto shall be made at the time of and
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<PAGE> 21
together with any subsequent adjustment that, together with such amount and any
other amount or amounts so carried forward, shall aggregate at least $0.01.
8.10 Certificate of Adjustment. After each adjustment of the
Exercise Price or the amount of Warrant Securities purchasable upon exercise of
Warrants pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman, President, Treasurer or Secretary of the
Company setting forth: (i) the Exercise Price, as so adjusted; (ii) the amount
of Warrant Securities purchasable upon exercise of each Warrant after such
adjustment; and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with its records and
cause a brief summary thereof to be sent by ordinary first class mail to each
Holder at such Holder's last address as it shall appear on the registry books of
the Company.
8.11 Validity of Warrant Certificate. Notwithstanding any
adjustments or changes in the Exercise Price or the amount of Warrant Securities
purchasable upon exercise of Warrants, Warrant Certificates theretofore and
thereafter issued shall continue to express the Exercise Price per share and the
amount of Warrant Securities purchasable thereunder as of the date such Warrant
Certificates were originally issued; provided, the Holders shall be entitled to
exercise Warrants represented by such Warrant Certificates after giving effect
to each such adjustment and change, and such Warrant Certificate shall be deemed
to incorporate each such adjustment and change as if new Warrant Certificates
reflecting each such adjustment and change had been issued to the Holders.
8.12 No Dilution or Impairment. The Company shall not, by
amendment of its certificate of incorporation or bylaws or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issue,
sale, grant or assumption of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
agreement or the Warrants, but will at all times, whether or not requested to do
so, in good faith assist in the carrying out of all such terms and in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the Holders of the Warrants against dilution or other impairment.
Without limiting the generality of the foregoing, the Company take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Shares upon the exercise of all
Warrants from time to time outstanding.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable, without expense, upon the surrender thereof by the
Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Warrant Securities in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
such Warrant Certificates, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor in lieu thereof.
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<PAGE> 22
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants to purchase Common Stock, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of shares of Common Stock
or other securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized capital stock, solely for
the purpose of issuance upon the exercise of the Warrants, such number of shares
of Common Stock or other securities, property or rights as shall be issuable
upon exercise thereof. The Company covenants and agrees that, upon exercise of
the Warrants and payment of the Exercise Price therefor, all shares of Common
Stock and other securities issued by the Company upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any security holder of the Company. As long as the Warrants
shall be outstanding, the Company shall use its reasonable best efforts to cause
the Common Stock issuable upon the exercise of the Warrants to be listed
(subject to official notice of issuance) on all securities exchanges on which
the Common Stock may then be listed and/or quoted by NASDAQ if the Common Stock
issued to the public is so quoted.
12. Notices to Holders. Nothing contained in this Agreement shall be
construed as conferring upon the Holders the right to receive dividends or to
vote or to consent or to receive notice as a stockholder with respect to any
meetings of stockholders for the election of directors or any other matter or as
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.
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Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with any of the events described in this
Section 12.
13. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to a Holder, to the address of such Holder as
shown on the books of the Company; or
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may designate by notice
to the Holders.
14. Supplements and Amendments. The Company and the Underwriters may
from time to time supplement or amend this Agreement without the approval of any
Holders (other than the Representative) in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Representative may deem necessary or desirable and which the Company and the
Representative deem shall not adversely affect the interests of the Holders in
any material respect.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on February ______, 2006. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on February ______, 2011.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT AND EACH
WARRANT CERTIFICATES ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE
UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED
IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT GIVING EFFECT TO THE RULES OF
SAID STATE GOVERNING THE CONFLICT OF LAWS.
The Company, the Underwriter and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be brought and enforced in the courts of the State
of New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Underwriter and the Holders hereby irrevocably waive
any objection to such exclusive jurisdiction or inconvenient forum and also
hereby irrevocably waive any right or claim to trial by jury in connection with
any such action, proceeding or claim. Any such process or summons to be served
upon any of the Company, the Underwriter and the Holders (at the option of the
party bringing such action, proceeding or claim) may be served by transmitting a
copy thereof, by registered or certified mail, return
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receipt requested, postage prepaid, addressed to it at the address set forth in
Section 13 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
The Company, the Underwriter and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
17. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof. Except as set forth in Section 14 hereof, this Agreement
may not be modified or amended except by a writing duly signed by the Company,
Holders of Warrants or Warrant Securities representing a majority of the shares
of Common Stock issuable or issued hereunder and the party against whom
enforcement of the modification or amendment is sought.
18. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
19. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only, and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
20. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person, corporation or entity other than the Company,
the Underwriter and any other Holders of Warrants and/or Warrant Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriter and any other Holders of Warrants and/or Warrant Securities.
21. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original and such counterparts shall together constitute but one and the
same instrument.
24
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SUNHAWK.COM CORPORATION
By: _________________________________
Name:
Title:
Attest:
_________________________________
Name:
Title:
JOSEPH GUNNAR & CO., LLC
By: _________________________________
Name:
Title: A Member
25
<PAGE> 26
EXHIBIT A
FORM OF WARRANT CERTIFICATE
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, FEBRUARY ___, 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 ___, 2001 until 5:30 p.m. New York time on
_______________, 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 $__________ 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 Underwriter's Warrant
Agreement dated as of February _____, 2000 by and between the Company and Joseph
Gunnar & Co, LLC (the "Warrant Agreement"). Payment of the Exercise Price, shall
be made by certified or official bank check in New York Clearing House funds
payable to the order of the Company and by surrender of this Warrant
Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the amount the type and/or number of the Company's
securities issuable hereunder may, subject to certain conditions, be adjusted.
Subject to Section 8.6 of the Warrant Agreement, in such event, the Company
will, at the request of the holder, issue a new Warrant Certificate evidencing
the adjustment in the Exercise Price and the number and/or type of
<PAGE> 27
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 ______ ,2000
SUNHAWK.COM CORPORATION
[SEAL] By: _________________________________
Name:
Title:
Attest:
_____________________________
Name:
Title:
<PAGE> 28
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
Underwriter's Warrant Agreement dated as of February ___, 2000 by and between
Sunhawk.com Corporation and Coleman and Company Securities, Inc. The undersigned
requests that a certificate for such securities be registered in the name of
________________________________ whose address is _____________________________
__________________________________________________and that such certificate be
delivered to _________________________ whose address is ________________________
____________________________________________________________________________.
Dated:_________________ Signature ____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate)
______________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE> 29
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
Underwriter's Warrant Agreement dated as of February ___, 2000 by and between
Sunhawk.com Corporation and Joseph Gunnar & Co., LLC. 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> 30
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 Assignee)
<PAGE> 1
EXHIBIT 3.5
ARTICLES OF AMENDMENT
OF
SUNHAWK.COM CORPORATION
Pursuant to RCW 23B.10.060, the undersigned corporation adopts the
following Articles of Amendment to its Articles of Incorporation:
FIRST: The Articles of Incorporation are hereby amended as follows:
Article II
Capital Stock
The total number of shares of common stock, no par value, which the
Corporation shall have authority to issue, is 30,000,000 shares which shall be
the same class.
The Corporation's ability to issue preferred stock shall be reinstated and
the total number of shares of preferred stock which the Corporation shall have
the authority to issue is 10,000,000. The rights and preferences of the
preferred stock shall be determined at the time of issuance.
SECOND: The amendment does not provide for an exchange, reclassification,
or cancellation of issued shares.
THIRD: The foregoing amendment was adopted by the Board of Directors of
the Corporation on December 22, 1999, and by the shareholders of the Corporation
on January 11, 2000 in accordance with RCW 23B.10.030 and RCW 23B.10.040.
Dated: January 12, 2000
Sunhawk.com Corporation,
a Washington corporation
By: /s/ Tricia Parks-Holbrook
--------------------------
Title: CFO
Tricia Parks-Holbrook
Chief Financial Officer
<PAGE> 1
EXHIBIT 4.1
[Sunhawk.com Logo]
INCORPORATED UNDER THE LAWS OF
THE STATE OF WASHINGTON
This Certifies that _______________________________
is the record holder of _____________________
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE OF
Sunhawk.com Corporation
Transferable on the books of the Corporation by the Holder in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. The
certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ David M. Otto /s/ Marlin J. Eller
- ---------------------- [corporate seal] ----------------------
Secretary President and Chief
Executive Officer
The Corporation will furnish to any stockholder, upon request and without
charge, a statement of the powers, designations, preferences, and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights, insofar as the same shall have been fixed, and of the authority
of the Board of Directors to designate any preferences, rights and limitations
of any wholly unissued series. Any such request should be directed to the
Secretary of the Corporation at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT - _____ Custodian _____ under Uniform Gifts To Minors Act
UNIF TRF MIN ACT - _____ Custodian (until age ____ under Uniform Transfers
to Minors Act _______
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sells, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
<PAGE> 2
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(please Print or type name and address, including zip code of assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
to transfer the said stock of the books of the within named Corporation with
full power of substitution in the premises.
Dated:___________________
----------------------------------------
----------------------------------------
NOTICE: the signatures to this
assignment must correspond with the
name(s) as written upon the face of the
certificate in every particular, without
alteration or enlargement or any change
whatever.
Signature(s) Guaranteed
By
------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE> 1
Exhibit 5.1
January 26, 2000
Sunhawk.com Corporation
223 Taylor Avenue North, Suite 200
Seattle, Washington 98109
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
This opinion is furnished to Sunhawk.com Corporation, a Washington
corporation (the "Company"), with respect to certain matters in connection with
the offering of up to (i) of the Company's common stock, no par value (the
"Shares"), (which includes 210,000 Shares subject to an option granted to the
underwriter of such offering solely to cover over-allotments, if any) (ii) up to
140,000 additional shares of common stock underlying certain warrants (the
"Representative's Warrants") to be issued to the underwriter for the offering
and (iii) 41,680 additional shares of common stock issuable to certain
individuals upon exercise of the bridge loan warrants (the "Bridge Warrants")
pursuant to the prospectus (the "Prospectus") included in the Company's
registration statement on Form SB-2, as amended (File No. 333-80849) (the
"Registration Statement").
We have acted as counsel for the Company in connection with the offering
and sale of the Shares. In the course of such representation, our firm assisted
the Company in the preparation of the Registration Statement and related
documents and correspondence. In connection with the opinions expressed herein,
we have reviewed the Company's Articles of Incorporation, as amended, Bylaws,
form of Representative's Warrant Agreement, Agency? Agreement and related bridge
loan documents, minutes of meetings of and actions by the Board of Directors and
the Company's shareholders and other relevant documents we deemed necessary.
This letter should be read in conjunction with the Prospectus and, unless the
context hereof clearly otherwise provides, all capitalized terms herein shall
have the respective meanings ascribed thereto in the Prospectus.
