<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
REGISTRATION NO. 333-80849
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
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 securities for an offering to be made on
a continuous or delayed basis, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<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>
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value................ 1,610,000shares $12.50 $20,125,000 $5,313
- ------------------------------------------------------------------------------------------------------------------------
Underwriter's warrants to purchase shares
of Common Stock, no par value(3)........ 140,000shares $0.001 $ 140 None(4)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value, issuable upon
exercise of Underwriter's warrants...... 140,000shares $15.00 $ 2,100,000 $ 555
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value, issuable upon
exercise of bridge loan warrants(3)..... 41,680shares $12.50 $ 521,000 $ 138
- ------------------------------------------------------------------------------------------------------------------------
Total...................................................................................... $6,006
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 FEBRUARY 11, 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 Tier II
of 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 5 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.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<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.
-------------------------
Offers and sales of the common stock to investors pursuant to this
prospectus are restricted to individuals who meet suitability standards of not
less than annual gross income of $65,000 and a minimum net worth of $65,000,
exclusive of automobile, home and home furnishings, or a minimum net worth of
$150,000, exclusive of automobile, home and home furnishings.
-------------------------
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 system that secures, enhances, prepares and publishes
copyrighted digital content and other proprietary digital products for
distribution over the Internet. We currently sell digital sheet music, audio
music in the MP3 format and other proprietary digital products.
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.
THE OFFERING
<TABLE>
<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.
3
<PAGE> 6
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
----------- ----------- ---------
<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
------ ----- ----- ------------------
<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>
4
<PAGE> 7
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 DIGITAL RIGHTS MANAGEMENT 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.
5
<PAGE> 8
OUR DIGITAL RIGHTS MANAGEMENT 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.
THERE IS AN EXISTING EFFORT TO ESTABLISH A STANDARD FOR THE DISTRIBUTION OF
DIGITAL MUSIC THROUGH A CONSORTIUM KNOWN AS THE SECURE DIGITAL MUSIC INITIATIVE,
AND IF A STANDARD, EXCLUDING SUNHAWK.COM, IS ADOPTED, OUR BUSINESS WOULD BE
HARMED.
There is an existing effort to establish a standard for the distribution of
digital music through the Secure Digital Music Initiative. The Secure Digital
Music Initiative seeks to create the industry standard for the distribution of
music and, potentially, other proprietary digital products. We cannot assure you
that our Solero(R) format will be a successful format for the creation, storage
and distribution of digital music and other 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 is chosen, 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.
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.
OUR PRINCIPAL SUBCONTRACTORS ARE LOCATED IN RUSSIA AND THEIR UNAVAILABILITY AS A
RESULT OF POLITICAL INSTABILITY 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
6
<PAGE> 9
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.
WE HAVE NO WRITTEN AGREEMENT WITH OUR DISTRIBUTORS OF PRINTED SHEET MUSIC AND
OUR FAILURE 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.
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
7
<PAGE> 10
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.
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.
8
<PAGE> 11
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 digital rights
management 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 digital rights management 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 which bear
interest at a rate of 8.5% per annum and is due at
the earlier of the closing of this offering or
September 26, 2000.................................. 1,000,000 7%
Acquisition and upgrade of equipment for our digital
rights management 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.
9
<PAGE> 12
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 or
warrants. 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.
10
<PAGE> 13
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 or
warrants. 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 or warrants 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.
11
<PAGE> 14
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>
12
<PAGE> 15
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 Bros. Publications U.S. Inc. and EMI Christian Music Publishing for the
right to sell and distribute selected portions of their sheet music catalogs.
From March 1997 through 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 Bros.
Publications U.S. Inc. and EMI Christian Music Publishing 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
Bros.
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<PAGE> 16
Publications U.S. Inc. and EMI Christian Music Publishing. Upon the sale of any
digital title licensed from Warner Bros. Publications U.S. Inc. or EMI Christian
Music Publishing, we are required to remit the appropriate royalty to the
respective publisher. Royalty payments range from 10% to 70% and are based on
actual sales, less credit card processing fees and shipping costs, if any.
Inventory consists of CD-ROMs and the cost of the printed sheet music books.
Amortization of the cost of producing digital masters 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 Bros. Publications U.S. Inc. 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 Bros. Publications U.S.
Inc. and EMI Christian Music Publishing;
- 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.
14
<PAGE> 17
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 strategic alliances with Warner Bros. Publications U.S. Inc.
and EMI Christian Music Publishing, 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 Bros. Publications U.S. Inc. and EMI Christian Music
Publishing, 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
15
<PAGE> 18
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.
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 Bros. Publications U.S. Inc. and EMI
Christian Music Publishing 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
16
<PAGE> 19
$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.
On January 12, 2000, we 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 bear interest at a
rate of 8.5% per annum and will be due at the earlier of the closing of this
offering or September 26, 2000. The loans hold a first security on Sunhawk.com's
assets as collateral. The loans 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 are exercisable commencing six months following the
closing date of this offering. Upon closing of the bridge financing, payments to
Joseph Gunnar & Co., LLC will include
- a commission equal to 7% of the aggregate loan amount;
- a structuring fee equal to 3% of the aggregate loan amount;
- reimbursement of out-of-pocket expenses; and
- reimbursement of reasonable fees and disbursement of counsel to Joseph
Gunnar & Co., LLC.
The loans closed on January 26, 2000.
In connection with securing the bridge financing loans, there may have been
a violation of Section 5 of the Securities Act of 1933 and Sunhawk.com may be
subject to liability, which may require us to repay the funds loaned to us in
connection with the bridge financing. Under the terms of the bridge financing
loans, the loans are to be repaid from the proceeds of this offering.
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
17
<PAGE> 20
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 and meet our material commitments, such as our annual
lease payments, 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.
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.
18
<PAGE> 21
BUSINESS
OVERVIEW
We are an Internet based digital rights management and digital publishing
company. We provide digital rights management 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 digital rights management 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.
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 digital rights management 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 digital rights management 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., which also
owns 7% of Sunhawk.com, EMI Christian Music Publishing a division of EMI
Christian Music Group, and Mel Bay Publications, Inc.
We also securely distribute music in the MP3 compressed format using our
digital rights management distribution system for our partners. Additionally,
discussions are underway with book publishers and other owners of content 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.
Our digital rights management 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.
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<PAGE> 22
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, 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
20
<PAGE> 23
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.
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.
Our digital rights management 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 patent entitled "Encryption
System with Transaction Coded
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<PAGE> 24
Decryption Key" is directed to a technology for monitoring the distribution of
encrypted digital data. The following is a description of how our system 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.
- 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 digital rights management 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 digital rights management 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 digital rights
management distribution system to empower artists, authors, musicians,
publishers and other owners of
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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 digital rights management distribution
system -- We will target leading technology and device companies that can, on an
OEM basis, incorporate our digital rights management 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 digital rights management 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 digital rights management 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 digital rights management 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 Bros. Publications U.S. Inc. and EMI Christian Music Publishing.
We intend to continue entering into direct relationships with premier and
emerging 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 digital rights management 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 digital rights management distribution system securely manages
all aspects of every transaction.
By providing a combination of digital rights management 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.
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PRODUCTS AND SERVICES
We have used sheet music as the initial product for the application of our
digital rights management 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 digital rights management 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.
DIGITAL RIGHTS MANAGEMENT DISTRIBUTION TECHNOLOGY. Our digital rights
management 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 digital rights
management 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 Bros.
Publications U.S. Inc. and EMI Christian Music Publishing web sites. Once a
customer has entered our web site, he may search for a song by composer, artist,
title or keyword. In addition, our titles are arranged by music type such as
rock, classical, Christian and country, and a customer can browse these pages
based on his own music preferences and interests. Our site also features "top
ten" lists, new releases and editor's picks to further stimulate customer
interest in our products.
Our library of interactive digital sheet music in the Solero(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.
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. 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 digital rights management technology.
PREPARATION AND ENHANCEMENT. Our preparation and enhancement services
provide publishers and customers with a content rich digital product. We have
the ability to
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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 Bros. Publications U.S. Inc.'s and EMI Christian Music Publishing'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. The patent entitled "Method and Apparatus for Nonsequential Storage of
and Access to Digital Musical Score and Performance Information" is directed to
processing musical scores in a nonsequential format. Our technology for
electronically storing musical symbols 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.
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
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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 digital
rights management 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, EMI
Christian Music Publishing 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 digital rights management 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.
We depend, to a very material extent, on our patents and other technology
related to our digital rights management 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 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
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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 digital rights management 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.
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. 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
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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.
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 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.
We consider our patents, trademarks, trade secrets and other similar
intellectual property to be an important 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.
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COMPETITION
As an operator of a digital rights management 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 digital rights management 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
digital rights management 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 Bros. Publications
U.S. Inc. -- 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 digital rights management distribution system
has operated in a reliable and commercial manner over an extended period of time
for Warner Bros. Publications U.S. Inc. and EMI Christian Music Publishing.
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. Sheet Music Direct 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.
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- 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.
- 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
digital rights management 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 digital
rights management 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 Bros. Publications U.S. Inc. and EMI
Christian Music Publishing, 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.
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GOVERNMENT REGULATION
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 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, however, that
this moratorium will be extended.
As commerce on the Internet continues to evolve, federal, state, local or
foreign agencies may adopt laws and regulations that may impact our business,
including legislation and regulations relating to the distribution of music and
other content over the Internet and privacy and encryption issues. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain.
Further, the growing use of the Internet has burdened the existing
telecommunications infrastructure and has caused interruptions in telephone
service. Telephone carriers have petitioned the government to regulate the
Internet and impose usage fees on Internet service providers. The imposition of
such laws and regulations could expose us to significant liability. In addition,
any such new legislation or regulation or government enforcement of existing
regulations may limit the growth of the Internet, increase our cost of doing
business or increase our legal exposure, any of which could harm our business.
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 February 11, 2000, we had approximately 60 full-time and 5 part-time
employees. None of our employees is represented by a labor union, and we believe
that our employee relations are good.
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<PAGE> 37
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> 38
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 U.S. Inc., 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> 39
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
37
<PAGE> 40
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
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. 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,
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<PAGE> 41
determined for each share as of the date the option to purchase the shares was
granted, any such excess options shall be treated as nonstatutory stock options.
In the event that we are acquired by another company, we expect that awards
outstanding under the plan will be assumed or equivalent awards substituted by
our acquiror. If an acquiror did not agree to assume or substitute awards, the
vesting of outstanding options will accelerate prior to consummation of the
transaction.
The board of directors has the authority to amend or terminate the plan as
long as such action does not materially and adversely affect any outstanding
options and provided that shareholder approval for any amendments to the plan
shall be obtained to the extent required by applicable law.
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 Bros.
Publications U.S. Inc.. As part of the consideration paid by us for the rights
granted to us
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<PAGE> 42
under the distribution agreement, we agreed to issue 99,073 shares of our common
stock to Warner Bros. Publications U.S. Inc., contingent upon the 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
Bros. Publications U.S. Inc. 99,073 shares of our common stock. Further, under
the terms of the Warner Bros. Publications U.S. Inc. 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 Bros. Publications U.S.
Inc. to our board of directors. This right will continue for so long as Warner
Bros. Publications U.S. Inc. owns shares representing at least 2% of our
outstanding common stock. Warner Bros. Publications U.S. Inc. 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> 43
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 Bros.
Publications U.S. Inc., 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> 44
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> 45
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 30,000,000 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> 46
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 Bros.
Publications U.S. Inc., Warner Bros. Publications U.S. Inc. 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 Bros. Publications U.S. Inc. may request that we register all or a part
of its shares. Warner Bros. Publications U.S. Inc. may make this request no more
than twice. Under the terms of Warner Bros. Publications U.S. Inc.'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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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> 48
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Sales of a substantial amount of common stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the common stock prevailing from time to time in the public market and
could impair our ability to raise additional capital through the sale of our
equity securities in the future.
Upon completion of this offering, there will be 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 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
46
<PAGE> 49
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.
47
<PAGE> 50
SELLING SHAREHOLDERS
The following table sets forth the number of shares of common stock which
may be owned as of the date of this prospectus by each of the participants in a
bridge loan to Sunhawk.com, who have received warrants to purchase our Common
Stock, based on the exercise of such warrants, and the resulting percentage
ownership by such person. As of the date of this prospectus, such persons own no
other shares of Common stock of Sunhawk.com. Accordingly, after the offer and
sale of the shares set forth below, such persons will own no shares of common
stock of Sunhawk.com. None of such persons has had any position, office or other
material relationship with Sunhawk.com within the past three years other than as
a result of the ownership of such warrants and the bridge loan notes.
Such persons will sell their common stock only in "brokers' transactions"
within the meaning of Section 4(4) of the Securities Act of 1933 or in
transactions directly with a "market maker," as that term is defined in Section
3(a)(38) of the Securities Exchange Act of 1934. Such persons will sell their
common stock at prevailing market prices. No sale of any common stock can occur
until six months after consummation of this offering, since the warrants will
not be exercisable until such time.
The bridge loan was underwritten by Joseph Gunnar & Co., LLC, which
received a commission equal to 7% of the aggregate loan amount an a structuring
fee equal to 3% of the aggregate loan amount. The notes and warrants issued in
connection with the bridge loan are exempt from registration under Rule 506 of
Regulation D of the General Rules and Regulations under the Securities Act.
<TABLE>
<CAPTION>
PERCENTAGE SHARES
NUMBER OF SHARES DOLLAR OF COMMON BEING
UNDERLYING EACH AMOUNT OF SHARES OFFERED
DATE NAME INVESTOR'S WARRANT LOAN OUTSTANDING HEREBY**
---- ---- ------------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
1/26/00 Actinor Shipping ASA 1042 $ 25,000 * 1042
1/26/00 Neil Anderson 6252 150,000 * 6252
1/26/00 Elliot J. Baum 1042 25,000 * 1042
1/26/00 Continental Concessions 1042 25,000 * 1042
1/26/00 Geoffrey DeBelloy 3126 75,000 * 3126
1/26/00 Peter Durham 1042 25,000 * 1042
1/26/00 Robert & Karen Edwards 1042 25,000 * 1042
1/26/00 Donald & Betty Goldrich 1042 25,000 * 1042
1/26/00 Mark & Denise Goldschmidt 1042 25,000 * 1042
1/26/00 Brian Hilgendorf 2084 50,000 * 2084
1/26/00 Jerry L. Ivy, Jr. 3126 75,000 * 3126
1/26/00 K.K. Investors Co. 6252 150,000 * 6252
1/26/00 Mitchell & Allison Kersch 2084 50,000 * 2084
1/26/00 Robert MacDonald 1042 25,000 * 1042
1/26/00 Francine Manzo 1042 25,000 * 1042
1/26/00 John & Ann Pillote 1042 25,000 * 1042
1/26/00 Clinton & Sharon Plant 1042 25,000 * 1042
1/26/00 Edmund O. Rothschild 1042 25,000 * 1042
1/26/00 Achyut Sahaerabudhe 2084 50,000 * 2084
1/26/00 Jay & Bernice Salomon 1042 25,000 * 1042
1/26/00 Michael J. Valenzo 1042 25,000 * 1042
1/26/00 Jerold Weinger 1042 25,000 * 1042
- ----------------------------------------------------------------------------------------------
Total 41,680 $1,000,000 41,680
</TABLE>
- ------------------------
* Less than 1%
** The offering and sale of such shares shall not take place until six months
after the offering of the common stock to be sold by Sunhawk.com.
48
<PAGE> 51
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 underwriter
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 underwriter 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 shares. The shares issuable upon exercise of the
underwriter's warrants will be in all
49
<PAGE> 52
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 % 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.
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 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 was 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
50
<PAGE> 53
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.
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,
51
<PAGE> 54
may be inspected without charge at the Public Reference Room of the Securities
and Exchange Commission, Judiciary Plaza Building, 450 Fifth Street, N.W.,
Washington D.C. 20549, and the regional offices of the Securities and Exchange
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained at prescribed rates from the
Public Reference Room of the Securities and Exchange Commission at Room 1024,
Judiciary Plaza Building, 450 Fifth Street, N.W. Washington D.C. 20549. You may
obtain information regarding the Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange
Commission maintains a web site that contains registration statements, reports,
proxy statements and other information regarding registrants, including
Sunhawk.com, that file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commission's web site is
www.sec.gov.
As a result of this offering, we will be subject to the informational
requirements of the Exchange Act. So long as we are subject to the informational
reporting requirements of the Exchange Act, we will provide our shareholders
with annual reports containing audited financial statements and interim
quarterly reports containing unaudited financial information.
52
<PAGE> 55
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> 56
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), as to which the date is January 12, 2000 and Note
13 as to which the date is January 26, 2000
F-2
<PAGE> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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. and EMI Christian Music Publishing,
respectively. These agreements provide Sunhawk.com with nonexclusive rights to
distribute selected digital sheet music from the respective music catalogs
maintained by Warner Bros. Publications U.S. Inc. and EMI Christian Music
Publishing. The terms of the agreements are approximately ten and five years,
respectively.
The Warner Bros. Publications U.S. Inc. agreement provides Sunhawk.com with
nonexclusive right to distribute selected digital sheet music from the Warner
Bros. Publications U.S. Inc. music catalog. As a nonforfeitable part of the
consideration and as inducement to enter into the agreement, Sunhawk.com agreed
to issue 99,073 shares of its common stock to Warner Bros. Publications U.S.
Inc., contingent upon either the closing of a firmly underwritten public
offering or the private sale or other disposition of 15% or more of
Sunhawk.com's common stock then authorized and outstanding.
As a result of the sale of common stock to certain founders on March 31, 1999,
the contingency was removed, the shares were issued to Warner Bros. Publications
U.S. Inc. and became fully vested and non-forfeitable under the terms of the
agreement. The value of the shares of common stock issued to Warner Bros.
Publications U.S. Inc. 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
F-10
<PAGE> 65
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE TO SHAREHOLDER (CONTINUED)
shareholder. The notes are due on February 1, 2000, and carry interest at the
federal applicable short-term rate, or approximately 5%.
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
F-11
<PAGE> 66
SUNHAWK.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
related notes to the financial statements have been retroactively adjusted to
give effect to the reverse stock splits.
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 248,278 shares of common stock were
available for future grant.
F-12
<PAGE> 67
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> 68
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> 69
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> 70
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 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 September 26,
2000. The loans hold a first security on Sunhawk.com's assets as collateral. The
Loans 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
are exercisable commencing six months following the closing date of the
offering. Sunhawk.com will, at the closing of the bridge financing, 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 closed
on January 26, 2000.
F-16
<PAGE> 71
- ------------------------------------------------------
- ------------------------------------------------------
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......................... 5
Forward-looking statements........... 8
Use of proceeds...................... 9
Capitalization....................... 10
Dilution............................. 11
Dividend policy...................... 11
Selected financial data.............. 12
Management's discussion and analysis
of financial condition and results
of operations...................... 13
Business............................. 19
Management........................... 35
Related-party transactions........... 39
Principal shareholders............... 41
Description of securities............ 43
Shares eligible for future sale...... 46
Selling shareholders................. 48
Underwriting......................... 49
Transfer agent and registrar......... 51
Legal matters........................ 51
Experts.............................. 51
Where you can find more
information........................ 51
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> 72
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> 73
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 Bros. Publications U.S. Inc. 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> 74
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.
The following table sets forth the number of shares of Common Stock which
may be owned as of the date of this prospectus by each of the participants in a
bridge loan to Sunhawk.com, who have received warrants to purchase our Common
Stock, based on the exercise of such warrants, and the resulting percentage
ownership by such person. As of the date of this prospectus, such persons own no
other shares of Common stock of Sunhawk.com. Accordingly, after the offer and
sale of the shares set forth below, such persons will own no shares of common
stock of Sunhawk.com. None of such persons has had any position, office or other
material relationship with Sunhawk.com within the past three years other than as
a result of the ownership of such warrants and the bridge loan notes.
Such persons will sell their common stock only in "brokers' transactions"
within the meaning of Section 4(4) of the Securities Act of 1933 or in
transactions directly with a "market maker," as that term is defined in Section
3(a)(38) of the Securities Exchange Act of 1934. Such persons will sell their
common stock at prevailing market prices. No sale of any common stock can occur
until six months after consummation of this offering, since the warrants will
not be exercisable until such time.
The bridge loan was underwritten by Joseph Gunnar & Co., LLC, which
received a commission equal to 7% of the aggregate loan amount an a structuring
fee equal to 3% of the aggregate loan amount. The notes and warrants issued in
connection with the bridge loan are exempt from registration under Rule 506 of
Regulation D of the General Rules and Regulations under the Securities Act.
In connection with securing the bridge financing loans, there may have been
a violation of Section 5 of the Securities Act of 1933 and Sunhawk.com may be
subject to liability, which may require us to repay the funds loaned to us in
connection with the bridge financing. Under the terms of the bridge financing
loans, the loans are to be repaid from the proceeds of this offering.
II-3
<PAGE> 75
<TABLE>
<CAPTION>
PERCENTAGE SHARES
NUMBER OF SHARES DOLLAR OF COMMON BEING
UNDERLYING EACH AMOUNT OF SHARES OFFERED
DATE NAME INVESTOR'S WARRANT LOAN OUTSTANDING HEREBY**
---- ---- ------------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
1/26/00 Actinor Shipping ASA 1042 $25,000 * 1042
1/26/00 Neil Anderson 6252 $150,000 * 6252
1/26/00 Elliot J. Baum 1042 $25,000 * 1042
1/26/00 Continental Concessions 1042 $25,000 * 1042
1/26/00 Geoffrey DeBelloy 3126 $75,000 * 3126
1/26/00 Peter Durham 1042 $25,000 * 1042
1/26/00 Robert & Karen Edwards 1042 $25,000 * 1042
1/26/00 Donald & Betty Goldrich 1042 $25,000 * 1042
1/26/00 Mark & Denise Goldschmidt 1042 $25,000 * 1042
1/26/00 Brian Hilgendorf 2084 $50,000 * 2084
1/26/00 Jerry L. Ivy, Jr. 3126 $75,000 * 3126
1/26/00 K.K. Investors Co. 6252 $150,000 * 6252
1/26/00 Mitchell & Allison Kersch 2084 $50,000 * 2084
1/26/00 Robert MacDonald 1042 $25,000 * 1042
1/26/00 Francine Manzo 1042 $25,000 * 1042
1/26/00 John & Ann Pillote 1042 $25,000 * 1042
1/26/00 Clinton & Sharon Plant 1042 $25,000 * 1042
1/26/00 Edmund O. Rothschild 1042 $25,000 * 1042
1/26/00 Achyut Sahaerabudhe 2084 $50,000 * 2084
1/26/00 Jay & Bernice Salomon 1042 $25,000 * 1042
1/26/00 Michael J. Valenzo 1042 $25,000 * 1042
1/26/00 Jerold Weinger 1042 $25,000 * 1042
- ------------------------------------------------------------------------------------------
Total 41,680 $1,000,000 41,680
</TABLE>
- ------------------------
* Less than 1%
** The offering and sale of such shares shall not take place until six months
after the offering of the common stock to be sold by Sunhawk.com.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
1.2++ Form of Underwriter's Warrant Agreement.
1.3++ Selected Dealers' 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.
</TABLE>
II-4
<PAGE> 76
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
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.
10.10# Promotional Share Lock-In Agreement.
10.11++ Form of Agreement Regarding the Assignment and Assumption of
Sheet Music Production.
10.12++ License Agreement dated December 7, 1999 between Maranatha!
Music and Sunhawk.com Corporation.
10.13++ Music Conversion Agreement dated November 1, 1998 between
Avtograf, a Russian Joint Stock Company and Eller-McConney,
LLC.
10.14++ Form Letter Agreement between Sunhawk.com Corporation and
Eller McConney LLC.
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>
- -------------------------
++ 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.
II-5
<PAGE> 77
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-6
<PAGE> 78
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. 6
to the registration statement to be signed on its behalf by the undersigned, in
the City of Seattle, State of Washington, on the 11th day of February, 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. 6 to the registration statement has been signed by the following
persons in the capacities indicated below on the 11th day of February, 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-7
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
1.2++ Form of Underwriter's Warrant Agreement.
1.3++ Selected Dealers' 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.
10.12++ License Agreement dated December 7, 1999 between Maranatha!
Music and Sunhawk.com Corporation.
10.13++ Music Conversion Agreement dated November 1, 1998 between
Avtograf, a Russian Joint Stock Company and Eller-McConney,
LLC.
10.14++ Form Letter Agreement between Sunhawk.com Corporation and
Eller McConney LLC.
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>
- -------------------------
++ 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, $.0001 par value per share
("Common Stock"), set forth in Schedule I hereto (the "Offering"). Such shares
are hereinafter referred to as the "Firm Securities." Upon your request, as
provided in Section 2(b) of this Agreement, the Company shall also issue and
sell to the 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
2
<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
3
<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
4
<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.
7
<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
8
<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
9
<PAGE> 10
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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<PAGE> 11
(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 ____% 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
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<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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(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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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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<PAGE> 22
(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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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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(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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(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
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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
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<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
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<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
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<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,
no 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).
4
<PAGE> 5
(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
5
<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
6
<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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<PAGE> 10
(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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<PAGE> 12
(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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<PAGE> 13
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 ____% 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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<PAGE> 15
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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<PAGE> 16
(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
17
<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
18
<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
19
<PAGE> 20
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
20
<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.
21
<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.
22
<PAGE> 23
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
23
<PAGE> 24
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
26
<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 1.3
1,400,000 SHARES
COMMON STOCK, NO PAR VALUE
SUNHAWK.COM CORPORATION
SELECTED DEALER AGREEMENT
Ladies and Gentlemen:
1. Registration under the Securities Act of 1933, as amended (the
"Securities Act"), of 1,400,000 shares (the "Firm Shares") of common stock, no
par value (the "Common Stock"), of Sunhawk.com Corporation, a Washington
corporation (the "Company"), plus 210,000 shares (the "Option Shares") of Common
Stock which are the subject of an option granted to the underwriters solely to
cover over-allotments, if any, (the Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Stock"), as more fully described in
the final prospectus enclosed herewith (the "Prospectus"), has become effective.
We are offering certain of shares of the Stock for purchase by a selected group
signing this Agreement (the "Selected Dealers") on the terms and conditions
stated herein.