On the basis of the foregoing, and subject to the qualifications set forth
herein, we are of the opinion that (a) the Shares have been duly authorized,
and, upon the issuance and sale thereof by the Company as described in the
Registration Statement, and the receipt of the consideration therefor as
described therein, the Shares will be validly issued, fully paid and
non-assessable, and (b) the Representative's Warrants and the shares to be
issued upon exercise of the Representative's Warrants, when issued in exchange
for the consideration
1
<PAGE> 2
recited therein, will be legally issued, fully paid and non-assessable. This
opinion does not address the compliance, or lack thereof, of the offering or
such issuance and sale with any securities laws or any law or statute other than
the Washington Business Corporation Act (Title 23B of the Revised Code of
Washington).
This letter and the opinions expressed herein are solely for the benefit of
the Company, and should not be relied upon by any other person without our prior
written consent, except that we hereby consent to the reference to our firm
under "Legal Matters" in the Prospectus and to the inclusion of this letter as
Exhibit 5.1 to the Registration Statement.
Very truly yours,
THE OTTO LAW GROUP, P.L.L.C.
/s/ David M. Otto
-----------------------------------
David M. Otto
2
<PAGE> 1
EXHIBIT 10.7
LOCK UP LETTER
Joseph Gunnar & Co., LLC
30 Broad Street, 12th Floor
New York, NY 10004
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement") between Sunhawk.com
Corporation, a Washington corporation (the "Company"), and you as representative
of the several underwriters (the "Underwriters") named in Schedule I thereto,
relating to an underwritten public offering (the "Offering") of 1,400,000 shares
of the Company's common stock, no par value (the "Common Stock") (including
210,000 shares of Common Stock subject to an option granted to the Underwriters
solely to cover over-allotments, if any).
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement with respect to the Offering, the undersigned, intending
to be legally bound, hereby agrees, for the benefit of the Company, you and the
other Underwriters, that for a period of twenty-four (24) months following the
effective date of the Registration Statement relating to the Offering (the
"Lock-up Period"), the undersigned will not, without the prior written consent
of the Representative (as defined in the Underwriting Agreement), directly or
indirectly, offer, offer to sell, sell, contract to sell, grant any option for
the purchase of, assign, transfer, pledge, hypothecate or otherwise encumber or
dispose of any beneficial interest in ("Transfer") any Common Stock or
securities convertible into or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock (either pursuant to Rule
144 of the regulations under the Securities Act of 1933, as amended, or
otherwise) either beneficially owned by the undersigned as of the effective date
of the Registration Statement or acquired by the undersigned during the Lock-up
Period as a result of the exercise of options (the "Securities").
Notwithstanding the foregoing, the undersigned may effect a Transfer of shares
of Common Stock as a bona fide gift or gifts, provided that the undersigned
provides prior written notice of such gift or gifts to you and the donee or
donees thereof agree to be bound by the restrictions set forth herein.
In the event that the Representative consents to a Transfer, the
undersigned hereby agrees that, during the Lock-up Period, the execution of any
order relating to a Transfer of Securities shall be placed through the
Representative.
<PAGE> 2
To enable the Company and the Underwriters to enforce the aforesaid
covenants, the Undersigned hereby consents to the placing of legends on the
Securities and stop-transfer orders with the transfer agent of the Company's
securities with respect to any of the Securities registered in the name of or
beneficially owned by the undersigned.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
choice of law or conflict of laws principles.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall be likewise terminated at such time.
Dated: January 26, 2000
-------------------------------------
Signature
-------------------------------------
Printed Name
-------------------------------------
Print Address
-------------------------------------
Print Social Security Number or
Taxpayer I.D. Number
<PAGE> 3
To enable the Company and the Underwriters to enforce the aforesaid
covenants, the Undersigned hereby consents to the placing of legends on the
Securities and stop-transfer orders with the transfer agent of the Company's
securities with respect to any of the Securities registered in the name of or
beneficially owned by the undersigned.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
choice of law or conflict of laws principles.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall be likewise terminated at such time.
Dated: Aug. 19, 1999
/s/ Marlin J. Eller
-------------------------------------
Signature
Marlin J. Eller
-------------------------------------
Printed Name
-------------------------------------
Print Address
-------------------------------------
Print Social Security Number or
Taxpayer I.D. Number
<PAGE> 4
To enable the Company and the Underwriters to enforce the aforesaid
covenants, the Undersigned hereby consents to the placing of legends on the
Securities and stop-transfer orders with the transfer agent of the Company's
securities with respect to any of the Securities registered in the name of or
beneficially owned by the undersigned.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
choice of law or conflict of laws principles.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall be likewise terminated at such time.
Dated: Aug. 19, 1999
/s/ David W. Gray
-------------------------------------
Signature
David W. Gray
-------------------------------------
Printed Name
-------------------------------------
Print Address
-------------------------------------
Print Social Security Number or
Taxpayer I.D. Number
<PAGE> 5
To enable the Company and the Underwriters to enforce the aforesaid
covenants, the Undersigned hereby consents to the placing of legends on the
Securities and stop-transfer orders with the transfer agent of the Company's
securities with respect to any of the Securities registered in the name of or
beneficially owned by the undersigned.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
choice of law or conflict of laws principles.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall be likewise terminated at such time.
Dated: Aug. 19, 1999
/s/ Mary E. McConney
-------------------------------------
Signature
Mary E. McConney
-------------------------------------
Printed Name
-------------------------------------
Print Address
-------------------------------------
Print Social Security Number or
Taxpayer I.D. Number
<PAGE> 6
To enable the Company and the Underwriters to enforce the aforesaid
covenants, the Undersigned hereby consents to the placing of legends on the
Securities and stop-transfer orders with the transfer agent of the Company's
securities with respect to any of the Securities registered in the name of or
beneficially owned by the undersigned.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
choice of law or conflict of laws principles.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall be likewise terminated at such time.
Dated: Aug. 19, 1999
/s/ Brent Mills
-------------------------------------
Signature
Brent Mills
-------------------------------------
Printed Name
-------------------------------------
Print Address
-------------------------------------
Print Social Security Number or
Taxpayer I.D. Number
<PAGE> 7
To enable the Company and the Underwriters to enforce the aforesaid
covenants, the Undersigned hereby consents to the placing of legends on the
Securities and stop-transfer orders with the transfer agent of the Company's
securities with respect to any of the Securities registered in the name of or
beneficially owned by the undersigned.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
choice of law or conflict of laws principles.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall be likewise terminated at such time.
Dated: Aug. 19, 1999
/s/ Judy McOstrich
-------------------------------------
Signature
Judy McOstrich
-------------------------------------
Printed Name
-------------------------------------
Print Address
-------------------------------------
Print Social Security Number or
Taxpayer I.D. Number
<PAGE> 1
EXHIBIT 10.8
AGREEMENT REGARDING THE ASSIGNMENT AND ASSUMPTION
OF THE RIGHT TO RECEIVE SHEET MUSIC
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Agreement") is entered
into this _______ day of _______________, 1999, by and among the Eller McConney,
L.L.C. ("Eller McConney"), a Washington limited liability company, Avtograf
Corporation, a Russian joint stock company ("Avtograf")(Eller McConney and
Avtograf are collectively referred to herein as "Assignors"), Sunhawk.com
Corporation, a Washington corporation ("Assignee") and Music Production
International, a Russian corporation ("MPI").
Recitals
WHEREAS, Assignors desire to assign to the Assignee all of Assignors'
right, title, and interest in such agreements and obligations as more
particularly described below; and
WHEREAS, Assignee desires to accept such assignment from Assignors and
receive digital sheet music from MPI in connection with this Agreement and that
certain Agreement Regarding the Assignment and Assumption of Sheet Music
Production (the "Production Agreement").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignors, Assignee and MPI agree,
joint and severally, as follows:
1. Assignment. Assignors assign, set over, transfer, convey, and sell to
Assignee, for total consideration to be paid to Eller McConney in the amount of
six hundred thousand dollars ($600,000), all of Assignors' right, title, and
interest in and to that certain agreement between Eller McConney and Avtograf
whereby Avtograf has agreed to provide Eller McConney with at least 270,000
pages of digital sheet music as a result of an investment made by Eller McConney
in Avtograf (the "Assignors' Agreement"). This assignment includes, without
limitation, the right to receive from MPI, in accordance with the terms of that
certain Production Agreement, a minimum of two thousand two hundred and fifty
(2,250) pages of digital sheet music per month, beginning on or about October
_____, 1999, and continuing for a period of ten (10) years. The total number of
pages of digital sheet music to be purchased by the Assignee, and to be provided
by MPI, shall equal 270,000 (the "Production Amount").
All of the right, title and interest in the digital sheet music assigned
to Assignee by Assignors shall be subject to satisfying Assignee's qualitative
standards. To the extent any page of digital sheet music provided by MPI to
Assignee does not satisfy the qualitative requirements of the Assignee, such
digital sheet music will not be deemed accepted by the Assignee and,
accordingly, will not be included in the two thousand two hundred and fifty
ASSIGNMENT AND ASSUMPTION AGREEMENT
Page 1
<PAGE> 1
EXHIBIT 10.9
[MEL BAY LOGO]
[CATHEDRAL LOGO]
[YOU CAN TEACH YOURSELF LOGO]
[EDITIONES CLASSICAE LOGO]
[BUILDING EXCELLENCE SERIES LOGO]
[CREATIVE KEYBOARD PUBLICATIONS LOGO]
MEL BAY PUBLICATIONS, INC. .. Over 50 years of Excellence in Music
SHEET MUSIC DISTRIBUTION AGREEMENT
BETWEEN
Sunhawk.com Corporation
And
Mel Bay(R) Publications, Inc.
#4 INDUSTRIAL DRIVE - P.O. BOX 66 - PACIFIC, MISSOURI 63069-0066 - (636)257-3970
TOLL FREE 1-800-8-MEL BAY (1-800-863-5229) - FAX (636)257-5062
WEB ADDRESS: http//www.melbay.com - E-MAIL ADDRESS: [email protected]
<PAGE> 2
SHEET MUSIC DISTRIBUTION AGREEMENT
This Sheet Music Distribution Agreement ("Agreement") is made and entered
into effective as of 5th day of January, 2000, by and between Mel Bay
Publications, Inc., a Missouri corporation ("Publisher"), and Sunhawk.com
Corporation ("Licensee"), a Washington corporation, and known as:
Business name: Sunhawk.com Corporation
Attention: VP, Legal and Business Affairs
Located at: 223 Taylor Avenue N. Suite 200
City, State, Zip: Seattle, WA 98109-5017
Telephone: 206-728-7063 Fax: 206-728-5929
RECITALS
I. Publisher possesses the right to license the Products (as
hereinafter defined).
II. Licensee distributes digital sheet music and digital audio
products via a website which is presently located at the URL. www.sunhawk.com..