Authorized Public
Offering Price: $_______ per share of Stock.
Dealers' Selling
Concession: Not to exceed $.____ per share of Stock, payable upon
termination of this Agreement, except as provided below.
We reserve the right not to pay such concession on any
Stock purchased by any of the Selected Dealers from us
and repurchased by us at or below the price stated above
prior to such termination.
Reallowance: You may reallow not in excess of $.____ per share of
Stock as a selling concession to dealers who are members
in good standing of the National Association of
Securities Dealers, Inc. ("NASD") or to foreign dealers
who are not eligible for membership in the NASD and who
have agreed not to sell the Stock (i) to purchasers in,
or to persons who are nationals of, the United States of
America; and (ii) except in compliance with the
Interpretation with Respect to Free-Riding and
Withholding of the NASD (the "Interpretation") as to
sales outside the United States.
<PAGE> 2
Delivery and Payment: Delivery of the Stock shall be made on or
about __________, 2000 or such later date as we may
advise, using the facilities of the Depository Transfer
Corporation, or at such other place as we shall specify
on not less than one day's notice to you. Payment for
the Stock is to be made, against delivery, at the full
authorized public offering price stated above, or, if we
shall so advise you, at the public offering price less
the dealers' selling concession stated above, by a
certified or official bank check payable in same-day
funds to the order of_______________________ as agent
for Joseph Gunnar & Co., LLC.
Termination: This Agreement shall terminate at the close of business
on the 30th day following the effective date of the
Registration Statement (of which the enclosed Prospectus
forms a part), unless extended at our discretion for a
period or periods not to exceed in the aggregate 30
additional days. We may terminate this Agreement,
whether or not extended, at any time without notice.
2. Except as otherwise expressly provided in this Agreement, members
of the Selected Dealers may immediately offer the Stock for sale and take orders
therefor only at the public offering price, subject to confirmation and
allotment by us. We, in turn, are prepared to receive orders subject to
confirmation and allotment by us. We reserve the right to reject any order in
whole or in part or to allot less than the number of shares of Stock for which
application has been made. Orders transmitted by telephone must be promptly
confirmed by letter or telegram.
3. You, by becoming a member of the Selected Dealers, agree (a) to
take up and pay for the shares of Stock allotted and confirmed to you; (b) not
to use any of the Stock to reduce or cover any short position you may have; (c)
upon our request, to advise us of the number of shares of Stock purchased from
us as manager of the Selected Dealers remaining unsold by you and to resell to
us any or all of such unsold Stock at the public offering price stated above,
less all or such part of the concession allowed you as we may determine; and (d)
to make available a copy of the Prospectus to all persons who on your behalf
will solicit orders for the Stock prior to the making of such solicitations by
such persons. You are not authorized to give any information or to make any
representations other than those contained in the Prospectus or any supplements
or amendments thereto.
4. As contemplated by Rule 15c2-8 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), you agree to mail a copy of the
Prospectus to any person making a written request therefor during the period
referred to in the rules and regulations adopted under the Exchange Act, the
mailing to be made to the address given in the request. You confirm that you
have delivered all preliminary prospectuses and revised preliminary
prospectuses, if any, required to be delivered under the provisions of Rule
15c2-8 and agree to deliver all copies of the Prospectus required to be
delivered thereunder. We have heretofore delivered to you such preliminary
prospectuses as have been required by you, receipt of which is hereby
acknowledged, and will deliver such further prospectuses as may be requested by
you.
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<PAGE> 3
5. You agree that until termination of this Agreement you will not
make purchases or sales of the Common Stock except (a) pursuant to this
Agreement, (b) pursuant to authorization received from us or (c) in the ordinary
course of business as broker or agent for a customer pursuant to any unsolicited
order.
6. Additional copies of the Prospectus and any supplements or
amendments thereto shall be supplied to you in reasonable quantity upon your
request.
7. The Stock is offered by us for delivery when, as and if sold to,
and accepted by, us and subject to (i) the terms herein and in the Prospectus or
any supplements or amendments thereto, (ii) our right to vary the concessions
and terms of offering after their release for public sale, (iii) approval of
counsel as to legal matters and (iv) withdrawal, cancellation or modification of
the offer without notice.
8. Upon written application to us, you shall be informed as to the
jurisdictions under the securities or blue sky laws of which we believe the
Stock is eligible for sale, but we assume no responsibility as to such
eligibility or the right of any member of the Selected Dealers to sell any of
the Stock in any jurisdiction. Upon the completion of the public offering
contemplated herein, each member of the Selected Dealers agrees to promptly
furnish to us, upon our request, territorial distribution reports setting forth
each jurisdiction in which sales of the Stock were made by such member, the
number of shares of Stock sold in such jurisdiction, and any further information
that we may request, in order to permit us to file on a timely basis any report
which we as underwriter of the offering or manager of the Selected Dealers may
be required to file pursuant to the securities or blue sky laws of any
jurisdiction.
9. You, by becoming a member of the Selected Dealers, represent that
you are (a) a member in good standing of the NASD or (b) a foreign dealer who is
not eligible for membership in said NASD, and have agreed not to sell the Stock
(i) to purchasers in, or to persons who are nationals of, the United States of
America; and (ii) except in compliance with (A) the Interpretation with Respect
to Free-Riding and Withholding of said NASD as to sales outside the United
States and (B) Sections 2730, 2740, 2420 (as applicable to a non-member
broker/dealer in a foreign country) and 2750 of said NASD's Conduct Rules. In
addition, if you are a member of the NASD you confirm that you will not reallow
any commissions to any non-member broker/dealers, including foreign
broker/dealers registered pursuant to the Exchange Act.
You further represent and warrant that neither you nor any of your
affiliates (as such term is defined in Rule 405 promulgated under the Securities
Act) have received compensation of any nature from the Company pursuant to any
agreement, arrangement or understanding with the Company or otherwise during the
12-month period prior to and including the date hereof and neither you nor any
such affiliate will enter into any agreement, arrangement or understanding with
the Company for or otherwise receive compensation of any nature from the Company
during the 12-month period following the date hereof.
10. You, by becoming a member of the Selected Dealers, represent
that neither you nor any of your directors, officers, partners or "persons
associated with" you (as defined in the By-Laws of the NASD), nor, to your
knowledge, any "related person" (defined by the NASD
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<PAGE> 4
to include counsel, financial consultants and advisors, finders, members of the
selling or distribution groups, and any other persons associated with or related
to any of the foregoing) or any other broker/dealer, (i) within the last 18
months have purchased in private transactions, or intends before, at or within
six months after the commencement of the public offering of the Stock to
purchase in private transactions, any securities of the Company or any parent,
predecessor or subsidiary thereof; (ii) within the last 12 months had any
dealings with the Company or the parent, predecessor, subsidiary or controlling
stockholder thereof; or (iii) have, except as contemplated by this Agreement,
any agreement, arrangement or understanding to receive compensation in
connection with (as defined by the NASD) the distribution of the Stock.
11. Nothing herein shall constitute any members of the Selected
Dealers partners with us or with each other, but you agree, notwithstanding any
prior settlement of accounts or termination of this Agreement, to bear your
proper proportion of any tax or other liability based upon the claim that the
Selected Dealers constitute a partnership, association, unincorporated business
or other separate entity and a like share of any expenses of resisting any such
claim.
12. We shall be the underwriter of the offering and manager of the
Selected Dealers and shall have full authority to take such action as we may
deem advisable with respect to all matters pertaining to the offering or the
Selected Dealers or any members of them. Except as expressly stated herein, or
as may arise under the Securities Act, we shall be under no liability to any
member of the Selected Dealers as such for, or with respect to, (i) the validity
of the Stock; (ii) the form of, or the statements contained in, the Prospectus,
the Registration Statement of which the Prospectus forms a part, any supplements
or amendments to the Prospectus or such Registration Statement, any preliminary
prospectus, any instruments executed by or obtained from, or any supplemental
sales data or other letters from, the Company, or others; (iii) the form or
validity of the Underwriting Agreement or this Agreement; (iv) the eligibility
of the Stock for sale under the laws of any jurisdiction; (v) the delivery of
the Stock; (vi) the performance by the Company, or others, of any agreement on
its or their part; or (vii) any matter in connection with any of the foregoing,
except our own want of good faith.
13. If for federal income tax purposes the Selected Dealers, among
themselves or with us, should be deemed to constitute a partnership, then we
elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A
of the Internal Revenue Code of 1986, as amended, and we agree not to take any
position inconsistent with such selection. You authorize us, in our discretion,
to execute and file on your behalf such evidence of such election as may be
required by the Internal Revenue Service.
14. All communications from you shall be addressed to us at Joseph
Gunnar & Co., LLC, 30 Broad Street, 12th Floor, New York, New York 10004,
Attention: Neal Scott, Syndicate Department. Any notice from us to you shall be
given if mailed, telegraphed or telexed to you at the address to which this
letter is mailed. This Agreement shall be construed in accordance with the laws
of the State of New York without giving effect to conflict of laws rules or
principles. Time is of the essence in this Agreement.
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<PAGE> 5
If you desire to become a member of the Selected Dealers, please
advise us to that effect immediately by telegram and sign and return to us the
enclosed counterpart of this letter.
Very truly yours,
JOSEPH GUNNAR & CO., LLC
By:
-----------------------------------
Name: Joseph A. Alagna, Jr.
Title: A Member
We accept membership in the Selected Dealers on the terms specified above
and acknowledge receipt of the final Prospectus. In purchasing any Stock, we
have relied solely on the final Prospectus and on no other statements, written
or oral.
Dated: February ___, 2000
-----------------------------------
(Name of Entity)
By:
-----------------------------------
Name:
Title:
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<PAGE> 1
[STOCK CERTIFICATE]
SUNHAWK.COM
[SEAL] [SEAL]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF WASHINGTON CUSIP 86 7378 10 4
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 hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This 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 SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
SUNHAWK.COM CORPORATION
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 _____________
(Cust) (Minor)
under Uniform Gifts to Minors
ACT _________________________________
(State)
UNIF TRF MIN ACT - _________ Custodian (until age ______)
(Cust)
_________ under Uniform Transfers
(Minor)
to Minors Act _______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated ________________________ X _________________________________________
X _________________________________________
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
David M. Otto
Email: [email protected]
February 11, 2000
VIA OVERNIGHT MAIL
Richard Wulff, Chief
Office of Small Business
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Mail Stop 3-4
Washington, D.C. 20549
Re: Sunhawk.com Corporation
Registration Statement on Form SB-2
File No. 333-80849
Dear Mr. Wulff:
We are writing to request the withdrawal of our previous request for
confidential treatment of the following exhibits.
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, and
10.4 Music Conversion Agreement dated as of April 1, 1998 by and between
Sunhawk.com Corporation and International Music Engraving Company, as
amended.
Should you have any additional comments or questions, please feel free to
contact the undersigned.
Sincerely,
THE OTTO LAW GROUP, P.L.L.C.
David M. Otto
cc: Stephan Stein
Stuart Sieger, Esq.
Tricia Parks-Holbrook
Carol Sherman, Esq.
Aaron L. Autajay
Michael Coco, Esq.
Jason Wilder
Client file
<PAGE> 2
EXHIBIT 10.2
WARNER BROS. PUBLICATIONS U.S. INC.
15800 N.W. 48th Avenue
Hialeah, Florida 33014
Dated: May 18, 1998
SUNHAWK CORPORATION
318 Terry Avenue North
Seattle, WA 98109
Gentlepersons:
The following, when signed by you and by us, will constitute the agreement
pursuant to which we have granted you a nonexclusive license to distribute
copies of printed editions included in our catalog from time to time (but, in
each instance, only for such periods of time as we ourselves have the right to
distribute such editions) ("EDITIONS") via your internet website (currently
located at "http://www.sunhawk.com") (the "WEBSITE"):
1. TERM:
1.1. The Term of this Agreement shall be deemed to have commenced as of
the above date and shall continue in effect to and including December 31, 2007
(subject to possible earlier termination as provided below.)
1.2. Such Term shall be subject to early termination at our election by
notice to you upon the occurrence of any of the following events of default:
1.2.1. The voluntary filing by you of any bankruptcy or insolvency
proceeding, or the filing of bankruptcy or insolvency proceedings against you,
or any other creditors' proceedings seeking control of your stock and/or
assets, which are not dismissed within one hundred twenty (120) days thereafter;
1.2.2. Your failure to account to us and/or to pay us amounts due
hereunder which failure is not cured within ten (10) business days following
your receipt of notice from us demanding the same;
1.2.3. Any other breach of this Agreement not cured by you in the
manner prescribed in Paragraph 11.2, below; or
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<PAGE> 3
Sunhawk Corporation
Distribution Agreement
May 18, 1998
1.2.4. In the event that Marlin Eller and Brent Mills shall no
longer be actively in charge of the day to day operations of your company, it
being understood and agreed that notice of termination pursuant to this Section
1.2.4 must be given within six (6) months following our receipt of notice that
both Messrs. Eller and Mills are no longer actively in charge of such day to
day operations (provided that the latter notice shall have been given to us
within ten [10] days following the first day upon which neither Mr. Eller nor
Mr. Mills is actively in charge).
2. TERRITORY:
The Territory covered by this Agreement shall be the world, provided,
however, that in any instance in which our print and/or digital/internet rights
with respect to a specific Edition and/or any composition(s) contained herein
are less than worldwide, your rights hereunder shall be limited to those
territories in respect of which we have the right to distribute such Edition
and/or component composition(s).
3. GRANT OF RIGHTS/RESTRICTIONS/PROCEDURES/COSTS OF CONVERSION AND OPERATION:
3.1 Grant of Rights/Restrictions:
3.1.1. Subject in each instance to (1) possible territorial
limitations as provided in Section 2, above, (2) any and all requirements
and/or restrictions as to time, content, and the manner of distribution
contained in the agreements through which the rights granted to you hereunder
have been or may hereafter be derived, and (3) our prior written consent (which
consent shall not be unreasonably withheld) as to each and every specific
Edition, you shall have the nonexclusive right to advertise, promote and sell
or electronically distribute Editions solely via the Website within the
Territory during the Term (as well as the right after the Term to fulfill
orders placed during the Term but not fulfilled prior to the expiration of the
Term.)
3.1.2 In each instance in which we give our written consent
pursuant to Section 3.1.1, above, we shall inform you as to any time, content
and/or manner restrictions applicable to the Edition(s) covered by the consent.
In addition, in any instance in which we lose our rights with respect to a
specific Edition, or our rights with respect to such Edition are further
limited, we shall so notify you.
3.2. Distribution Methods and Procedures:
3.2.1. At your election, you may distribute the Editions on (I) a
"HARD COPY FULFILLMENT" basis (i.e., where consumers order hard copies from you
via the Website, you
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Sunhawk Corporation
Distribution Agreement
May 18, 1998
forward such orders to us, and we fulfill such orders), the procedure for which
is described in paragraph 5.3, below, or (ii) on an "ELECTRONIC DISTRIBUTION"
basis (i.e., where consumers download their copies directly from the Website.)
3.2.2. Preparation For Electronic Distribution;
Disposition of Electronic Files; Post-Term Uses:
(A) We will establish a procedure under which we will supply you
with an approved text of and, in the event (and to the extent) that we elect to
prepare the same, an electronic version with information concerning the coding
of, each Edition to be distributed by you hereunder. In addition, we shall
provide editorial/marketing advice to you to assist you to select and
prioritize Editions to be distributed hereunder.
(B) You shall have the right to convert Editions approved by us
into electronic formats suitable for electronic distribution;
(C) The entire cost of such conversion shall be borne by you,
including, but not limited to, translating and electronic coding of each
Edition.
(D) At the end of the Term (whether by expiration or by early
termination), you shall immediately discontinue all distribution activities
with respect to Editions (except for the completion of transactions commenced
prior to such termination), and remove all electronic file copies of Editions
from the Website file server(s).
(E) Within ten (10) days thereafter, you shall deliver to us
electronic copies of all files of Edition(s) so converted by you, together with
an affidavit sworn to by a responsible corporate officer attesting to your
discontinuance of all distribution activities with respect to the Editions and
your removal of all electronic file copies of Editions from the Website file
server(s), it being understood and agreed that you may retain archival copies
of Editions previously distributed by you hereunder. However, in the event that
such termination is pursuant to paragraph 1.2.4, above, such archival copies
shall be destroyed and we shall be provided with an affidavit sworn to by a
responsible corporate officer attesting to such destruction.
(F) We understand and agree that such electronic files may
incorporate technological elements which are proprietary in nature (whether or
not the same have been covered by patent(s), trademark(s), trade secrets or
other statutory protection(s)), that as between you and us, such technological
elements are and will remain your property (unless, and to the extent that,
such technological elements become public domain), and that (if and to the
extent
3
<PAGE> 5
Sunhawk Corporation
Distribution Agreement
May 18, 1998
that you notify us thereof at or prior to the time of delivery of the
electronic file copies described above) we shall not utilize such technological
elements thereafter except pursuant to a written agreement between you and us,
provided, however, that if (and to the extent that) you permit any third party
to utilize such technological elements from time to time, you shall notify us
thereof and you shall make the same technological elements available to us upon
the same terms and condition as are offered to such third party.
3.2.3. Separate Sub-Page:
(A) You shall develop and maintain at all times during the
Term a separate sub-page within the Website entitled MUSIC FROM WARNER BROS.
PUBLICATIONS, (the "SUB-PAGE") which shall be utilized solely for the purposes
of this Agreement.
(B) The Sub-Page shall be designed by you and such design and
any subsequent modifications thereto shall be subject in each instance to our
prior written approval, which may be obtained by you via fax (and shall be
deemed to have been given in any instance in which we do not disapprove via fax
within five (5) business days following our receipt of the material for which
approval is sought).
(C) The Sub-Page shall include such trademarks, service
marks, and artwork as may be specified by us by notice to you, or approved in
writing by us, from time to time, and shall be made available for our and
Warner/Chappell Music, Inc.'s use as a linking page to our and/or their
website(s).
3.2.4. Electronic distribution shall be under such publisher
imprints as we shall specifically designate by notice to you in each instance,
it being understood and agreed that each electronically distributed Edition
shall be formatted to include such trademarks and/or copyright notices as we may
specify from time to time, so that such information is made part of each
electronic distribution.
3.2.5. Each Edition which is made available for electronic
distribution shall be offered only in such specific format(s) as we shall
supply, and, unless we specifically notify you to the contrary, the downloadable
file of each such Edition shall include a playback feature which incorporates a
midi file arrangement based solely upon the musical content of the subject
Edition.
3.3. All costs of operating and maintaining the Website (including the
Sub-Page), and all costs of distribution, advertising, marketing, promotion and
sale of Editions by you shall be borne by you.
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<PAGE> 6
Sunhawk Corporation
Distribution Agreement
May 18, 1998
4. LINKS:
4.1. You will assist us in the establishment of a reasonable number of
site-to-site Internet LINKS FROM other websites to the Website, including, but
not limited to, links from music dealers, various Warner Music Group websites,
and, specifically (and without limiting the generality of the foregoing) from
the websites of Warner/Chappell Music, Inc. ("WCMI") and/or us.
4.2. We and WCMI will provide (and maintain at all times during the Term
of this Agreement) highly visible banner ad and song links from all present
and/or future websites controlled by either or both of us, including, but not
limited to, www.warnerchappell.com, and we shall use best efforts to obtain the
same ads and links on www.warnerbros.com. Such banner ad and song links will be
at least as prominent as the banner and song links provided by WCMI or us to
other distributors of Editions, if any, publicized on any present and/or future
websites controlled by WCMI and/or us.
4.3. You will also provide (and maintain at all times during the Term of
this Agreement) links from your present and/or future website(s) to all
websites referred to in paragraph 4.2, above.
5. ROYALTIES:
5.1. Electronic Distribution of Editions:
5.1.1. In consideration of the foregoing, you hereby agree to pay us
sixty-five percent (65%) of your "GROSS RECEIPTS" (as defined in paragraph
5.4.1., below) from the electronic distribution of Editions.
5.1.2. However, in the event that you (I) pay a higher royalty rate
in respect of electronic distribution to any other "MUSIC PUBLISHER" (as
defined in para. 5.4.2. below) during the Term, or (ii) issue shares of your
common stock ("COMMON STOCK"), or grant any option, warrant or other security
exercisable for or convertible into shares of Common Stock, representing more
than ten percent (10%) of the then-issued and outstanding shares of Common
Stock, to any other Music Publisher, you will promptly notify us and we
shall have the right, in our sole discretion, to accept all of the terms of
your agreement with such Music Publisher in lieu of the provisions hereof with
respect to royalty rates, music conversion costs (if any), and rights to an
equity interest in you, effective as of the date of your agreement with such
Music Publisher.
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<PAGE> 7
Sunhawk Corporation
Distribution Agreement
May 18, 1998
5.2. Electronic Distribution of Third Party Editions:
In addition, you hereby agree to pay us amount equal to ten percent
(10%) of the royalties paid by you to third parties with respect to the
electronic distribution of editions of "popular" musical compositions pursuant
to agreements between you (or any person, firm or corporation directly or
indirectly owned or controlled by you) and any other "MUSIC PUBLISHER" (as
defined in paragraph 5.45, below.)
5.3. Hard Copy Fulfillment:
5.3.1. With respect to hard copy fulfillment, orders shall be
received by you and the sale/credit card transaction shall be completed by you.
Such order shall be transmitted to us for fulfillment and we shall credit your
account with a distribution fee equal to twenty percent (20%) of the retail
selling price of each copy sold, paid for and not returned.
5.3.2. It is understood and agreed that in the event that you
forward a hard-copy order to us and we do not then have the item(s) ordered in
stock, you will first authorize the purchase utilizing the prospective buyer's
credit card, and you will settle the sale and complete the credit transaction
after we fulfill the order (and notify you thereof).
5.4. Definitions:
5.4.1. "GROSS RECEIPTS":
(A) "GROSS RECEIPTS" means the gross amount of monies
actually received by you, or credited to your account, in respect of electronic
distribution of Editions, less any taxes, discounts, reasonable credit card
transaction fees and/or credits actually paid or borne by you. (In the context
of this paragraph 5.4.1, "you" shall include any parent, subsidiary or
affiliated entity or any other person, firm or corporation directly or
indirectly controlled by you which receives monies on your behalf by reason of
the electronic distribution of Editions via the Website.) In addition, you may
deduct a credit card transaction fee not to exceed $.50 per transaction, a
credit card transaction rate of 5%, and a "music lover's club discount" of 5%.
(B) Notwithstanding the foregoing, a minimum level of
"Gross Receipts" shall be established by mutual written agreement for each
classification of Edition prior to your first distribution thereof. Such
minimum shall be based on our then-standard price parameters for similar
printed versions of each classification of Editions and shall take into
consideration the value-added features of the downloadable Edition.
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<PAGE> 8
5.4.2. "MUSIC PUBLISHERS" means any of the following music publishers (as
well as any subsidiary and affiliated companies, except where indicated below):
- EMI Music (but excluding EMI's Christian music publishing
division);
- PolyGram Music
- BMG Music
- MCA Music
- Rondor Music
- Sony Music
6. FUTURE STOCK ISSUANCE/REGISTRATION RIGHTS/DIRECTORSHIP:
6.1. In consideration of the covenants and agreements undertaken by us
hereunder, you agree to issue to us 415,543 unregistered shares of Common Stock
(the "SHARES"), as adjusted from time to time in the event of any stock split,
stock dividend, or similar recapitalization, upon the closing of a firmly
underwritten public offering of Common Stock, or the private sale (or other
disposition) of 15% or more of the Common Stock then authorized and
outstanding. You warrant and represent that 20,000,000 shares of Common Stock
are authorized, and that of such shares 3,739,894 are presently issued and
outstanding.
6.2. We acknowledge that the Shares will not be registered under the
Securities Act of 1933, as amended (the "ACT"), or applicable state securities
laws. We further acknowledge that we will be required to bear the economic
risks of our investment in the Shares for an indefinite period of time because
we will be unable to sell, transfer or assign the Shares except in compliance
with the registration provisions of the Act and applicable state securities
laws, or with an opinion of counsel reasonably satisfactory to you that
registration under the Act and applicable state securities laws is not required
for lawful disposition of the Shares. We consent to the placement of a legend
on the certificates for the Shares indicating our investment intent and the
restrictions on transfer of the Shares, and also to the placement of a "stop
transfer" order on your stock transfer books until such time as the Shares may
be lawfully resold or distributed.
6.3. If you receive a written request from us, at any time after the
later of (I) the expiration of any "lock-up" period or (ii) 180 days following
the closing of a firmly underwritten public offering of Common Stock, that you
register all or a part of the Shares for resale to us, then you will, as soon
as practicable, use your best efforts to effect such registration as would
permit or facilitate the sale and distribution of all or such portion of the
Shares as are specified in our request. We agree to furnish you with such
information, including information relating to our plan of distribution of the
Shares, as you may request by written notice to us, and to enter into customary
indemnification covenants with you, in connection with such registration.
7
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Sunhawk Corporation
Distribution Agreement
May 18, 1998
6.3.1. If your Board of Directors determines in good faith
that such registration would be seriously detrimental to you and that it is
essential to defer the filing of such registration statement, then you shall
have the right to defer such filing for a period of not more than 180 days
after the receipt of the request from us, provided that you shall not defer
your obligation in this manner more than twice in any twelve-month period.
6.3.2. You shall not be obligated to effect, or to take any
action to effect, any registration pursuant to para. 6.3 after you have
initiated two such registrations.
6.4 Brent Mills and Marlin Eller will vote (or cause to be voted)
their shares of Common Stock (as well as the shares of Common Stock held by any
person owned or controlled, directly or indirectly, by either or both of
Messrs. Mills and Eller) for the election of an individual to be designated by
us as a nominee to your Board of Directors at each election of directors held
while we own shares representing at least two percent (2%) of the outstanding
Common Stock. It is understood and agreed that we will be entitled to nominate
one person to serve as a member of your Board of Directors at any given time,
irrespective of whether you implement a staggered Board or if, for any other
reason, there is an election of directors during our nominee's tenure in
office. By their signatures below, Messrs. Mills and Eller accept the
obligations of the para. 6.3.1 insofar as the same apply to shares directly or
indirectly owned or controlled by either or both of them.