III. Subject to the terms and conditions of this Agreement, (a)
Licensee desires to obtain a license from Publisher to distribute Electronic
Editions to end users from such website, and (b) Publisher desires to grant such
a license to Licensee in order that end users can obtain the Electronic Editions
from such website.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below, Publisher and Licensee agree as follows;
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings given those terms as hereinafter set forth:
1.1. "AGREEMENT" shall have the meaning given that term in the
first paragraph written above.
1.2. "BANKRUPTCY CODE" shall have the meaning given that term in
Section 8.2.4 below.
1.3. "CUSTOM COMPILATION" shall mean one or more individual
musical compositions (and the related artwork, titles,
photographs and likenesses of artists, liner notes,
coverwork, and narratives, associated with such
compositions) which are included in one or more Products
and which have been reordered into an new compilation which
differs in order, combination, organization or number of
individual musical compositions from the Product or
Products; provided, however, that Publisher has approved
each such Custom Compilation and set the Suggested Retail
Price prior to the first offering of such Custom
Compilation for sale.
1.4. "EFFECTIVE DATE" means the date first written above.
-2-
<PAGE> 3
1.5. "ELECTRONIC EDITION" means a Product or Custom Compilation
that has been converted into electronic format using
Licensee's Proprietary Format.
1.6. "END USER LICENSE AGREEMENT" means the end user license
agreement that is included in the Solero(R) Viewer and on
the Sunhawk.com website as updated from time to time, and
applicable to, each Electronic Edition. A copy of the
current End User License Agreement is attached hereto as
Schedule "C".
1.7 "EVENTS OF DEFAULT" shall have the meaning given that term
in Section 8.2 below.
1.8. "LICENSEE" shall have the meaning given that term in the
first paragraph written above.
1.9. "LICENSEE'S PROPRIETARY FORMAT" shall mean the electronic
digital file formats which are proprietary to Licensee and
known generally as Solero(R), Sunhawk(R) Scans and
Sunhawk(R) Audio or such other proprietary electronic
format agreed to in writing from time to time by Publisher.
1.10. "LICENSEE'S WEBSITE" shall mean the website located at the
URL listed above or such other website or websites from
which Licensee offers or advertises Electronic Editions and
to which Publisher has given its prior written consent.
1.11. "PRODUCT" means the musical compositions and compilations
or anthologies of compositions, and accompanying artwork,
titles, photographs and likenesses of artists, liner notes,
coverwork, and narratives, associated with the titles
listed on Schedule A (in either sheet music format or on
CD-ROM as indicated on such Schedule) or listed on any
amendment to such Schedule executed from time to time by
Publisher and Licensee. Publisher shall have the right from
time to time upon reasonable prior written notice to
remove, restrict, or delete any specific composition
because of termination for any reason (other than the sale
or other transfer) of Publisher's rights therein and such
composition shall no longer be deemed an Electronic Edition
hereunder. In such event, Licensee's rights with respect to
such composition shall be terminated as of the date set
forth in such notice. In the event Publisher has knowledge
that the rights to any of the Products will terminate prior
to the Initial Term of this Agreement, Publisher shall
provide the date when it expects the rights to terminate.
1.12. "PUBLISHER" shall have the meaning given that term in the
first paragraph written above.
1.13. "REPORT" shall have the meaning given that term in Section
4.2 below.
1.14. "RETAIL LIST PRICE" means Publisher's suggested retail
price for the applicable Electronic Edition at the time of
sale of the applicable Electronic Edition, less only sales
or use tax applicable to the Electronic Edition and charged
to end users, discounts (provided that Licensee may only
deduct discounts up to 15% of the Suggested Retail Price),
credits for returns of the Electronic Editions, and actual
credit card, debit card and other online payment system
transaction fees (e.g., Trivnet).
1.15. "TERM" shall have the meaning given that term in Section
8.1 below.
1.16. "TERRITORY" means worldwide, except for the United Kingdom
and Australia and except for Product-specific limitations
required because of limitations on Publisher's rights to
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such specific Products. Such Product-specific limitations
shall be noted on Schedule A or on any amendment to such
Schedule.
1.17. "TRADEMARKS" means the trademarks, trade names, and logos
listed on Schedule B hereto, which Schedule may be changed
from time to time by Publisher upon reasonable prior
written notice to License.
2. LICENSE.
2.1. LICENSE GRANT.
2.1.1. Subject to the terms and conditions of this
Agreement, Publisher hereby grants Licensee, and Licensee
hereby accepts, a non-exclusive and non-transferable
license to distribute Electronic Editions during the Term
directly to end users who are located in the Territory. The
license granted herein is a license to distribute
Electronic Editions solely from Licensee's Website and
solely for the non-commercial use of end users. Further,
the End User License Agreement shall be posted at all times
on the Website and shall be included with Licensee's
proprietary viewer used by End Users to access the
Electronic Editions. The license granted herein shall
entitle Licensee to convert the Products to Licensee's
Proprietary Format and to copy and distribute the
Electronic Editions in such format; provided that Licensee
shall not change the content of the Products except as
necessary to convert the Products into Licensee's
Proprietary Format or to correct errors, and provided
further, that each such copy shall contain the copyright
legends and notations that are included on the copies
delivered hereunder to Licensee. Custom Compilations shall
include such copyright legends and notations as shall be
reasonably required by Publisher. Licensee shall promptly
correct any errors or disapproved modifications to the
Electronic Editions which Publisher brings to Licensee's
attention. Licensee agrees that the costs of such
conversion shall be at Licensee's sole cost and expense and
that Publisher shall retain all copyrights in the
Electronic Editions; provided, however, Publisher agrees
that it will not own any interest in the file format, any
software code, or other proprietary material of Licensee
used to convert the Products to Licensee's Proprietary
Format or included in the Electronic Editions.
2.1.2. Notwithstanding Publisher's ownership of the
copyrights in and to the Electronic Editions, Licensee may
retain archival copies of each Electronic Edition; provided
however, that, following termination of this Agreement for
any reason, Licensee shall limit the number of archival
copies to a reasonable number per Electronic Edition; and
provided, further, that Licensee shall not transfer or
assign its rights in such archival copies and Licensee
shall have no right to distribute such archival copies,
other than pursuant to Section 12.5.
2.1.3. The license granted herein shall include the right
of Licensee to digitally perform the Electronic Editions
solely on and from the Website and from the downloaded
Electronic Edition preview files, but only in connection
with marketing the Electronic Editions to potential
end-users and not otherwise for commercial purposes.
Licensee's current digital distribution method makes use of
the Solero(R) Viewer. This Agreement grants Licensee all
necessary rights to use, distribute and license the
Electronic Editions for use with the Solero Viewer,
including the song preview, display, print (one licensed
copy and one extra copy if the end user encounters printer
problems) and playback features of the Solero Viewer.
Licensee shall have the right to provide preview samples of
the Electronic Editions free of charge through download or
audio streaming.
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2.1.4. The license granted herein does not give Licensee
any right or authority, without Publisher's prior approval:
(1) to modify, change or alter any Product or Electronic
Edition, including any artwork, coverwork or narratives
packaged or included with a Product or Electronic Edition,
except as necessary to convert the Product to Licensee's
Proprietary Format, to correct errors, or minor changes to
cover designs in connection with promotion of the
Electronic Editions; (2) to remove or add to any artwork,
coverwork, or narratives packaged or included with a
Product; (3) to create any derivative work; (4) except with
respect to Custom Compilations, to combine Products into
any grouping, compilation, arrangement, or anthology of
Electronic Editions other than those as produced and
delivered to Licensee or (5) post any Electronic Edition on
the Website or any other website where the Electronic
Editions may be used free of charge, except for excerpts to
the Electronic Editions for demonstration purposes which
excerpts have been approved in the reasonable discretion of
Publisher.
2.1.5. Licensee shall have the right to permit third
parties, other than as described on Schedule D or otherwise
reasonably objected to by Publisher, ("Associates") to
link to the Licensee Web Site in order to refer potential
customers to Licensee. Licensee shall have the right to
contract with Associates and pay such Associates a referral
fee as provided in Section 4.1. Licensee agrees that in all
cases, Licensee shall maintain control over the Electronic
Edition files and all Copy Protection Routines, as
hereafter defined.
2.2. RESERVATION OF RIGHTS. All rights not expressly granted by
Publisher to Licensee in this Agreement are hereby reserved by
Publisher. Without limiting the generality of the foregoing,
Publisher reserves the right to distribute Products directly
and/or to grant a license or right to distribute Products to a
third party in potential or actual competition with Licensee.
Similarly, Licensee shall have the right to distribute products
which are in potential or actual competition with Publisher.
2.3. RESTRICTIONS. Except as expressly provided in this
Agreement, Licensee shall not license, transfer, sell, publish, or
otherwise make available the Products or the Electronic Editions
to others. Licensee shall not: (a) distribute an Electronic
Edition to, or for the use of, any individual or entity in
violation of any export control laws of the United States; (b)
except as required to convert the Products into Licensee's
Proprietary Format and except for minor changes to cover designs
in connection with promotion of the Electronic Editions, remove or
add to any artwork, coverwork, or narratives packaged or included
with a Product or Electronic Edition; or (c) remove any copyright
or proprietary rights legend from any Product or Electronic
Edition.
2.4. TITLE TO PRODUCT AND ELECTRONIC EDITIONS. All right, title,
and interest in the copyrights in each Electronic Edition and in
each Product provided by Publisher hereunder shall remain vested
with Publisher and/or its applicable suppliers. Nothing in this
Agreement shall give Publisher greater rights than it might have
under the copyright laws. For example, this Agreement shall not
give Publisher ownership rights in content to the extent the
content is in the public domain.
2.5. LICENSEE'S USE. Nothing contained in this Agreement grants
Licensee a right or license to use a Product or Electronic Edition
except as expressly set forth in Section 2.1.
2.6. TRADEMARK LICENSE. Publisher hereby grants Licensee a
nonexclusive, nontransferable license to use the Trademarks during
the Term of this Agreement solely in connection with distribution
of the Electronic Editions by Licensee pursuant to this Agreement.
In connection
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with such use, Licensee may use the Trademarks for normal advertising
and promotion of the Electronic Editions and display the Trademarks on
the Website, subject, however, to (a) written directions from Publisher
which withdraws or modifies such authorization, and (b) the further
provisions of this Agreement (including, without limitation, Section
9.3 below). All use of the Trademarks in any marketing or promotion
(including, without limitation, advertising or display on the Website)
shall contain such notices as may be specified by Publisher from
time-to-time, and Licensee shall submit to Publisher for Publisher's
approval or disapproval, prior to use, distribution or disclosure, any
advertising, promotion, publicity, or webpages in which the Trademarks
are used; provided however, that Licensee shall be entitled to make
changes to its webpages as long as the Trademarks continue to be used
in a manner that was previously approved by Publisher. Licensee agrees
not to use any of Publisher's trade names or trademarks except as
expressly provided in this Agreement. Licensee shall not have the right
to sublicense the Trademarks except that Associates (as defined in
Section 2.1.5.) shall have the right to use the Trademarks solely in
connection with the activities described in Section 2.1.5., in
accordance with the terms of this Section, and subject to Publisher's
right in its sole discretion to reject, terminate, or prohibit such by
any specific Associate. Publisher shall have the right at reasonable
times to review Licensee's and any Associate's use of the Trademarks to
determine that all use complies with the provisions of this Agreement.