7. ACCOUNTING AND PAYMENT/AUDIT/SUIT:
7.1. You shall keep true and accurate books of account concerning
transactions under this Agreement, and you shall deliver an accounting
statement (plus the appropriate payment of royalties) to us, within forty-five
(45) days following the end of each calendar quarter. To the extent that we are
paid by you, we shall in turn account to and pay all third parties from or
through whom the rights granted to you hereunder are derived (as well as
arrangers and/or adaptors engaged by us in the preparation of Editions, but
excluding such personnel engaged by you).
7.2. We shall keep true and accurate books of account concerning
sales by us pursuant to hard copy fulfillment orders referred by you to us
pursuant to para. 5.3, and we shall deliver an accounting statement (plus the
appropriate payment of distribution fees) to you, within forty-five (45) days
following the end of each calendar quarter.
7.3. Each party shall have the right, at such party's sole cost and
expense, to examine the other party's books of account concerning transactions
pursuant to this Agreement. Each
8
<PAGE> 10
Sunhawk Corporation
Distribution Agreement
May 18, 1998
statement (and the accounting period to which such statement relates) shall be
open to inspection for three (3) years following the date when such statement
is received by such party. Such inspection shall take place at the examined
party's principal place of business during normal business hours upon at least
thirty (30) days' notice, not more than once during each calendar year
(although a specific inspection may involve more than one visit.)
7.4 Legal action with respect to a specific statement and/or the
accounting period to which such statement relates shall be forever barred if
not commenced in a court of competent jurisdiction within the earlier of (1)
thirty-six (36) months following the receipt of such statement or (2) twelve
(12) months following the examined party's receipt of the audit report for such
accounting period.
7.5 For the purposes of this paragraph 7, a statement shall be deemed to
have been received when due unless the party to whom such accounting is
rendered gives notice of nonreceipt within sixty (60) days following the due
date thereof (in which event the time limitations prescribed above shall be
deemed to run from the date of actual receipt of such statement.)
8. ARRANGEMENTS/ADAPTATIONS:
8.1 Any arrangement(s) and/or adaptation(s) of compositions included in
Editions created by you or on your behalf shall be created under your
supervision on a "work for hire" basis, at your sole cost and expense. However,
from inception, the same shall belong to us, subject only to your right to use
the same for the purposes of this Agreement.
8.2 In each instance, promptly upon completion thereof, you shall assign
to us all rights in the copyright therein, throughout the world, inclusive of
copyright in the electronic file thereof, together with the right to register
such copyright in our name as the "author" or to assign such right to such
third party or parties as we may choose.
8.3 In any instance in which you fail to deliver the appropriate
assignment to us, we shall have the right to execute the same in your name and
on your behalf as your attorney-in-fact (which appointment is coupled with an
interest and is therefore irrevocable) and to register the same with the U.S.
Copyright Office and any other governmental agencies throughout the world as we
may select.
9. SPECIAL NOTICE:
In addition to the notice requirements set forth in paragraph 3.2.3(C),
above, you shall include the
9
<PAGE> 11
Sunhawk Corporation
Distribution Agreement
May 18, 1998
following special notice in A PROMINENT TYPEFACE READILY READABLE WITH THE
NAKED EYE on each copy of each electronically distributed Edition:
"NOTICE: Purchasers of this musical file are entitled to use it for their
personal enjoyment and musical fulfillment. However, any duplication,
adaptation, arranging and/or transmission of this copyrighted music
requires that written consent of the copyright owner(s) and of WARNER BROS.
PUBLICATIONS, INC. Unauthorized uses are infringements of the copyright
laws of the United States and other countries and may subject the user to
civil and/or criminal penalties."
10. WARRANTIES AND REPRESENTATIONS:
10.1. Each party warrants and represents to the other that such party has
full right, power and authority to enter into and to perform its obligations
pursuant to this Agreement in accordance with its terms.
10.2. In each instance in which (and to the extent to which) we grant you
the right to electronically distribute an Edition, such grant shall constitute
a warranty and representation on our part that your exercise of the rights so
granted to you in compliance with the terms and conditions set forth above
shall not violate applicable law and shall not infringe upon the rights of any
third party, whether contractual in nature or whether based upon other rights,
including but not limited to those relating to copyright, trademark, service
mark, or rights of privacy and/or publicity.
10.3. Your use on the Website of any material(s) not provided to you by us
shall constitute a warranty and representation on your part that you own or
control sufficient rights therein to permit such use thereof and that such use
shall not violate applicable law and shall not infringe upon the rights of any
third party, whether contractual in nature or whether based upon other rights,
including but not limited to those relating to copyright, trademark, service
mark or rights of privacy and/or publicity.
11. INDEMNITIES; CURE OF BREACHES; WAIVER:
11.1. Indemnity:
11.1.1. Each party will indemnify the other, and hold the other harmless,
against any loss or damage (including court costs and reasonable attorneys'
fees) due to a breach of this agreement by that party which results in a
judgment against the other party or which is settled with the indemnifying
party's prior written consent (not to be unreasonably withheld)
10
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Sunhawk Corporation
Distribution Agreement
May 18, 1998
11.1.2. Each party (the "DEFENDING PARTY") will provide a defense on
behalf of the other party in the event of any claim, demand, or litigation
arising from or related to the breach (or alleged breach) of the Defending
Party's representations and warranties hereunder or otherwise relating to such
party's obligations under this Agreement.
11.1.3. Each party shall at all times maintain in force a policy of
errors-and-omissions insurance, issued by a carrier licensed to do business in
New York, California, Tennessee and Florida, having policy limits of at least
Two Million Dollars ($2,000,000) for a single claim and Six Million Dollars
($6,000,000) for all claims thereunder, which policy shall name the other party
as an additional insured and which shall require at least thirty (30) days'
advance notice of cancellation to the other party. Certificates of such coverage
shall be provided by each party to the other party promptly following execution
of this Agreement.
11.1.4. Each party shall give the other party prompt notice of any
third party claim, action or proceeding in respect of which indemnity is sought
and the other party shall make a good faith effort to consult with the
notifying party prior to responding to such claim, action or proceeding.
11.1.5. Each party is entitled to be notified of all proceedings in
any action in respect of which such party is the indemnitee, and to
participate in the defense thereof by counsel selected by such party, at such
party's sole cost and expense.
11.2. Cure of Breaches.
11.2.1. Neither party will be deemed in breach unless the other party
gives notice and the notified party fails to cure within 30 days (10 business
days, in the case of a payment of money or the rendition of an accounting
statement) after receiving notice; provided, that if the alleged breach does
not involve a payment of money and/or the rendition of an accounting statement
and is of such a nature that it cannot be completely cured within 30 days, the
notified party will not be deemed to be in breach if the notified party
commences the curing of the alleged breach within such 30-day period and
proceeds to complete the curing thereof with due diligence within a reasonable
time thereafter.
11.2.2. However, either party shall have the right to seek injunctive
relief to prevent a threatened breach of this agreement by the other party.
11
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Sunhawk Corporation
Distribution Agreement
May 18, 1998
11.3 Waiver:
The waiver of the applicability of any provision of this Agreement or
of any default hereunder in a specific instance shall not affect the waiving
party's rights thereafter to enforce such provision or to exercise any right or
remedy in the event of any other default, whether or not similar.
12. CONFIDENTIALITY/NONDISCLOSURE:
12.1 In the course of performing this Agreement, one party may disclose
information to the other concerning its inventions, know-how, trade secrets and
proprietary information ("CONFIDENTIAL INFORMATION") as may be necessary to
further the purposes of this Agreement. All such Confidential Information
disclosed hereunder shall remain the sole property of the party disclosing such
information and the other party shall have no interest in or rights with
respect thereto. Each party agrees not to (i) use Confidential Information
disclosed by the other party or (ii) to disclose such Confidential Information
to any of its employees or agents or any third party, except for such persons
who have a bona fide need for such information to effect the purposes of this
Agreement, without the disclosing party's prior written consent. Each party
will take all reasonable precautions to prevent an unauthorized disclosure of
such Confidential Information, including at a minimum exercising the same degree
of care and taking the same precautions that such party exercises and takes
with regard to protection of its own most confidential information.
12.2 Neither party hereto shall disclose the terms and conditions of this
Agreement to any third party (other than such party's attorneys and/or
accountants), and shall take reasonable steps to ensure that its employees,
affiliates, and agents do not disclose the terms and conditions of this
Agreement to any third party, without the prior written consent of the other
party, except to the extent that such disclosure is made to such party's
attorneys and/or accountants or is otherwise compelled in connection with
litigation proceedings.
12.3 The obligations set forth in this Section 12 will survive the Term of
this Agreement.
13. NOTICES/STATEMENTS/CONSENTS:
13.1 Notices shall be sent by certified (return receipt requested),
registered mail, Federal Express or Airborne Express, or any other means by
which delivery may be verified, to you and to us at the addresses set forth
above, or to such other addresses as the parties may designate from time to
time by notice in like manner.
12
<PAGE> 14
Sunhawk Corporation
Distribution Agreement
May 18, 1998
13.2. Statements (and payments, if applicable) shall be sent by
ordinary mail to the parties' respective addresses for notice.
13.3. Approval/Consent:
Where the consent or approval of a party is required, it shall
not be unreasonably withheld (unless expressly provided otherwise herein) and
shall be deemed given unless the party whose consent or approval has been
requested delivers notice of nonconsent or disapproval to the other party
within 15 days after receipt of notice requesting such consent or disapproval.
14. LAW AND FORUM:
14.1. This Agreement has been entered into in and is to be
interpreted in accordance with the laws of, the State of Florida. All actions
or proceedings seeking the interpretation and/or enforcement of this Agreement
shall be brought only in the State or Federal Courts located in Miami-Dade
County, all parties hereby submitting themselves to the jurisdiction of such
courts for such purpose.
14.2. Service of Process:
14.2.1. Service of process in any action between the parties
may be made by registered or certified mail addressed to the parties'
then-current addresses for notice as prescribed in para. 13, above.
14.2.2. Service shall become effective thirty (30) days
following the date of receipt by the party served (unless delivery is refused,
in which event service shall become effective thirty [30] days following the
date of such refusal).
15. MISCELLANEOUS:
15.1. This Agreement contains the entire agreement between the
parties concerning the subject matter, and replaces and supersedes any and all
prior agreements, written and/or oral.
15.2. This Agreement may not be modified or amended except by a
further written agreement signed by both parties.
15.3. The parties are independent contractors, and nothing contained
herein shall constitute either party the agent of, or a partner, joint venture
or co-venturer with, the other party.
13
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Sunhawk Corporation
Distribution Agreement
May 18, 1998
Neither party shall hold itself out to any third party as authorized to enter
into binding commitments on behalf of the other.
15.4. Personal Nature of Agreement; Assignment:
15.4.1. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties and their respective successors and assigns. However,
this Agreement is personal to the parties, and neither party may assign this
Agreement in whole or part except to a parent or subsidiary corporation of the
assignor or to a purchaser of substantially all of the assignor's stock or
assets which is then actively engaged on a regular basis in the same business
as the assignor.
15.4.2. No such assignment shall relieve the assignor of any
liability hereunder, and no such assignment shall become effective unless the
assignee shall deliver to the other party the assignee's written assumption of
the performance of the assignor's obligations hereunder (and the responsibility
for the assignor's warranties and representations hereunder) for all periods
following the effective date of such assignment.
15.5. The paragraph headings included in this Agreement are included for
the convenience of the parties, and neither add to nor detract from the
provisions of said paragraphs.
Very truly yours,
WARNER BROS. PUBLICATIONS U.S. INC.
By: /s/ FRED S. ANTON
--------------------------------
Fred S. Anton - President
Chief Operating Officer &
Chief Financial Officer
AGREED AND ACCEPTED:
SUNHAWK CORPORATION
By: /s/ MARLIN J. ELLER
--------------------------
Marlin Eller
Chairman
14
<PAGE> 16
Sunhawk Corporation
Distribution Agreement
May 18, 1998
The undersigned hereby accepts the obligations described in para 4.2 of the
Agreement.
WARNER/CHAPPELL MUSIC, INC.
By: /s/ DONALD E. BIEDERMAN
---------------------------------
Donald E. Biederman
Executive Vice President
Business Affairs
The undersigned hereby accept the obligations described in paragraph 6.4 of the
within Agreement.
/s/ MARLIN ELLER
- ------------------------------------
MARLIN ELLER
/s/ BRENT MILLS
- ------------------------------------
BRENT MILLS
15
<PAGE> 17
Amendment to Agreement
("EPS" File Conversion)
This is an amendment to the agreement which was made as of May 18, 1998
("Agreement") by and between Warner Bros. Publications U.S. Inc. ("Warner") and
Sunhawk Corporation ("Sunhawk").
Warner wishes to convert the Edition entitled "Rhapsody in Blue" into the
Solero(TM) format, and may from time to time request that Sunhawk convert other
specific Editions into the Solero format.
Sunhawk wishes to convert "Rhapsody in Blue" into the Solero format and
distribute it in accordance with the terms of the Agreement.
The parties therefore amend the Agreement to effective October 20, 1998 as
follows:
1. From time to time Warner may request that Sunhawk convert a specific
Edition into the Solero format.