3. LICENSEE'S OBLIGATIONS.
3.1 GENERAL. Licensee shall promote and distribute the Electronic
Editions on the terms and conditions contained herein, and shall
conduct its business in a manner which will reflect favorably on
Publisher and the Electronic Editions, avoid any deceptive, misleading
or unethical practices or advertising which is, or could be deemed,
detrimental to Publisher, the Electronic Editions, or the public, and
comply in all respects with applicable federal, state, and local laws.
3.2 LICENSEE'S COST. Licensee shall be solely responsible for all
expenses it incurs in the promotion and distribution of the
Electronic Editions.
3.3 CONTINUING OBLIGATIONS. Licensee shall:
3.3.1 (a) promote the distribution of the Electronic
Editions, and (b) develop and maintain the reputation
and goodwill of Publisher and the Electronic Editions
with Licensee's customers:
3.3.2 Support Licensee's customers in respect of the
Electronic Editions by providing technical assistance
to such customers in the use of Licensee's
Proprietary Format at the same level which Licensee
provides for its own products, but in no event less
than reasonable assistance; and
3.4 COPY PREVENTION MECHANISMS. Licensee represents and warrants
that the software which produces Licensee's Proprietary Format
contains software security mechanisms or routines ("Copy
Protection Routines") which were designed to limit
unauthorized duplication of Products when converted into
Licensee's Proprietary Format. Licensee represents and
warrants that each copy of an Electronic Edition will be
delivered to end users using the Copy Protection Routines.
Licensee agrees to monitor the state of the art during the
Term of this Agreement and upon learning that such Copy
Protection Routines are no longer effective, to use reasonable
efforts to either correct or upgrade the existing Copy
Protection Routines or to create new software code or another
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mechanisms designed to reasonably prevent unauthorized duplication of
the Electronic Editions. Licensee shall notify Publisher immediately of
any such material failure of the security mechanisms and Publisher
shall have the right to require Licensee to suspend all distribution of
Electronic Editions until Publisher is reasonably satisfied that such
mechanisms have been repaired or replaced. Suspension of distribution
of Electronic Editions shall be Publisher's sole remedy for such
material failure unless such failure is caused by the gross negligence
of Licensee or the intentional wrongful behavior of Licensee. Publisher
acknowledges that each Electronic Editions will be encrypted with a
unique key and that isolated incidents of decryption of individual
Electronic Editions, without a compromise of the overall encryption
scheme, will not be deemed a material failure of the security
mechanism.
4. FEES AND TAXES.
4.1 FEES. Licensee shall pay to Publisher a fee equal to sixty
percent (60%) of the applicable Retail List Price for each
copy of an Electronic Edition distributed by Licensee where
the sale results directly from a direct referral link from the
Electronic Edition on Publisher's website to the order
fulfillment section of Licensee's Website. Licensee shall pay
to Publisher a fee equal to fifty percent (50%) of the Retail
List Price from sales originating from Licensee's web site or
referral links from Associate's Program web sites. Licensee
shall be entitled to distribute copies of Electronic Editions
at no charge in connection with the promotion of its business
or the Electronic Editions. Provided that Publisher has
consented to the number of such copies to be so distributed
prior to their distribution, no fee shall be due hereunder
with respect to such copies. Publisher agrees that such
consent shall not be unreasonably withheld, delayed or
conditioned.
4.2 REPORTS AND PAYMENT. Licensee shall provide Publisher with
access to online, realtime reports of Electronic Editions
sales transactions. Such reports shall be provided as
estimates only and shall not be relied upon in place of formal
quarterly royalty reports. Commencing on the forty-fifth
(45th) day after the end of the first calendar quarter
following the Effective Date, and on or before the forty-fifth
(45th) day after the end of each calendar quarter thereafter,
Licensee shall provide Publisher a report (each a "Report")
which lists the number of Electronic Editions distributed
during the preceding calendar quarter and the amount of the
Gross Receipts therefor. Each Report shall be accompanied by
full payment of all fees due Publisher pursuant to Section 4.1
in respect of the calendar quarter to which such Report
relates. A late charge equal to the lesser of (a) 18% or (b)
the maximum rate allowed by applicable law may be added to
past due amounts, other than amounts that are subject to a
good-faith dispute. Upon reasonable notice and during normal
business hours, Publisher shall have the right to cause an
independent CPA to audit the books and records of Licensee
with respect to sales of Electronic Editions, but not more
than one (1) time during any calendar year unless the previous
audit disclosed an underpayment of more than 10% of the amount
actually owed, in which case may audit two (2) times during
any calendar year. In addition, if any audit discloses an
underpayment of more than 10% of the amount actually owed,
Licensee shall reimburse Publisher for Publisher's reasonable
costs for such audit.
4.3 TAXES
4.3.1 IMPOSED ON LICENSEE. The fees enumerated in Section
4.1 above are exclusive of any federal, national, state,
municipal or other governmental tax or any fee, license, or
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other charge which has the effect of a sale, use or similar
tax (collectively, a "Tax") imposed, directly or indirectly,
on the transfer of a copy of the Electronic Edition from
Publisher to Licensee. Such Taxes shall be paid by Licensee
or, in lieu thereof, Licensee shall provide a valid exemption
certificate to Publisher and the appropriate taxing
authorities.
4.3.2 IMPOSED ON PUBLISHER. Although Taxes are not included
in the determination of the fees enumerated in Section 4.1
above, such fees shall be paid without reduction of any Tax
imposed. In furtherance of the foregoing:
4.3.2.1 If any Tax is required by law or regulation
to be collected with respect to the distribution of
the Electronic Edition to the end user, Licensee
shall (a) timely collect such Tax from the end user,
(b) timely pay the amount so collected to the
applicable national or municipal governmental
authority, and (c) if the purchase of the Electronic
Edition from Producer is not exempt from such tax,
pay to Publisher, at the same time the underlying fee
is paid, such additional amounts as might be
necessary in order that every net payment after the
deduction or withholding of such Tax will be the
gross amount of fees that would otherwise be payable
hereunder without such withholding or deduction; and
5. PUBLISHER'S OBLIGATIONS.
5.1. DELIVERY. Within 20 days after the Effective Date, Publisher
shall (a) deliver to Licensee the Products the sheet music in printed
form (or digital form if available) and the audio recordings on audio
CDs pursuant to this Agreement, and (b) copies of the Trademarks.
5.2. ROYALTIES. Publisher acknowledges that it might be subject to
copyright and other laws, and/or is a party to various agreements with
composers, authors, performance rights societies, and mechanical and
other licensing agencies, pursuant to which it might owe a fee or
royalty because of the distribution of an Electronic Edition by
Licensee and the uses by end-users' contemplated under this Agreement
(a "Composer's Royalty"). Publisher shall be responsible for the
payment of, and shall promptly pay all Composer's Royalties.
5.3. ADVERTISING. Publisher may, from time to time during the Term,
and subject to the terms of this Agreement, include Licensee's name,
trade names, trademarks, and internet address as part of Publisher's
advertising and promotion of Electronic Editions, either alone or in
conjunction with others (including, without limitation the names,
trademarks, of other distributors of Electronic Editions). Such
advertising and promotion may include, without limitation, print,
radio, and/or television advertising. Licensee shall have the right at
reasonable times to review Publisher's use of the Licensee trademarks
to determine that all use complies with Licensee's quality control and
standard trademark use guidelines.
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6. PUBLISHER'S WARRANTIES AND INDEMNIFICATION.
6.1. The Products are being distributed to Licensee "AS IS".
ACCORDINGLY, PUBLISHER AND ITS SUPPLIERS HEREBY DISCLAIM ALL
WARRANTIES, CONDITIONS, AND/OR REPRESENTATIONS, WHETHER EXPRESS,
IMPLIED, ORAL OR WRITTEN, INCLUDING, WITHOUT LIMITATION, ANY AND) ALL
IMPLIED WARRANTIES OF MERCHANTABILITY, REASONABLE CARE, AND/OR FITNESS
FOR A PARTICULAR PURPOSE (WHETHER OR NOT PUBLISHER AND/OR ITS SUPPLIERS
KNOWS, HAS REASON TO KNOW, HAS BEEN ADVISED, OR IS OTHERWISE IN FACT
AWARE OF ANY SUCH PURPOSE), IN EACH INSTANCE WITH RESPECT TO (I) THE
PRODUCT, OR ANY PART OR ELEMENT THEREOF, AND (II) ANY AND ALL SERVICES
PROVIDED HEREUNDER. PUBLISHER AND ITS SUPPLIERS HEREBY DISCLAIM ALL
WARRANTIES, CONDITIONS, AND/OR REPRESENTATIONS OF TITLE.
6.2. Licensee is not authorized to modify any representations
and/or warranties contained in the End User License Agreement with
respect to a Product or Electronic Edition or to make any additional
representations and/or warranties with respect to a Product or
Electronic Edition without Publisher's prior written approval.
6.3 INDEMNIFICATION. Subject to the terms and conditions of this
Agreement, Publisher agrees to indemnify, defend and hold Licensee
harmless from and against any and all claims, injuries, losses, and
expenses including, without limitation, reasonable attorney's fees,
which Licensee might incur and which might arise out of the breach of
this Agreement by Publisher. Specifically, Publisher agrees to
indemnify, defend and hold Licensee harmless from and against any and
all claims, injuries, losses, and expenses including, without
limitation, reasonable attorney's fees, arising from infringement
claims associated with the Products licensed to Licensee, and
Publisher's failure to obtain all necessary licenses and pay all
necessary fees associated with the rights granted to Licensee under
this Agreement.
7. DAMAGES AND LIMITATION OF LIABILITY.
7.1. CONSEQUENTIAL DAMAGES. EXCEPT WITH RESPECT TO THE WILLFUL
VIOLATION OF INTELLECTUAL PROPERTY RIGHTS, IN NO EVENT SHALL EITHER
PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES
ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, EVEN IF THE
APPLICABLE PARTY IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7.2. RISK ALLOCATION. The provisions of this Section 7 and of
Section 6 above represent a reasonable allocation of the risks under
this Agreement. Publisher's willingness to grant the license herein
granted reflects this allocation of risk.
8. TERM AND TERMINATION.
8.1. TERM. The initial term ("Initial Term") of this Agreement
shall commence on the Effective Date and shall terminate on December
31, 2004 unless earlier terminated as hereafter provided. The term of
this Agreement shall renew automatically for successive one (1) year
terms (each a "Renewal Term") unless this Agreement is terminated at
the end of the Initial Term or the then effective Renewal Terms upon at
least 120 days prior written notice.
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8.2. TERMINATION BY PUBLISHER. Publisher may terminate this Agreement
immediately, in addition to exercising any other rights and
remedies provided at law or in equity, upon the happening of one
or more of the following events (herein called "Events of
Default"):
8.2.1 If Licensee breaches any provision of this Agreement and
fails to cure such breach within fifteen (15) days (or
commences in good faith to cure such breach within fifteen
(15) days if the cure cannot be reasonably effected within
that time period) after Publisher gives Licensee written
notice thereof; or
8.2.2 If (a) Licensee voluntarily files a petition for relief
under the Bankruptcy Code of 1978, as amended, 11 U.S.C.
101 et. seq., as hereafter amended from time-to-time (the
"Bankruptcy Code"), (b) an order for relief under the
Bankruptcy Code is entered against Licensee following the
filing of an involuntary petition for relief under the
Bankruptcy Code against Licensee, (c) an involuntary
petition for relief under the Bankruptcy Code is filed
against Licensee and the proceeding initiated by such
filing is not terminated within 30 days after the day on
which such involuntary petition is filed, (d) Licensee
makes an assignment for the benefit of its creditors, (e) a
receiver is appointed for Licensee or any of its assets, or
(f) any assets of Licensee are attached or foreclosed.
9. TERMINATION PROCEDURES.
9.1. DUTIES UPON TERMINATION. Upon termination of this Agreement for
any reason, Licensee shall promptly: (a) return to Publisher the original
copies of the Products and Trademarks which Publisher originally provided
to Licensee; (b) remove all Trademarks from the Website and any other
Product-specific advertising materials then used by Licensee; (c) remove
all references to any of the Products or Electronic Editions on any page
of the Website, except for references to the Products and Trademarks
which resellers are permitted to make under the law; and (d) cease
offering distribution of the Electronic Editions.
9.2. EFFECT OF TERMINATION. Termination of this Agreement shall not
limit either party from pursuing any other remedies available to it,
including injunctive relief, nor shall such termination relieve Licensee
of its obligation to pay all fees properly due that accrued prior to such
termination.
9.3. TRADEMARKS AND TRADE NAMES. If this Agreement is terminated,
except as provided in Section 9.1(c) above, Licensee shall immediately
discontinue all advertising and publicity that refers to, references or
uses Publisher's trade name or Trademarks, and Licensee shall immediately
remove from Licensee's Website all signs and materials that refer to,
reference or use the Publisher trade name or trademarks, and the
Electronic Editions. Licensee acknowledges that breaching these
obligations could cause irreparable harm to Publisher, and that monetary
damages would be inadequate to compensate Publisher for Licensee failing
to comply with these post-termination obligations.
10. LICENSEE'S REPRESENTATIONS AND INDEMNIFICATION.
10.1. AUTHORITY. Licensee represents and warrants that (a) it has the
right to enter into this Agreement without the consent of any third
party, and (b) Publisher's use of Licensee's name, trademarks and/or
Licensee's Website address in accordance with Section 5.2 above (or any
other provision of this Agreement) shall not infringe (or otherwise
violate) the rights of any third party.
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10.2. INDEMNIFICATION. Licensee agrees to indemnify and hold Publisher
harmless from and against any and all claims, injuries, losses, and expenses
including, without limitation, attorney's fees, arising out of (a) the breach of
this Agreement by Licensee, (b) any misrepresentation by Licensee in connection
with Publisher and/or an Electronic Edition, and/or (c) any other wrongful
conduct of Licensee (including, without limitation, its agents and employees).
11. CONFIDENTIAL INFORMATION. If either party desires that documents and
other information provided to the other party under and in furtherance of
this Agreement be held in confidence, the disclosing party agrees to
identify such information as "Confidential" or "Proprietary"
(collectively, "Confidential Information"). ". Licensee agrees forever
not to (a) disclose Confidential Information, or (b) use Confidential
Information, in each instance other than for purposes expressly provided
for in this Agreement.
12. GENERAL.
12.1. INDEPENDENT CONTRACTOR. Licensee shall carry out its duties and
obligations under this Agreement as an independent contractor and not as
a joint venturer with Publisher or an agent of Publisher, and Licensee's
performance shall not be subject to supervision or control by Publisher,
but shall be subject solely to the terms of this Agreement. In
furtherance of the foregoing but without limiting the generality thereof,
Licensee shall not make any agreements, representations and/or warranties
on behalf of Publisher.
12.2. GOVERNING LAW. This Agreement shall be in all respects governed
by, and construed in accordance with the laws of the State of New York
without regard to the conflict of law provisions thereof.
12.3. ENTIRE AGREEMENT. Except for written agreements which are
expressly referenced herein, this Agreement supersedes and cancels all
prior and contemporaneous agreements, written or oral, between the
parties hereto with respect to the subject matter hereof and constitutes
the entire understanding between the parties with respect to the subject
matter hereof.
12.4. FORCE MAJEURE. Subject to the further provisions of this Section
12.4, any delays or failures by either party hereto in the performance of
the obligations hereunder shall be excused if and to the extent such
delays or failures are caused by occurrences beyond such party's control,
including, without limitation, acts of God, strikes or other labor
disturbances, war, whether declared or not, sabotage, and/or any other
cause or causes, whether similar or dissimilar to those herein specified,
which cannot reasonably be controlled by such party. The period of
excused performance pursuant to the foregoing shall be (and only shall
be) the actual period during which such an occurrence continues.
Accordingly, neither party hereto shall have the right to terminate this
Agreement for cause on account of a failure of the other party timely to
perform its obligations hereunder during the period of such excused
performance pursuant to the foregoing. Notwithstanding the foregoing,
delays or failures by Licensee in the payment of money shall not be
excused for any reason.
12.5. ASSIGNMENT. This Agreement may not be assigned, transferred,
pledged or hypothecated by Licensee, whether voluntarily, involuntarily,
by operation of law or otherwise, and Licensee may not subcontract to
another any of the obligations of Licensee under this Agreement, in each
instance without the prior written consent of Publisher, given in its
reasonable discretion. Licensee acknowledges that withholding of consent
because the assignee is a competitor of Publisher shall be deemed
reasonable.
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12.6. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement or any application thereof finally shall be
declared by a court of competent jurisdiction to be invalid, illegal or
unenforceable in any respect, the validity, legality or enforceability of
the remaining provisions of this Agreement or any application thereof
shall not in any way be affected or impaired, except that, in such an
event, this Agreement shall be amended in such respects as are necessary
to provide the party adversely affected by such declaration with the
benefit of its expectation, such expectation being evidenced by the
provision(s) affected by such declaration, to the maximum extent legally
permitted. The parties hereto shall negotiate the terms of such amendment
in good faith but, in the event they do not reach an agreement in that
regard for any reason, the court in which the aforesaid declaration is
made shall have the right to effectuate such amendment or, if that is not
possible, provide the party adversely affected by such declaration with
another appropriate remedy.
12.7. MODIFICATIONS AND AMENDMENTS. This Agreement may not be modified
or amended except by an instrument in writing signed by the parties
hereto. Accordingly, no course of conduct shall constitute an amendment
or modification of this Agreement.
12.8. SECTION HEADINGS. Headings of articles and sections in this
Agreement are for the convenience of the parties only. Accordingly, they
shall not constitute a part of this Agreement when interpreting or
enforcing this Agreement.
12.9. BREACH AND WAIVER. No waiver of any breach of this Agreement shall
(a) be effective unless it is in a writing which is executed by the party
charged with the waiver, or (b) constitute a waiver of a subsequent
breach, whether or not of the same nature. All waivers shall be strictly
construed. No delay in enforcing any right or remedy as a result of a
breach of this Agreement shall constitute a waiver thereof.
12.10. SURVIVAL OF TERMS. All of Publisher's and Licensee's respective
obligations, representations and warranties under this Agreement which
are not, by the expressed terms of this Agreement, fully to be performed
while this Agreement is in effect shall survive the termination of this
Agreement for any reason.
12.11. BINDING AGREEMENT. Subject to the provisions of Section 12.5
above, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective legal representatives,
successors and permitted assigns. Specifically, the rights and
obligations set forth in this Agreement shall continue with respect to
the Electronic Editions notwithstanding any sale, assignment, licensing
or other transfer of rights in the Products by Publisher.
12.12. DEFINED TERMS AND USE OF TERMS. All defined terms used in this
Agreement shall be deemed to refer to the masculine, feminine, neuter,
singular and/or plural, in each instance as the context and/or particular
facts might require. Use of the terms "hereunder", "herein", "hereby",
and similar terms refer to this Agreement.
12.13. RECITALS. The recitals to this Agreement are hereby incorporated
herein as an integral part hereof.
12.14. CUMULATIVE REMEDIES. Except as otherwise provided herein, no right
or remedy conferred by this Agreement is exclusive of any other right or
remedy conferred herein or by law or in equity; rather, all of such
rights and remedies are cumulative of every other such right or remedy
and may be exercised concurrently or separately from time-to-time.
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12.15. NOTICES. Except as otherwise specifically enumerated in this
Agreement, (a) all notices required by this Agreement shall be in
writing, (b) notices from Licensee to Publisher shall be delivered or
mailed to Mel Bay Publications, Inc. at #4 Industrial Drive, Pacific,
Missouri 63069, Attn: William Bay, and (c) notices from Publisher to
Licensee shall be delivered or mailed to Licensee at the address set
forth on the first page of this Agreement. Any notice to be given
hereunder shall be deemed given and received if delivered personally,
when received, or if mailed, three (3) days after being mailed certified
mail, postage prepaid.
12.16. NO BATTLE OF FORMS. Each order of Licensee's shall be deemed to
incorporate this Agreement by reference. No terms in any such order that
vary from the terms of this Agreement shall be of any force and effect,
whether or not Publisher signs such order or otherwise indicates its
acceptance, unless Publisher expressly refers to the specific variances
in question as constituting a modification of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and have
caused this Agreement duly to be executed and delivered as of the Effective
Date.
LICENSEE PUBLISHER
Sunhawk.com Corporation Mel Bay Publications, Inc.