2. If Sunhawk agrees to produce the conversion, Warner will provide Sunhawk
with encapsulated postscript (EPS) files for each page of the Edition to
be converted.
3. Upon receipt of the files, Sunhawk shall convert the files into the Solero
format as soon as reasonably possible (or other mutually agreed-upon date).
4. Upon completion of the conversion, Sunhawk shall have the right to
distribute the Edition in accordance with the terms of the Agreement.
5. Warner shall pay Sunhawk $10.00 per non-playable Solero page (or other
mutually agreed-upon fee).
6. This Section 6 shall apply to the "Rhapsody in Blue" project only.
a. Sunhawk agrees to convert "Rhapsody in Blue" into non-playable Solero
format (approximately 400 pages) at a cost of $10.00 per page. Upon
completion of the conversion, Sunhawk shall
i. create an index of the converted files in the Solero database
system ("Solero Index")
ii. deliver on a PC CD-ROM (win95, 98 an NT 4.0 compatible) the
converted files, Solero Viewer(TM), and Solero Index(TM) made
from Warner-supplied liner notes and other text which Warner
will provide to Sunhawk in digital form.
1
<PAGE> 18
b. Warner shall pay the conversion fee for "Rhapsody in Blue" upon
execution of this amendment by both parties. If the conversion fee is not
paid within one (1) month of the execution of this amendment, Sunhawk
shall have the right to deduct the fee from amounts which may be payable
to Warner under the Agreement.
c. Sunhawk shall use commercially reasonable efforts to correct any
material program errors in the CD-ROM which Warner brings to Sunhawk's
attention but shall not be responsible for any costs associated with
replacing CD-ROM copies (for warranty claims or otherwise) distributed by
Warner to end users. The Solero Viewer and Solero files are provided to
end users in accordance with the end user license agreement contained in
the Solero Viewer.
7. Each party shall indemnify the other party in accordance with Section 11 of
the Agreement. Specifically, Sunhawk shall indemnify Warner with respect to
claims arising from materials which it creates and provides for the "Rhapsody
in Blue" or any other conversion project. With respect to the "Rhapsody in
Blue" and any other conversion project, Warner shall indemnify Sunhawk with
respect to claims arising from the manufacture and distribution of the CD-ROM
as well as claims which arise from materials which Warner provides for the
CD-ROM, including the underlying music, EPS files, liner notes and any other
materials.
Except as provided in this amendment, and except to the extent any term in the
Agreement is inconsistent with the terms of this amendment, all other terms and
conditions of the Agreement shall remain unmodified and are hereby reaffirmed.
IN WITNESS WHEREOF, this amendment is executed as of the Effective Date set
forth above.
Warner Bros. Publications U.S. Inc. Sunhawk Corporation
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ BRENT MILLS
------------------------------- -------------------------------
Brent Mills
- ---------------------------------- ----------------------------------
Print Name Print Name
2
<PAGE> 19
AMENDMENT TO AGREEMENT
("ASSOCIATE(S) PROGRAM/HARD COPY FULFILLMENT")
This is an amendment to the Agreement that was made as of May 18, 1998 (the
"Effective Date") by and between Warner Bros. Publications U.S. Inc. ("Warner")
and Sunhawk Corporation ("Sunhawk").
Whereas the parties wish to amend the terms of the Agreement, it is hereby
amended effective as of January 1, 1999 as follows:
1. Sunhawk shall have the right to enter into agreements to permit
individuals and entities, including WB, to obtain copies of Editions by
directly or indirectly linking their websites to Sunhawk's Digital
Distribution System ("Associate(s)"). "Digital Distribution System" shall mean
the Sunhawk web site currently located at store.sunhawk.com.
2. Sunhawk shall have the right to pay Referral Fees to Associate(s)
(including WB) who originate sales from their websites. With respect to the
Editions, Sunhawk shall pay Ten Percent (10%) based on Associate(s)'s Net
Sales. In the Associate(s) Agreements, "Net Sales" is defined as the amount
actually received by Sunhawk from visitors to the Associate(s)'s site who make
purchases of digital versions of the Editions using the special links to the
Digital Distribution System, excluding amounts collected by us for sales taxes,
duties, shipping, handling and similar charges, amounts due to credit card
fraud and bad debt, credits for returned goods, database processing fees,
credit card validation fees or other charges incurred when processing
transactions.
3. The following is hereby added to the end of Section 5.1.1 of the
Agreement:
"For sales made through Associate(s) referrals via the Sunhawk Digital
Distribution System, you shall pay to us an amount equal to fifty-five
percent (55%) of your Gross Receipts (as defined in Section 5.4.1. below)
from the electronic distribution of Editions, together with any Referral
Fees for sales of digital versions of the Editions originating from a WB
website."
4. Referral Fees shall be payable to Associate(s) on a quarterly basis.
In the case that the Referral Fee does not exceed $100, that quarter's Referral
Fee will be rolled over into the next quarter and added to the subsequent
quarter's Referral Fee and continue to rollover until such time as the Referral
Fee reaches $100 or greater.
5. Sunhawk shall have the right to provide Affiliates with a listing of
the Editions in digital form, including, but not limited to, Title, Artist and
Sunhawk catalog number, from which the Affiliate can link to the Sunhawk
Digital Distribution System.
<PAGE> 20
6. Sunhawk shall be responsible for administering the Associate(s)
program. Before executing an Associate(s) agreement that includes access to
Editions, Sunhawk shall provide WB with the identity of the proposed
Associate(s). Said Associate(s) shall be deemed approved by WB unless Sunhawk
is notified within three (3) days that the Associate(s) is not approved. WB
shall have the right to cancel its approval of any Associate(s) upon thirty
(30 days) written notice to Sunhawk.
7. Section 5.3.1 is hereby amended to read: "With respect to hard copy
fulfillment, orders shall be received by you and the sale/credit card
transaction shall be completed by you. Such order shall then be transmitted to
WB who will ship the products ordered to Sunhawk and invoice Sunhawk for the
hard copies of 50% off of list price."
Except as provided in this amendment, and except to the extent any term in the
Agreement is inconsistent with the terms of this amendment, all other terms and
conditions of the Agreement shall remain unmodified and are hereby reaffirmed.
IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date set
forth above.
Warner Bros. Publications, U.S. Inc. Sunhawk Corporation
By: /s/ DAVID C. OLSEN By: /s/ MARLIN J. ELLER
------------------------------------- ----------------------------
David C. Olsen, Dir., Business Affairs Marlin J. Eller
------------------------------------- ----------------------------
Print Name Print Name
<PAGE> 1
SUNHAWK CORPORATION
318 Terry Ave, North, Seattle, WA 98109
DISTRIBUTION AGREEMENT
as of June 12, 1998
EMI Christian Music Publishing
PO Box 5085
Brentwood, TN
37024
tel: (615) 371-6838
fax: (615) 371-6897
Gentlemen and ladies:
When signed by you ("EMI") and us ("Sunhawk"), the following will constitute our
agreement:
1. EMI hereby grants to Sunhawk the non-exclusive right to sell and
distribute digital editions of EMI's copyrighted musical composition(s) and
third party compositions for which EMI has obtained the rights (the
"Editions(s)"), solely via Sunhawk's Solero(TM) technology/format over the
Internet from Sunhawk's website, currently located a http://www.sunhawk.com.
subject but not limited to the following:
o CONTENT: EMI will supply Sunhawk with compositions chosen by EMI for
distribution via the Sunhawk website. The downloadable file of each
such composition shall include a playback feature which incorporates a
midi file arrangement based solely on the musical content of the
Editions(s).
o FORMAT: Each edition(s) shall be formatted in such a way as to include
any and all appropriate copyright information supplied by EMI, and
Sunhawk shall insure that such copyright information is made part of
each download/sale.
o WEBSITE DISPLAY: Sunhawk shall display the edition(s) on Sunhawk's web
site which may display and use EMI's trademarks, service marks and any
and all appropriate artwork, all as selected by EMI. Links to the
edition(s) will be provided to EMI for use and display on EMI's web
site and/or any other web site of EMI's choosing. A link to EMI's web
site will be provided from the Sunhawk web site.
o FILE USAGE: Both EMI and Sunhawk may keep archival copies of the
Solero files. The usage of Solero files is restricted to the terms of
this contract. Sunhawk is sole distributor of the Solero file. EMI is
permitted to make paper copies for use in their own paper publishing.
EMI cannot distribute Solero files or file derived from a Solero file
without Sunhawk's written consent and similarly, Sunhawk cannot
extract midi components or sell the music without EMI's written
consent. Sunhawk will provide to EMI under separate non-disclosure and
license agreements a copy of the Solero Music Editor along with
instructions on how to save Solero files to a postscript format for
the purposes of traditional paper publishing without financial
obligation to Sunhawk (not including support) while Sunhawk is the
distributor of EMI's digital music, and EMI may sell such music in any
format except digital without obligation to Sunhawk.
2. The territory applicable to this Agreement shall be the World (the
"Territory").
3. Sunhawk shall pay EMI a fee for music sold according to the following
formula:
Sums equal to sixty-five percent (65%) based on the amount of Sunhawk's
Gross Receipts (hereinafter defined) but not less than the following
amount(s) per Edition(s) sold: $2.62 per "full
<PAGE> 2
PIANO/VOCAL/CHORDS" Edition, $2.03 per "EASY PIANO" Edition and $.85 per
"FAKEBOOK/LEADSHEET" Edition. Such minimums to increase or decrease
according to the formula:
R = your percent = 65%
CCP = credit card transaction fee = $.45
CCR = credit card transaction rate = 4.5%
MLC = Music Lover's Club Discount = 5%
SRP = suggested retail price
Minimum payment = R x (SRP - CCF - (SRP x CCR) - (SRP x MLC))
As used herein, the term "Gross Receipts" means the gross amount of monies
actually received by Sunhawk, or credited to Sunhawk's account, in respect
of sales of the Edition(s), less any taxes, discounts, reasonable credit
card transaction fees and/or credits. The foregoing sums include all
payments to be made to writer(s) and/or publisher(s) and/or arranger(s)
(other than arranger(s) engaged by Sunhawk) of the Edition(s) for which
payments EMI shall be responsible). EMI shall hold Sunhawk free and
harmless from and against any claim of the writer(s) and/or publisher(s)
and/or arranger(s) of the Edition(s) other than arrangers engaged by
Sunhawk.
4. If the conversion or transcription of a composition should for any
reason be considered an arrangement of that composition, Sunhawk will have the
arrangement made by a person connected with Sunhawk as Sunhawk's
employee-for-hire and Sunhawk shall, in each instance, assign to EMI (or the
third party that owns the compositions) all rights in the copyright in the
arrangement, together with the sole right of registering the copyright as a
work made for hire in EMI's name or the name of EMI's designee.
5. The cost of preparing and offering for sale the aforesaid Edition(s)
will be covered in full by Sunhawk. Suggested retail list prices shall be set
by EMI.
6. The rights hereunder granted shall continue for a term of five (5)
years commencing on the date hereof. Thereafter, the rights granted shall
continue on a yearly basis until such time as EMI, by written notice, notify
Sunhawk that such rights hereunder are terminated.
7. Sunhawk shall render monthly accountings to EMI within thirty (30) days
following the end of each calendar month, accompanied by appropriate
remittances for all sums shown to be due thereunder. EMI (and/or EMI's
designated agent) shall have the right, at EMI's sole cost and expense, upon
thirty (30) days prior written notice, and not more than once during each
calendar year, to audit at Sunhawk's office during normal business hours
Sunhawk's books and records with respect to the Edition(s). Each accounting
statement shall be conclusive and binding on EMI in all respects and EMI shall
be barred from maintaining or instituting any action or objection to such
accounting statement unless EMI shall give Sunhawk a detailed written
objection, stating the basis thereof, within the earlier of (i) thirty six (36)
months following the end of the accounting period which is subject to dispute,
or (ii) twelve (12) months following EMI's audit of such accounting period.
8. EMI warrants and represents that EMI has the full and unrestricted
right to enter this agreement and to grant all of the rights herein granted to
Sunhawk; and that the exercise of such distribution rights by Sunhawk in
accordance with this agreement will not infringe upon the copyright or violate
the property, contractual or other rights of any third party. EMI further
grants and assigns to Sunhawk the benefit of all warranties and representations
made for EMI's benefit by any third party with respect to the Edition(s). EMI
shall hold Sunhawk free and harmless and shall indemnify Sunhawk against any
actual loss or damages (including court costs and reasonable attorneys' fees)
due to a breach of this agreement which results in a final adverse judgment
against Sunhawk or which is settled with EMI's prior written consent (which
shall not be unreasonably withheld).
9. Sunhawk warrants and represents that Sunhawk has the full and
unrestricted right to enter this agreement and to grant all of the rights
herein granted to EMI.
<PAGE> 3
10. If a claim, whether oral or written, is presented against Sunhawk
which is inconsistent with any of EMI's warranties, representations or
covenants contained herein, Sunhawk shall thereupon serve notice upon EMI
containing the full details of such claims then known to Sunhawk, and EMI shall
assume the defense thereof (except to the extent that such claim involves
Sunhawk's alleged act of omission).