Signature: /s/ MARLIN J. ELLER Signature: /s/ WILLIAM A. BAY
---------------------- -------------------------
Name: Marlin J. Eller Name:
--------------------------- ------------------------------
Title: CEO Title:
-------------------------- -----------------------------
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<PAGE> 14
SCHEDULE A
PRODUCTS
<PAGE> 15
SCHEDULE B
TRADEMARKS
YOU CAN TEACH YOURSELF(R) (INCLUDING STYLIZED VERSION)
[MEL BAY LOGO]
<PAGE> 16
SCHEDULE C
END USER LICENSE AGREEMENT
-2-
<PAGE> 17
Schedule C
End User License Agreement
SUNHAWK.COM CORPORATION
SOLERO(R) VIEWER LICENSE AGREEMENT -- VERSION 6/16/99
NOTICE TO USER:
PLEASE READ THIS DOCUMENT CAREFULLY BEFORE PROCEEDING. THIS IS THE MOST CURRENT
VERSION OF SOLERO(R) VIEWER LICENSE AND REPLACES ANY EARLIER VERSION OF THE
LICENSE WHICH APPEARED WHEN YOU INSTALLED YOUR VIEWER.
THIS AGREEMENT LICENSES THE SOLERO VIEWER SOFTWARE TO YOU AND CONTAINS WARRANTY
AND LIABILITY DISCLAIMERS. THIS AGREEMENT ALSO GOVERNS ANY MUSIC OR OTHER
CONTENT WHICH SUNHAWK.COM MAKES AVAILABLE FOR USE WITH THE SOLERO VIEWER. BY
CLICKING THE "DOWNLOAD" BUTTON, OR BY TAKING ANY OTHER ACTION TO DOWNLOAD
CONTENT, YOU ARE AGREEING TO BECOME BOUND BY THE TERMS OF THIS AGREEMENT AND
CONFIRMING YOUR ACCEPTANCE OF THE SOFTWARE. PROCEEDING TO DOWNLOAD CONTENT SHALL
BE DEEMED ACCEPTANCE OF THE TERMS OF THIS AGREEMENT. IF YOU DO NOT WISH TO DO
SO, DO NOT CLICK "DOWNLOAD" AND DO NOT TAKE ANY OTHER ACTION TO DOWNLOAD
CONTENT.
"Software" means the Solero(R) Viewer and related explanatory written materials
as well as any upgrades, modified versions or updates of the Software provided
to you by Sunhawk.com Corporation ("Sunhawk.com").
"Content" means (i) any music, text, graphics or other content in Solero(R),
Sunhawk(R) Audio, MIDI or any other digital form which is directly or indirectly
obtained from Sunhawk.com, (ii) any music, text, graphics or other content in
Solero, Sunhawk Audio, MIDI or any other digital form which may be generated by
the Software from Content, and (iii) any upgrades, modified versions or updates
of the Content.
"Printed Content Copy" means the paper copy that you are permitted to make when
you use the print function of the Solero Viewer to create a print copy from the
Content--for example, a paper copy of sheet music you have downloaded from the
Sunhawk.com site.
1. GRANT OF LICENSE TO THE SOLERO VIEWER; LICENSE RESTRICTIONS.
Upon your acceptance of this Agreement, Sunhawk.com grants to you (the end-user)
a nonexclusive, non-transferable, revocable license to use the Software only as
follows:
1.1 You may install and use the Software on a single computer only, and make
backup copies of the Software for use only on that same computer.
1.2 You may not sell, transfer, distribute, rent, modify, create derivative
works, lease, or
<PAGE> 18
sublicense the Software, or any rights to use the Software, to any other person
or entity.
1.3 You may not use, or transfer or copy the Software for use, on another
computer, network, or computer system that can be remotely accessed.
1.4 The Software may only be used to view, play and print encrypted Solero and
Sunhawk Audio files which have been produced by, or under written license from,
Sunhawk.com.
2. CONTENT LICENSE TERMS; LICENSE RESTRICTIONS
Upon your acceptance of this Agreement and your payment to Sunhawk.com of
applicable license fees, Sunhawk.com grants to you (the end-user) a
nonexclusive, non-transferable, revocable license to use the Content (for which
you have paid applicable license fees) only as follows:
2.1 You may install and use the Content on a single computer only, and make
backup copies of the Content for use only on that same computer.
2.2 Unless expressly stated otherwise in writing by Sunhawk.com when you obtain
or use the specific Content (i) you are licensed to print only one (1) Printed
Content Copy (e.g., one (1) copy of a sheet music title you have downloaded),
and (ii) you may not make additional Printed Content Copies or duplicate the
Printed Content Copy.
2.3 The Content and Printed Content Copy are for your personal, non-commercial
use only. Public Performance, public display, or synchronization with video tape
or film is expressly prohibited. Except for the stated limited use, you may not
duplicate, adapt, arrange and/or transmit Content or the Printed Content Copy in
any way. Specifically, you may not include the Content or Printed Content Copy
in any other publication or product, on any Web site, or on any computer
network. You agree to comply with all other terms, conditions and restrictions
concerning the Software, Content and Printed Content Copy which may appear on
the Sunhawk.com web site, Content or Printed Content Copy.
2.4 You may not sell, transfer, distribute, rent, modify, create derivative
works, lease, or sublicense the Content, or any rights to use the Content, to
any other person or entity.
2.5 You may not use, or transfer or copy the Content or Printed Content Copy for
use, on another computer, network, or computer system that can be remotely
accessed.
2.6 You may not convert the Content from the Solero or Sunhawk Audio format into
another digital file format, or use the Content in the Solero Editor or in any
third party software.
2.7 Unless expressly stated otherwise in writing by Sunhawk.com when you obtain
or use the specific Content, Content may be used with the Solero Viewer only.
3. Intellectual Property.. The Software, Content, Solero and Sunhawk Audio files
and file formats, and all related intellectual property rights (including
images, video, audio, music and text incorporated into the Software and Content)
are owned by Sunhawk.com or its Content providers and are protected by United
States Copyright Law, state trade secret laws, International Treaty provisions
and other applicable laws. The Software, Solero and
-2-
<PAGE> 19
Sunhawk Audio files and formats, and their structure, organization and
code are the valuable trade secrets of Sunhawk.com. You may not
modify, adapt, translate, disable or circumvent any feature in the
Software or Solero and Sunhawk Audio files and formats for the
protection of intellectual property rights, reverse engineer,
decompile, disassemble or otherwise attempt to discover the source
code of the Software, Solero and Sunhawk Audio files and formats, or
install or use them in a manner contrary to this Agreement. You may
use trademarks appearing on or associated with the Software only to
identify printed output produced by the Software, in accordance with
accepted trademark practice, including identification of the trademark
owner's name. Such use of any trademark does not give you any rights of
ownership in that trademark. This is a license of certain limited
rights and is not a sale. Except as stated above, this Agreement does
not grant you any intellectual property rights in the Software,
Content, Solero and Sunhawk Audio files and formats, or Printed
Content Copy. All rights not specifically granted in this Agreement,
including Federal and International Copyrights, are reserved.
4. U.S. Government Restricted Rights. The Software and Content are
provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by
the United States Government is subject to restrictions as set forth
in subparagraph (c)(l)(ii) of "The Rights in Technical Data and
Computer Software" clause at DFARS 252.227-7013 or subparagraphs
(c)(1) and (2) of the "Commercial Computer Software -- Restricted
Rights" clause at 48 CFR 52.227-19, as applicable. Manufacturer is
Sunhawk.com Corporation, 223 Taylor Avenue N., Seattle, WA 98109.
5. Equitable Remedies. You agree that any breach of Section 1, 2 or 3
of this Agreement shall cause irreparable harm to Sunhawk.com and its
suppliers which shall be entitled to receive equitable relief for such
breach. You will at your expense defend and indemnify Sunhawk.com
against all liabilities, damages, claims, fines and expenses
(including reasonable attorney's fees) arising out of your breach of
this Agreement.
6. Credit Card and Password Security. Since you may be liable for the
unauthorized use of your credit card, you should familiarize yourself
the terms and conditions imposed by the credit card issuer for
notification requirements and limitations on Customer's liability for
loss, theft or unauthorized use. SUNHAWK.COM DISCLAIMS ANY LIABILITY
FOR ANY USE OF YOUR CREDIT CARD, INCLUDING ANY LOSS, THEFT OR
UNAUTHORIZED USE THEREOF. If you join the Music Lover's Club you will
receive a confidential password. It is essential to keep your password
confidential. You agree to keep your password confidential, and any
failure of Customer to do so shall be deemed a material breach of this
Agreement. You will at your expense defend and indemnify Sunhawk.com
against all liabilities, damages, claims, fines and expenses
(including reasonable attorneys' fees) arising out of your breach of
this provision.
7. No Product Support. PRODUCT SUPPORT FOR THE SOFTWARE IS NOT
PROVIDED.
8. No Warranty. The Software and Content is being delivered to you AS
IS and Sunhawk.com and its suppliers make no warranty as to its use or
performance. SUNHAWK.COM AND ITS SUPPLIERS DO NOT AND CANNOT WARRANT
THE PERFORMANCE OR RESULTS YOU MAY OBTAIN BY USING THE SOFTWARE OR
CONTENT. SUNHAWK.COM AND ITS SUPPLIERS MAKE NO WARRANTIES, EXPRESS OR
IMPLIED, AS TO NONINFRINGEMENT OF THIRD PARTY RIGHTS, TITLE,
MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSE. YOU BEAR THE
ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE AND
-3-
<PAGE> 20
CONTENT. SHOULD THE SOFTWARE OR CONTENT PROVE DEFECTIVE IN ANY
RESPECT, YOU AND NOT SUNHAWK.COM OR ITS SUPPLIERS ASSUME THE ENTIRE
COST OF ANY SERVICE OR REPAIR.
9. Limitation of Liability. IN NO EVENT WILL SUNHAWK.COM OR ITS
SUPPLIERS BE LIABLE TO YOU FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES OR ANY LOSS OF REVENUE OR PROFITS, EVEN IF A
SUNHAWK.COM REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, AND REGARDLESS OF WHETHER THE CLAIM IS BASED UPON ANY
CONTRACT, TORT OR OTHER LEGAL OR EQUITABLE THEORY. SUNHAWK.COM AND ITS
SUPPLIER'S TOTAL LIABILITY UNDER THIS AGREEMENT WILL BE LIMITED TO THE
LICENSE FEES (INCLUDING ANY "MUSIC LOVER'S CLUB" MEMBERSHIP FEES)
WHICH YOU PAID TO SUNHAWK.COM FOR THE SOFTWARE AND CONTENT. Some
States do not allow the exclusion or limitation of incidental or
consequential damages, or the exclusion of implied warranties or
limitations on how long an implied warranty lasts, so the above
limitations or exclusions may not apply to you. The limited warranty,
exclusive remedies and limited liability set forth above are
fundamental elements of the basis of the bargain between Sunhawk.com
and you. You agree that Sunhawk.com would not be able to provide the
Software and Content on an economic basis without such limitations.
10. Governing Law; Export. This Agreement will be governed by the laws
of the United States and the State of Washington, excluding the
application of its conflicts of law rules. You consent to the personal
and exclusive jurisdiction and venue of the state and federal courts
located in Seattle, Washington. This Agreement will not be governed by
the United Nations Convention on Contracts for the International Sale
of Goods, the application of which is expressly excluded. You agree
that the Software will not be shipped, transferred or exported into
any country or used in any manner prohibited by the United States
Export Administration Act or any other export laws, restrictions or
regulations.