11. Nothing contained herein is intended to constitute a partnership or
joint venture between the parties hereto, it being understood that the
relationship between EMI and Sunhawk shall be that of independent contractors
and Sunhawk shall have no authority to bind EMI in any way to Sunhawk or any
third party.
12. In addition to the copyright notices supplied by E-mail and/or fax
from EMI on a song-by-song basis, Sunhawk shall include EMI's Worship Together
trademark, other trademarks determined by EMI and the following special notice
on the cover page on each Editions(s):
NOTICE: This song may be prepared for congregation use under the terms of your
CCLI license. However, if you are not a CCLI license holder, any duplication,
adaptation, arranging and/or transmission of this copyrighted music file
requires the written consent of the Copyright owner(s) and
EMI CHRISTIAN MUSIC PUBLISHING. Unauthorized uses are
an infringement of the Copyright Laws of the
United States and other countries.
13. This agreement shall be binding and shall inure to the benefit of the
parties hereto.
14. This is the entire agreement between Sunhawk and EMI and may only be
modified or terminated by an agreement in writing signed by Sunhawk and EMI.
This agreement shall be deemed to have been entered into, and shall be
interpreted in accordance with the laws of the State of Tennessee, and any
legal action concerning this agreement shall be heard in the State or Federal
Courts located in Nashville, Tennessee.
15. This agreement replaces and supersedes our prior Distribution
Agreement dated January 1, 1998, any and all prior agreements, written and/or
oral, with the exception of the Nondisclosure Agreement and License Agreement
(Service Provider) dated January 1, 1998.
SUNHAWK CORPORATION
/s/ BRENT MILLS
- -------------------------
By: Brent Mills
Its: CEO
AGREED TO AND ACCEPTED:
EMI Christian Music Group
/s/ [SIG]
- -------------------------
By:
Its: Sr. Vice President
<PAGE> 1
EXHIBIT 10.4
MUSIC CONVERSION AGREEMENT
This Agreement is made as of April 1, 1998 (the "Effective Date") by and between
Sunhawk Corporation, a Washington corporation with offices at 223 Taylor Avenue
North, Suite 200, Seattle, WA 98109 USA and International Music Engraving
Company, with it principal place of business at #7 Navy Road, Baguio City, 2600,
Philippines ("IMEC").
RECITALS
A. IMEC wishes to convert sheet music into Sunhawk's proprietary Solero(TM)
file format.
B. Sunhawk wishes to retain IMEC to convert sheet music into Sunhawk's
proprietary Solero file format.
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements set forth herein, Sunhawk and IMEC agree as follows:
SECTION 1
DEFINITIONS
1.1 Music Title. "Music Title" means a specific printed music composition
which may consist of one or more pages.
1.2 Source File. "Source File" (also called "Work Space") means a single
page of music in digital form which has been prepared by Sunhawk by scanning the
Music Title and converting it into a format which can be used by the Solero
Editor.
1.3 Source Materials. "Source Materials" means any copies of Music Titles
in original sheet music form, notes, audio recordings, or other source materials
which Sunhawk may provide IMEC concerning the Music Title.
1.4 Specifications. "Specifications" for the Final File shall be as set
forth in Schedule "A" of this Agreement.
1.5 Solero Editor. "Solero Editor" means the music editor software
provided to IMEC for use in preparing the Final Files as well as any templates,
editing tools, documentation, instruction files, instruction manuals, and any
other files, programs or other materials provided by Sunhawk for use in
converting the Source Files into Final Files.
1.6 Working Materials. "Working Materials" means the working file which is
prepared by IMEC from the Source File using the Solero Editor in accordance with
the Specifications. "Working Materials" also includes any materials, inventions,
documentation, original works of authorship, programs, files or other materials
which IMEC develops or creates which arises from or is otherwise related to the
Solero Editor, Source Files, Source Materials, Specifications or any other
information or materials provided to IMEC under this Agreement.
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1.7 Final File. "Final File" means the file which is prepared by IMEC from
the Source File(s) using the Solero Editor which IMEC believes in good faith to
conform in all respects to the Specifications. A Final File will contain one or
more Pages.
1.8 Page. "Page" means a page of music in a Final File which is considered
by the Solero Editor software as a full page of music.
1.9 Delivery and Payment Schedule. "Delivery Schedule" shall be as set
forth in Schedule "B" to this Agreement which lists the Pages contracted for and
the deadlines for their delivery. "Payment Schedule" shall be as also set forth
in Schedule "B".
SECTION 2
CONVERSION AND DELIVERY OF DELIVERABLES
2.1 Conversion Progress Reports. IMEC shall, using its best efforts,
convert the Source Files into Final Files in accordance with the Specifications.
IMEC acknowledges that it has reviewed said Specifications and that it agrees to
prepare Final Files in accordance to the quality standards described and
exemplified by the Specifications. ALL CONVERSION WORK WILL BE PERFORMED BY IMEC
OR ITS EMPLOYEES AT IMEC'S OFFICES. IMEC AGREES THAT NO CONVERSION WORK SHALL BE
PERFORMED BY INDEPENDENT CONTRACTORS WITHOUT THE EXPRESS WRITTEN APPROVAL OF
SUNHAWK. Upon Sunhawk's request, IMEC shall report on the status of the
conversion of Source Files and any problems encountered relating to conversion
of the Source Files. In addition, IMEC shall contact Sunhawk's representative
promptly by telephone or email upon discovery of any event or problem that will
materially delay conversion work, and thereafter, if requested, promptly confirm
such report in writing. While Sunhawk agrees to provide reasonable technical
support for the Solero Editor, IMEC acknowledges that it is its responsibility
to become proficient in the use of the Solero Editor. The use of the Solero
Editor software is subject to IMEC's acceptance of the terms and conditions of
the separate "Combined Solero Editor and Viewer License Agreement."
2.2 Staffing. IMEC agrees to maintain a staff of qualified employees large
enough to prepare the Pages on the dates set forth in the Delivery Schedule.
Schedule "C" contains a list of the qualifications which qualified staff
typically have.
2.3 Delivery. IMEC shall deliver Pages within the times specified in the
Delivery Schedule. Failure to deliver Pages on the dates set forth in the
Delivery Schedule shall be deemed a material breach of this Agreement.
2.4 Delivery of Source Materials. Upon request by Sunhawk, IMEC shall
either deliver to Sunhawk, or destroy, all corresponding Source Files and Source
Materials.
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<PAGE> 3
SECTION 3
TESTING AND ACCEPTANCE; EFFECT OF REJECTION
Testing and Acceptance Procedure. All Final Files shall be
thoroughly reviewed by IMEC and all necessary corrections as a result of such
review shall be made prior to delivery to Sunhawk. Upon receipt of a
Deliverable, Sunhawk will, in its sole discretion either: i) accept the Final
File and make the payment set forth in Schedule "B"; or, ii) provide IMEC with
written notice of the aspects in which the Final File contains errors or does
not conform to the Specifications and request that IMEC correct said Final File.
SECTION 4
OTHER OBLIGATIONS OF IMEC
4.1 Product Quality. IMEC agrees that the Final Files will be of high
quality and will conform in all respects to the Specifications. IMEC agrees to
fix at its own expense any errors which may be discovered in any Final File for
a period of one year after the date of acceptance of the Final File by Sunhawk.
IMEC further agrees to inform Sunhawk promptly of any known errors in the Final
Files.
SECTION 5
PROPRIETARY RIGHTS
5.1 Property Rights. IMEC acknowledges and agrees that the Solero Editor,
Source Files, Source Materials, Working Materials, and Final Files, including
but not limited to all source and object code, audiovisual effects associated
therewith are the property of Sunhawk (collectively "Proprietary Materials").
Title to all property rights including but not limited to copyrights, patents
and trade secrets in all of the Proprietary Materials shall remain with Sunhawk.
Except as expressly provided in this Agreement in order for IMEC to convert the
Source Files into Final Files, no license or other rights in the Proprietary
Materials is granted hereby.
5.2 Assignment of Rights. IMEC agrees to transfer and assign, and hereby
transfers and assigns to Sunhawk its entire right, title and interest, if any,
including without limitation all copyright ownership therein, no matter when
acquired, in the Working Materials and Final Files, and IMEC agrees to cooperate
with Sunhawk in perfecting any such assignment of rights. During and after this
Contract, IMEC will assist Sunhawk in every reasonable way, at Sunhawk's
expense, to establish original ownership of all such Working Materials and Final
Files on the part of Sunhawk and secure, maintain and defend for Sunhawk's
benefit all copyrights, patent rights, mask work rights, trade secret rights and
other proprietary rights in and to the Working Materials and Final Files. IMEC
agrees that it shall obtain no "moral", license, or other rights in the Final
Files, Working Materials or other Proprietary Materials.
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<PAGE> 4
SECTION 6
CONFIDENTIALITY
6.1 Confidential Information. The terms of this Agreement, Source Files,
Solero Editor, Source Materials, Working Materials, and Final Files, and any
other source code, computer program listings, techniques, algorithms and
processes and technical and marketing plans or other sensitive business
information, including all materials containing said information, which are
supplied by the Sunhawk to IMEC or developed by IMEC in the course of conversion
is the confidential information ("Confidential Information") of Sunhawk.
6.2 Restrictions on Use. IMEC agrees that except as authorized in writing
by Sunhawk: (i) IMEC will preserve and protect the confidentiality of all
Confidential Information; (ii) IMEC will not disclose to any third party, the
existence, source, content or substance of the Confidential Information or make
copies of Confidential Information; (iii) IMEC will not deliver Confidential
Information to any third party, or permit the Confidential Information to be
removed from IMEC's premises; (iv) IMEC will not use Confidential Information in
any way other than to develop the Final Files as provided in this Agreement; (v)
IMEC will not disclose, use or copy any third party information or materials
received in confidence by IMEC for purposes of work performed under this
Agreement; and (vi) IMEC shall require that each of its employees who work on or
have access to the materials which are the subject of this Agreement sign a
suitable confidentiality and work-for-hire/assignment agreement and be advised
of the confidentiality and other applicable provisions of this Agreement.
6.3 Limitations. Information shall not be considered to be Confidential
Information if it (i) is already or otherwise becomes publicly known through no
act of IMEC; or (ii) is authorized in writing by Sunhawk to be disclosed, copied
or used.
6.4 Return of Source Materials. Upon Sunhawk's acceptance of a Final File
for a Music Title, IMEC shall provide Sunhawk with all copies and originals of
the Source File, Source Materials, Working Materials and Final File for the
Music Title. Not later than seven (7) days after the termination of this
Agreement for any reason, or if sooner requested by Sunhawk, IMEC will return to
Sunhawk all originals and copies of the Proprietary Materials and Confidential
Information, as well as any other materials provided to IMEC, or created by IMEC
under this Agreement.
6.5 Third Party Confidential Information. IMEC acknowledges that its
association with Sunhawk is in no way conditioned or based upon its knowledge or
disclosure to Sunhawk of confidential information or trade secrets of others,
and agrees that IMEC will not disclose to Sunhawk or induce Sunhawk to use any
confidential information or trade secrets belonging to any third party.
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<PAGE> 5
SECTION 7
WARRANTIES, COVENANTS AND INDEMNIFICATION
7.1 Warranties and Covenants of IMEC. IMEC represents, warrants and
covenants to Sunhawk the following:
(a) IMEC has the full power to enter into this Agreement and perform the
services provided for herein, and that such ability is not limited or restricted
by any agreements or understandings between IMEC and other persons or companies;
(b) Any information or materials developed for, or any advice provided to
Sunhawk, shall not rely or in any way be based upon confidential or proprietary
information or trade secrets obtained or derived by IMEC from sources other than
Sunhawk.
c) The conversion and other work performed by IMEC under this Agreement
shall be in compliance with the Specifications.
7.2 IMEC's Indemnity. IMEC agrees to indemnify, hold harmless and defend
Sunhawk from all claims, defense costs (including reasonable attorneys' fees),
judgments and other expenses arising out of or on account of the conversion work
which it performs under this Agreement, including without limitation claims of
the breach of any covenant or warranty set forth in Section 7.1 above.
7.3 Conditions to Indemnity. IMEC's obligation to indemnify is conditioned
on Sunhawk's notifying IMEC promptly of any claim as to which indemnification
will be sought and providing IMEC reasonable cooperation in the defense and
settlement thereof.
7.4 Sunhawk's Indemnification. Sunhawk agrees to indemnify, hold harmless
and defend IMEC from all claims, defense costs (including reasonable attorneys'
fees), judgments and other expenses arising out of the breach of the following
Covenants and Warranties:
(a) Sunhawk possesses full power and authority to enter into this
Agreement and to fulfill its obligations hereunder.
(b) The performance of the terms of this Agreement and of Sunhawk's
obligations hereunder shall not breach any separate agreement by which Sunhawk
is bound.
7.5 Conditions to Indemnity. Sunhawk's obligation to indemnify is
conditioned on IMEC's notifying Sunhawk promptly of any claim as to which
indemnification will be sought and providing Sunhawk reasonable cooperation in
the defense and settlement thereof.