11. General Provisions. You represent and warrant that any name,
address, credit card or other information you may provide to
Sunhawk.com will be your true name, address, credit card or other
information. Any modification of this Agreement must be in writing
from Sunhawk.com. If any part of this Agreement is found void or
unenforceable, it will not affect the validity of the rest of the
Agreement, which shall remain valid and enforceable according to its
terms. The controlling language of this Agreement is English. If you
have received a translation in another language, it has been provided
for your convenience only. This Agreement constitutes the entire
agreement between the parties with respect to its subject matter, and
supersedes any and all written or oral agreements previously existing
between the parties with respect to such subject matter. This
Agreement will bind and inure to the benefit of each party's
successors and assigns, provided that you may not assign this
Agreement, in whole or in part, without Sunhawk.com's prior written
consent. No failure of either party to exercise or enforce any of its
rights under this Agreement will act as a waiver of such rights.
12. Changes to Terms. SUNHAWK.COM RESERVES THE RIGHT TO CHANGE THIS
AGREEMENT AT ANY TIME BY POSTING CHANGES ONLINE. IF THIS AGREEMENT IS
REVISED, THE CHANGES WILL BE POSTED THROUGH THE "LICENSE AGREEMENT"
LINK ON THE "DOWNLOAD" PAGE OF SUNHAWK.COM'S WEB SITE. A MORE RECENT
DATE AT THE TOP OF THE POSTED AGREEMENT THAN THE DATE AT THE TOP OF
THIS AGREEMENT WILL LET YOU KNOW THAT A CHANGED AGREEMENT HAS BEEN
POSTED. YOUR NON-TERMINATION OR CONTINUED USE OF THE SOFTWARE AFTER
CHANGES ARE POSTED CONSTITUTES YOUR ACCEPTANCE OF THIS
-4-
<PAGE> 21
AGREEMENT AS MODIFIED BY THE POSTED CHANGES.
13. Termination. This Agreement and the rights and licenses granted to
you under this Agreement shall automatically terminate upon failure by
you to comply with its terms. Within five (5) days after termination,
you will return or destroy all copies of the Software and Content in
your possession. Upon request, you will certify to Sunhawk.com that
all copies of the Software and Content have been returned to
Sunhawk.com or destroyed. The exercise by Sunhawk.com of any remedies
under this Agreement will be without prejudice to its other remedies
under this Agreement or otherwise. The rights and obligations of the
parties under Sections 1 through 13 will survive the expiration or
termination of this Agreement.
Copyright (c) 1995-99 Sunhawk.com Corporation. All rights reserved.
SOLERO and SUNHAWK are trademarks of Sunhawk.com Corporation.
-5-
<PAGE> 22
Schedule D
Associates Program Criteria
A Web site will be deemed inappropriate for the Sunhawk.com
Associate's Program if the Web site does any of the following:
1. Promotes discrimination based on race, sex, religion,
nationality, disability, sexual orientation or age.
2. Promotes sexually explicit materials.
3. Promotes violence
4. Promotes unlawful activities
5. Violates intellectual property rights
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<PAGE> 1
EXHIBIT 10.10
PROMOTIONAL SHARES LOCK-IN AGREEMENT
I. This Promotional Shares Lock-In Agreement ("Agreement"), which is
effective as of the 10th day of January, 2000, by and between Sunhawk.com
Corporation ("Issuer"), whose principal place of business is located at 223
Taylor Avenue North, Suite 200, Seattle, Washington 98109, and
______________________ ("Security Holder") witnesses that:
A. The Issuer has filed an application with the Securities
Administrator of each of the states listed on Schedule A attached
hereto ("Administrators") to register certain of its Equity
Securities for sale to public investors who are residents of
those states ("Registration");
B. The Security Holder is the owner of shares of common stock of
Issuer; and
C. As a condition to Registration, the Issuer and Security Holder
("Signatories") agree to be bound by the terms of this Agreement.
II. THEREFORE, the Security Holder agrees not to sell, pledge, hypothecate,
assign, grant any option for the sale of, or otherwise transfer or dispose of,
whether or not for consideration, directly or indirectly, PROMOTIONAL SHARES as
defined in the North American Securities Administrators Association ("NASAA")
Statement of Policy on Corporate Securities Definitions and all certificates
representing stock dividends, stock splits, recapitalizations, and the like,
that are granted to, or received by, the Security Holder while the PROMOTIONAL
SHARES are subject to this Agreement ("Restricted Securities").
Beginning two years from the completion date of the public offering, two
and one-half percent (2 1/2%) of the Restricted Securities may be released each
quarter pro rata among the Security Holders. All remaining Restricted Securities
shall be released from escrow on the anniversary of the fourth year from the
completion date of the public offering.
III. THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the Issuer's
assets or securities (including by way of tender offer), or any
other transaction or proceeding with a person who is not a
Promoter, which results in the distribution of the Issuer's
assets or securities ("Distribution"), while this Agreement
remains in effect that:
1. All holders of the Issuer's EQUITY SECURITIES will
initially share on a pro rata, per share basis in the
Distribution, in proportion to the amount of cash or other
consideration that they paid per share for their EQUITY
SECURITIES (provided that the Administrator has accepted
the value of the other consideration), until the
shareholders who purchased the Issuer's EQUITY SECURITIES
pursuant to the public offering ("Public
<PAGE> 2
Shareholders") have received, or have had irrevocably set
aside for them, an amount that is equal to one hundred
percent (100%) of the public offering's price per share
times the number of shares of EQUITY SECURITIES that they
purchased pursuant to the public offering and which they
still hold at the time of the Distribution, adjusted for
stock splits, stock dividends recapitalizations and the
like; and
2. All holders of the Issuer's EQUITY SECURITIES shall
thereafter participate on an equal, per share basis times
the number of shares of EQUITY SECURITIES they hold at the
time of the Distribution, adjusted for stock splits, stock
dividends, recapitalizations and the like.
3. The Distribution may proceed on lesser terms and
conditions than the terms and conditions stated in
paragraphs 1 and 2 above if a majority of the EQUITY
SECURITIES that are not held by Security Holders,
officers, directors, or Promoters of the Issuer, or their
associates or affiliates vote, or consent by consent
procedure, to approve the lesser terms and conditions.
B. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the Issuer's
assets or securities (including by way of tender offer), or any
other transaction or proceeding with a person who is a Promoter,
which results in a Distribution while this Agreement remains in
effect, the Restricted Securities shall remain subject to the
terms of this Agreement.
C. Restricted Securities may be transferred by will, the laws of
descent and distribution, the operation of law, or by order of
any court of competent jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder may be
hypothecated to pay the expenses of the deceased Security
Holder's estate. The hypothecated Restricted Securities shall
remain subject to the terms of this Agreement. Restricted
Securities may not be pledged to secure any other debt.
E. Restricted Securities may be transferred as a bona fide gift or
gifts, provided that the donee or donees thereof agree to be
bound by the restrictions set forth herein.
F. With the exception of paragraph A.3 above, the Restricted
Securities shall have the same voting rights as similar EQUITY
SECURITIES not subject to the Agreement.
G. A notice shall be placed on the face of each stock certificate of
the Restricted Securities covered by the terms of the Agreement
stating that the transfer of the stock evidenced by the
certificate is restricted in accordance with the conditions set
forth on the reverse side of the certificate; and
H. A typed legend shall be placed on the reverse side of each stock
certificate of the Restricted Securities representing stock
covered by the Agreement which states
-2-
<PAGE> 3
that the sale or transfer of the shares evidenced by the
certificate is subject to certain restrictions consistent with an
agreement between the Security Holder (whether beneficial or of
record) and the Issuer, which agreement is on file with the
Issuer and the stock transfer agent from which a copy is
available upon request and without charge.
I. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrators
("Effective Date") and shall terminate:
1. On the anniversary of the fourth year from the completion
date of the public offering; or
2. On the date the Registration has been terminated if no
securities were sold pursuant thereto; or
3. If the Registration has been terminated, the date that
checks representing all of the gross proceeds that were
derived therefrom and addressed to the public investors
have been placed in the U.S. Postal Service with first
class postage affixed; or
4. On the date the securities subject to this Agreement
become "Covered Securities," as defined under the National
Securities Markets Improvement Act of 1996.
J. This Agreement to be modified only with the written approval of
the Administrators.
IV. THEREFORE, the Issuer will cause the following:
A. A manually signed copy of the Agreement signed by the Signatories
to be filed with the Administrators prior to the Effective Date;
B. Copies of the Agreement and a statement of the per share initial
public offering price to be provided to the Issuer's stock
transfer agent;
C. Appropriate stock transfer orders to be placed with the Issuer's
stock transfer agent against the sale or transfer of the shares
covered by the Agreement prior to its expiration, except as may
otherwise be provided in this Agreement;
D. The above stock restriction legends to be placed on the periodic
statement sent to the registered owner if the securities subject
to this Agreement are uncertificated securities.
Pursuant to the requirements of this Agreement, the Signatories have
entered into this Agreement, which may be written in multiple counterparts and
each of which shall be considered an original. The Signatories have signed the
Agreement in the capacities, and on the dates, indicated.
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<PAGE> 4
IN WITNESS WHEREOF, the Signatories have executed this Agreement as of
the date first written above.
SUNHAWK.COM CORPORATION
By:
-----------------------------------
Marlin Eller
President
-----------------------------------
Name:
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<PAGE> 5
SCHEDULE A
Alabama Kentucky Pennsylvania
Alaska Louisiana Rhode Island
Arizona Maryland South Carolina
Arkansas Massachusetts South Dakota
California Michigan Tennessee
Colorado Mississippi Texas
Connecticut Missouri Utah
Delaware Nevada Vermont
Florida New Hampshire Virginia
Georgia New Jersey Washington
Idaho New Mexico West Virginia
Illinois North Dakota Wisconsin
Indiana Ohio Wyoming
Iowa Oklahoma
Kansas Oregon
-5-
<PAGE> 1
EXHIBIT 10.11
AGREEMENT REGARDING THE ASSIGNMENT AND ASSUMPTION
OF THE RIGHT TO RECEIVE SHEET MUSIC
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Agreement") is entered
into this _______ day of _______________, 2000, by and among the Eller McConney,
L.L.C. ("Eller McConney"), a Washington limited liability company, Avtograf
Corporation, a Russian joint stock company ("Avtograf")(Eller McConney and
Avtograf are collectively referred to herein as "Assignors"), Sunhawk.com
Corporation, a Washington corporation ("Assignee") and Music Production
International, a Russian corporation ("MPI").
Recitals
WHEREAS, Assignors desire to assign to the Assignee all of Assignors'
right, title, and interest in such agreements and obligations as more
particularly described below; and
WHEREAS, Assignee desires to accept such assignment from Assignors and
receive digital sheet music from MPI in connection with this Agreement and that
certain Agreement Regarding the Assignment and Assumption of Sheet Music
Production (the "Production Agreement") attached hereto as Exhibit A.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignors, Assignee and MPI agree,
joint and severally, as follows:
1. Assignment. Assignors assign, set over, transfer, convey, and sell to
Assignee, for total consideration to be paid to Eller McConney in the amount of
one million dollars ($1,000,000), plus interest, all of Assignors' right, title,
and interest in and to that certain agreement between Eller McConney and
Avtograf whereby Avtograf has agreed to provide Eller McConney with at least
270,000 pages of digital sheet music as a result of an investment made by Eller
McConney in Avtograf (the "Assignors' Agreement"). This assignment includes,
without limitation, the right to receive from MPI, in accordance with the terms
of that certain Production Agreement, a minimum of four thousand five hundred
(4,500) pages of digital sheet music per month, beginning on or about
_____________, 2000, and continuing for a period of five (5) years. The total
number of pages of digital sheet music to be purchased by the Assignee, and to
be provided by MPI, shall equal 270,000 (the "Production Amount").
All of the right, title and interest in the digital sheet music assigned
to Assignee by Assignors shall be subject to satisfying Assignee's qualitative
standards. To the extent any page of digital sheet music provided by MPI to
Assignee does not satisfy the qualitative requirements of the Assignee, such
digital sheet music will not be deemed accepted by the Assignee and,
accordingly, will not be included in the four thousand five hundred (4,500)
Page 1
<PAGE> 2
pages of digital sheet music required to be provided to the Assignee on a
monthly basis by MPI. By execution hereof, Assignee accepts the terms of this
Agreement, and is entitled to enforce all terms, conditions, and covenants made
by either Avtograf, MPI, or Eller McConney, as set forth in either the
Assignors' Agreement, as modified by either this Agreement or the Production
Agreement.
2. Payment. The payment of one million dollars ($1,000,000) shall be
made by certified check or money order by Assignee to Eller McConney LLC in
annual installments of two hundred thousand dollars ($200,000) over a five year
period, with the first such installment to occur twelve (12) months after the
date of this Agreement and each succeeding installment payment to occur twelve
(12) months after the previous payment.
3. Representations. Assignors represent and warrant that Assignors are
the owners of all interests conveyed hereby; that there is no default now
existing under the Assignors' Agreement; that the Assignor's Agreement is valid
and enforceable in accordance with its terms; that Assignors have full and
lawful authority to assign the Assignors' Agreement; and that Assignors will
defend the assignment and sale under this Agreement against all persons claiming
the same or any part thereof. In the event of such a claim, upon Assignors'
written request, Assignee shall make available to Assignors all documents, or
copies thereof, as are necessary to defend such a claim, and shall cooperate
with Assignors as is reasonably necessary, at no expense to Assignee, to defend
such a claim.
4. Indemnification. Assignors hereby agree to indemnify and hold the
Assignee harmless from and against any loss, expense, or liability (including
attorneys' fees, expenses of litigation, and costs of appeal) resulting from
Assignors' breach of any of Assignors' responsibilities and obligations under
the Assignors' Agreement assigned hereunder which may accrue prior to the date
hereof. Assignors further agree to indemnify and hold the Assignees harmless
from and against any loss, expense, or liability (including attorneys' fees,
expenses of litigation, and costs of appeal) resulting from any breach of the
Assignors' responsibilities and obligations under the Assignors' Agreement
assigned hereunder and assumed by the Assignee which may accrue from and after
the date hereof.
5. Recourse. To the extent the Assignee fails to receive or accept any
part or all of the Production Amount, then the Assignee shall have a right of
recourse against Eller McConney for those pages of sheet music not provided or
otherwise deemed unacceptable by the Assignee. This right of recourse shall
entitle the Assignee to receive that dollar amount equal to the product of (x)
the total number of pages of sheet music either not received by the Assignee or
deemed unacceptable by the Assignee multiplied by (y) $3.70 per page.
6. Integration. This Agreement and the terms of the Production Agreement
Page 2
<PAGE> 3
contain the entire understanding and agreement of the parties with respect to
the subject matter set forth herein, superseding any and all prior agreements,
written or oral, between the parties regarding the subject matter hereof.
7. Successors and Assigns. This Agreement shall inure to and be binding
upon the parties hereto and their respective heirs, successors, and assigns.
8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
EFFECTIVE as of the day and year first set forth above.
ASSIGNEE:
ASSIGNOR:
Sunhawk.com Corporation, a
The Eller McConney, L.L.C., a Washington corporation
Washington limited liability company
By By
--------------------------------- ---------------------------------
Its Its
------------------------------- --------------------------------
ASSIGNOR:
Avtograf Corporation, a Russian Music Production International, a
joint stock company Russian corporation
By By
--------------------------------- ---------------------------------
Its Its
------------------------------- --------------------------------
Page 3
<PAGE> 4
Exhibit A to
Exhibit 10.11
AGREEMENT REGARDING THE ASSIGNMENT AND ASSUMPTION
OF SHEET MUSIC PRODUCTION
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Agreement") is entered
into this _______ day of ____________, 2000, by and among the Eller McConney,
L.L.C., a Washington limited liability company ("Eller McConney") and Avtograf
Corporation, a Russian joint stock company ("Avtograf") (Avtograf and Eller
McConney are collectively referred to hereinafter as "Assignors"), Music
Production International, a Russian corporation ("Assignee") and Sunhawk.com
Corporation, a Washington corporation (the "Company").
Recitals
WHEREAS, Assignors desire to assign to the Assignee all of Assignors'
right, title, and interest in such agreements and obligations as more
particularly described below; and
WHEREAS, Assignee desires to accept such assignment from Assignors and
provide to the Company the digital sheet music previously provided by Avtograf
to Eller McConney.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignors, Assignee and the
Company agree, joint and severally, as follows:
1. Assignment and Assumption. Assignors assign, set over, transfer,
convey, and sell to Assignee, for total consideration to be paid by Assignee in
the amount of ten dollars ($ 10.00) all of Assignor's right, title, and interest
in and to, and all obligations associated with, that certain agreement between
Eller McConney and Avtograf whereby Avtograf has agreed and otherwise obligated
itself to provide Eller McConney with at least 270,000 pages of acceptable
digital sheet music as a result of an investment made by Eller McConney in
Avtograf (the "Assignors' Agreement"). Assignee further agrees, without
limitation, to assume the obligation and duty to provide the services previously
carried out by Avtograf on behalf of Eller McConney, and, further, to produce
for the benefit of the Company a minimum of four thousand five hundred (4,500)
pages of digital sheet music each month, beginning on or about ____________,
2000, and continuing for a period of five (5) years. The total number of pages
of digital sheet music to be produced by Assignee for the Company shall equal
270,000 pages (the "Production Amount").
All of the right, title and interest in the digital sheet music
production obligation being assigned herein to Assignee by Assignors for the
benefit of the Company shall be subject to satisfying the Company's qualitative
standards. To the extent any page of digital sheet music does not satisfy the
qualitative requirements of the Company, then such page or pages of sheet music
shall not be deemed accepted by the Company and,
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accordingly, will not be included in the four thousand five hundred (4,500)
pages of digital sheet music required to be provided each month by the Assignee
to the Company. By execution hereof, Assignee accepts the terms of this
Agreement, agrees to perform all terms, conditions, and covenants made by
Assignors in the Assignors' Agreement, except as modified by this Agreement.
Further, Assignee assumes all of the obligations of Avtograf under the
Assignors' Agreement from and after the date hereof, except as otherwise
modified by this Agreement.
2. Payment. The payment of ten dollars ($10.00) shall be made by
certified check or money order by Assignors to the Assignee on or by
______________, 2000.
3. Representations. Assignors represent and warrant that Assignors are
the owners of all interests conveyed hereby; that there is no default now
existing under the above referenced Assignors' Agreement; that the Assignor's
Agreement is valid and enforceable in accordance with its terms; that Assignors
have full and lawful authority to assign the Assignors' Agreement; and that
Assignors will defend the assignment and sale under this Agreement against all
persons claiming the same or any part thereof. In the event of such a claim,
upon Assignors' written request, Assignee shall make available to Assignors all
documents, or copies thereof, as are necessary to defend such a claim, and shall
cooperate with Assignors as is reasonably necessary, at no expense to Assignee,
to defend such a claim.
4. Indemnification. Assignors hereby agree to indemnify and hold the
Assignee harmless from and against any loss, expense, or liability (including
attorneys' fees, expenses of litigation, and costs of appeal) resulting from
Assignors' breach of any of Assignors' responsibilities and obligations under
the Assignors' Agreement assigned hereunder which may accrue prior to the date
hereof. Assignors further agree to indemnify and hold the Assignee harmless from
and against any loss, expense, or liability (including attorneys' fees, expenses
of litigation, and costs of appeal) resulting from any breach of the Assignors'
responsibilities and obligations under the Assignors' Agreement assigned
hereunder and assumed by the Assignee which may accrue from and after the date
hereof.
5. Recourse. To the extent the Company fails to either receive or accept
any part of the Production Amount, then the Company shall have a right of
recourse against Eller McConney for those pages of sheet music not provided or
otherwise deemed acceptable by the Company. This right of recourse shall entitle
the Company to receive that dollar amount equal to the product of (x) the total
number of pages of sheet music either not received or deemed unacceptable by the
Company multiplied by (y) $3.70 per page.
6. Integration. This Agreement and the Agreement Regarding the
Assignment and Assumption of the Right to Receive Sheet Music (the "Sheet Music
Agreement") contain the entire understanding and agreement of the parties with
respect to the subject matter set
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forth herein, superseding any and all prior agreements, written or oral, between
the parties regarding the subject matter hereof.
7. Successors and Assigns. This Agreement shall inure to and be binding
upon the parties hereto and their respective heirs, successors, and assigns.
8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
EFFECTIVE as of the day and year first above written.
ASSIGNOR: ASSIGNEE:
Eller McConney, L.L.C. Music Production International, a
Russian corporation
By By
--------------------------------- ---------------------------------
Its Its
-------------------------------- --------------------------------
ASSIGNOR:
Sunhawk.com Corporation
Avtograf Corporation
By By
--------------------------------- ---------------------------------
Its Its
-------------------------------- --------------------------------
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated November 24,
1999, except for note 7 (sixth paragraph) as to which the date is December 23,
1999 and note 7 (fourth paragraph) and note 13 as to which the date is January
12, 2000 in Amendment No. 5 to the Registration Statement (Form SB-2) and
related prospectus of Sunhawk.com Corporation for the registration of 1,400,000
shares of its common stock.
ERNST & YOUNG LLP
Seattle, Washington
January 25, 2000