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<PAGE> 6
SECTION 8
CONVERSION FEES
8.1 Payments. Sunhawk shall pay IMEC according to the payment schedule set
forth in Schedule "B" upon Sunhawk's acceptance of each Final File. "Acceptance"
shall mean the decision, made in Sunhawk's sole discretion, that the Final File
conforms to the Specifications. Payment will be based on the number of Pages
accepted by Sunhawk. No conversion fee shall be payable on Pages which are
conversions of title pages. Since a Page may be larger or smaller than the
original printed Music Title page, fees are payable on the number of Pages
accepted, and not on the number of pages in the original printed Music Title.
8.2 Compliance with Laws. Any and all amounts payable to IMEC hereunder
shall be subject to all laws and regulations now or hereafter in existence
requiring the deduction or withholding of payment for income or other taxes
payable by or assessable against IMEC. Sunhawk shall have the right to make such
deductions and withholdings and the payment thereof to the governmental agency
concerned, and IMEC agrees that it shall make and prosecute any claims which it
may have with respect thereto directly with the governmental agency having
jurisdiction over any such matter.
SECTION 9
TERMINATION
9.1 Termination for Non-Performance or Delay. In the event of a
termination of this Agreement by Sunhawk because of IMEC's material breach of
this Agreement, Sunhawk will have no further obligations or liabilities under
this Agreement. Sunhawk will have the right, in addition to all of its other
rights, to require that IMEC deliver to Sunhawk all of IMEC's work in progress,
including all originals and copies thereof, as well as any other materials
provided to IMEC, or created by IMEC under this Agreement. Payment of any
Delivery Schedule milestones under Schedule "B" which have been met shall be
deemed payment in full for all obligations of Sunhawk under this Agreement,
including full payment for all Working Materials, Final Files and all other
materials and work relating to the portion of this Agreement which has been
completed as of the time of termination.
SECTION 10
GOVERNING LAW; JURISDICTION AND VENUE
Governing Law; Venue. The validity, construction, and performance of this
Agreement shall be governed by the laws of the state of Washington without
respects to conflicts of laws, and all claims and/or lawsuits in connection with
agreement must be brought in Seattle, Washington. IMEC consents to the personal
and exclusive jurisdiction and venue of the state and federal courts located in
Seattle, Washington.
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<PAGE> 7
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Notices. For purposes of all notices required or permitted to be
given hereunder, the addresses of the parties hereto shall be as indicated
below. All notices shall be in writing and shall be deemed to have been duly
given if sent by facsimile, the receipt of which is confirmed by return
facsimile or email, or sent by first class registered or certified mail or
equivalent, return receipt requested, addressed to the Parties at their
addresses set forth below:
If to IMEC: Mr. Kee Bong Kim
International Music Engraving Company
#7 Navy Road
Baguio City 2600
Philippines
If to Sunhawk: Sunhawk Corporation
223 Taylor Avenue North
Suite 200
Seattle, WA 98109-5017 USA
Attn: General Counsel
11.2 Designated Person to Send and Receive Material. The Parties agree
that all materials exchanged between the parties for formal approval shall be
communicated between single designated persons, or a single alternate designated
person for each Party. Each Party shall have the right to change its Designated
Persons from time to time and to so notify the other.
11.3 Entire Agreement. Except for the Combined Solero Editor and Viewer
Agreement, this Agreement, including the attached Schedules which are
incorporated herein by reference as though fully set out, contains the entire
understanding and agreement of the Parties with respect to the subject matter
contained herein, supersedes all prior oral or written understandings and
agreements relating thereto except as expressly otherwise provided, and may not
be altered, modified or waived in whole or in part, except in writing, signed by
duly authorized representatives of the Parties.
11.4 Force Majeure. Neither Party shall be held responsible for damages
caused by any delay or default due to any contingency beyond its control
preventing or interfering with performance hereunder.
11.5 Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to any law, the remaining
provisions shall remain in full force and effect as if said provision never
existed.
11.6 Contract Assignment. This Agreement is personal to IMEC. IMEC may not
sell, transfer, sublicense, hypothecate or assign its rights and duties under
this Agreement without the
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<PAGE> 8
written consent of Sunhawk. No rights of IMEC hereunder shall devolve by
operation of law or otherwise upon any receiver, liquidator, trustee, or other
party. This Agreement shall inure to the benefit of Sunhawk, its successors and
assigns.
11.7 Waiver and Amendments. No waiver, amendment, or modification of any
provision of this Agreement shall be effective unless consented to by both
Parties in writing. No failure or delay by either Party in exercising any
rights, power, or remedy under this Agreement shall operate as a waiver of any
such right, power, or remedy.
11.8 Agency. The Parties are separate and independent legal entities. IMEC
is performing services for Sunhawk as an independent contractor. Nothing
contained in this Agreement shall be deemed to constitute either IMEC or Sunhawk
an agent, representative, partner, joint venturer or employee of the other party
for any purpose. Neither Party has the authority to bind the other or to incur
any liability on behalf of the other, nor to direct the daily work activities of
the other. Sunhawk shall however have the right to provide support in the use of
its Editor software, suggestions on procedures for creating Final Files, and
comments and corrections on the Final Files which are submitted for approval.
11.9 Titles and Headings. The titles and headings of each section are
intended for convenience only and shall not be used in construing or
interpreting the meaning of any particular clause or section.
11.10 Contract Interpretation. Ambiguities, inconsistencies, or conflicts
in this Agreement shall not be strictly construed against the drafter of the
language but will be resolved by applying the most reasonable interpretation
under the circumstances, giving full consideration to the Parties' intentions at
the time this Agreement is entered into.
11.11 No Third Party Rights. This Agreement is not for the benefit of any
third party, and shall not be considered to grant any right or remedy to any
third party whether or not referred to in this Agreement.
11.12 Singular and Plural Terms. Where the context of this Agreement
requires, singular terms shall be considered plural, and plural terms shall be
considered singular.
11.13 Limitation on Liability; Remedies. Except as provided in Section 7
above, and except in the case of the infringement or violations of copyright,
trade secret, trademark or any other intellectual property rights, neither party
shall be liable to the other party for any incidental,
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<PAGE> 9
consequential, special, or punitive damages of any kind or nature, including,
without limitation, the breach of this Agreement or any termination of this
Agreement, whether such liability is asserted on the basis of contract, tort
(including negligence or strict liability), or otherwise, even if either party
has warned or been warned of the possibility of any such loss or damage.
IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date set
forth above.
International Music Engraving Company Sunhawk Corporation
By: Kim Kee Bong By Brent Mills
---------------------------------- ---------------------------------
/s/ KEE KIM BONG /s/ BRENT MILLS
--------------------------------- ---------------------------------
Mr. Kee Bong Kim Brent Mills
Its: President, IMEC Its: CEO
-------------------------------- -----------------------------
9
<PAGE> 10
SCHEDULE A
SPECIFICATIONS
1. The Final Files shall conform to the Sunhawk Style Manual and any revisions
or updates which are issued during the term of this Agreement.
2. The Final Files will be of a quality consistent with that prepared and
published by Sunhawk.
3. The Final Files shall conform to the quality of sample files (for both a
visual and audio quality) and printed music provided by Sunhawk, including the
"Good and Bad" files, "Samples" and "Showcase Pages" located at
https://store.sunhawk.com/Pages/reference.
4. The Final File shall conform to any style or corrections memos which may
be issued by Sunhawk.
5. For each Final File submitted, IMEC will provide Sunhawk with the name of the
IMEC employee who did the final quality review ("slotted") of the Final File.
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<PAGE> 11
SCHEDULE B
DELIVERY AND PAYMENT SCHEDULE
Delivery Schedule
250 Pages by September 30, 1998
300 additional Pages by October 31, 1998.
400 additional Pages by November 30, 1998.
550 additional Pages by December 31, 1998.
Payment upon Acceptance
$20 for Pages 1 through 500 above.
$17 for Pages 501 though 1500 above.
(The parties acknowledge that in addition to the Pages listed above, IMEC has
delivered, and Sunhawk has accepted and paid for, 100 Pages at $10 per page.)
11
<PAGE> 12
SCHEDULE C
STAFFING QUALIFICATIONS
- - Music Degree (B.A.) or advanced music skills
- - Extensive experience using music notation software
- - Excellent verbal communication skills
- - Ability to work both independently and in team work environment
- - Good trouble-shooting skills
- - Excellent knowledge of music notation
- - Excellent ear training
12
<PAGE> 13
AMENDED SCHEDULE B
DELIVERY AND PAYMENT SCHEDULE
Delivery Schedule
IMEC shall deliver no less than 500, and no greater than 1500 additional Pages
by January 31, 1999.
During each subsequent month that this Agreement is in effect, IMEC shall
provide no less than 500, and no greater than 1500 additional Pages per month.
Payment upon Acceptance
$15 for Pages delivered under this Amended Schedule B.
Advance
As an advance against pages accepted by Sunhawk, Sunhawk shall pay IMEC $10,000
upon the execution of this Agreement by both parties. Said advance shall be
recoupable against fees due for accepted pages under this Schedule. That is, no
additional fees shall be payable to IMEC until the $10,000 is recouped by
Sunhawk. Any un-recouped advance shall be repaid to Sunhawk in the event this
Agreement is terminated because of a breach by IMEC.
<PAGE> 14
AMENDMENT #1 TO MUSIC CONVERSION AGREEMENT
This is an amendment to the Agreement which was made as of April 1, 1998
(the "Effective Date") by and between Sunhawk Corporation, a Washington
corporation with offices at 223 Taylor Avenue North, Suite 200, Seattle, WA
98109 USA and International Music Engraving Company, with it principal place of
business at #7 Navy Road, Baguio City, 2600, Philippines ("IMEC").
Whereas the parties wish to amend the terms of the Agreement, and in of the
premises and mutual covenants and agreements set forth herein, Sunhawk and IMEC
hereby amend the Agreement effective December 17, 1998 as follows.
1. The Agreement is hereby amended to add the attached "Amended Schedule B."
2. A new Section 9.2 is added as follows: "Termination for Convenience."
Sunhawk or IMEC shall have the right to terminate this Agreement at its
convenience (with or without cause) upon Two (2) months written notice."
Except as provided in this amendment, and except to the extent any term in the
Agreement is inconsistent with the terms of this amendment, all other terms and
conditions of the Agreement shall remain unmodified and are hereby reaffirmed.
IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date set
forth above.
International Music Engraving Company Sunhawk Corporation
By: Kim Kee Bong By Brent Mills
----------------------------------- ------------------------------
/s/ KEE BONG KIM /s/ BRENT MILLS
----------------------------------- ---------------------------------
Mr. Kee Bong Kim Brent Mills
Its: Its: CEO
--------------------------------- ----------------------------
<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 9th day of February, 2000, by and between Eller McConney, L.L.C. ("Eller
McConney"), a Washington limited liability company, (the "Assignor"), and
Sunhawk.com Corporation, a Washington corporation (the "Assignee").
RECITALS
WHEREAS, Assignor desire to assign to the Assignee all of Assignors'
right, title, and interest in such agreement as is more particularly described
below; and
WHEREAS, Assignee desires to accept such assignment from Assignor and
receive digital sheet music from Music Production International, a Russian
corporation ("MPI"), in connection with that certain Agreement Regarding the
Assignment and Assumption of Sheet Music Production (the "Production
Agreement") between Assignor and MPI.
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. Assignor assigns, sets over, transfers, conveys, and
sells to Assignee, for total consideration to be paid to Eller McConney in the
amount of one million dollars ($1,000,000) as set forth below, all of
Assignor's right, title, and interest in and to the Production Agreement. This
assignment includes, without limitation, the right to receive from MPI, in
accordance with the terms of the Production Agreement, a minimum of four
thousand five hundred (4,500) pages of digital sheet music per month, beginning
on or about February 1, 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 at least 275,000 pages (the
"Production Amount").
Acceptance of digital sheet music from MPI 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) pages of digital sheet music minimum monthly requirement to be
provided to the Assignee 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, a Russian joint stock corporation, or MPI,
in connection with the Production Agreement.
<PAGE> 2
2. Payment. At the end of each twelve month period, commencing with the
twelve months ending January 31, 2001, and ending with the twelve months ending
January 31, 2006, and provided that Assignee has received at least 4,500 pages
during each of the preceding twelve months of such year, Assignee shall pay
Assignor the sum of $200,000 (a total of $1,000,000 during the term of this
Agreement). If less pages have been received during any such month, Assignee
may deduct from such payment all costs it has reasonably incurred to have the
shortfall produced, or in the alternate, the losses Assignee has actually
incurred by not having the shortfall in its inventory.
3. Representations. Assignor represents and warrants that Assignor is the
owner of all interests conveyed hereby; that there is no default now existing
under the Production Agreement; that the Production Agreement is valid and
enforceable in accordance with its terms; that Assignor has full and lawful
authority to assign the Production Agreement; and that Assignor 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 Assignor's written
request, Assignee shall make available to Assignor all documents, or copies
thereof, as are necessary to defend such a claim, and shall cooperate with
Assignor as is reasonably necessary, at no expense to Assignee, to defend such
a claim. Assignor also represents that MPI is fully competent and able to
perform the Production Agreement in a timely manner.
4. Indemnification. Assignor hereby agrees 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
Assignor's breach of any of Assignor's responsibilities and obligations under
the Production Agreement assigned hereunder which may accrue prior to the date
hereof. Assignor further agrees 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 Production Agreement and
assumed by the Assignee which may accrue from and after the date hereof.
5. Integration. This Agreement and the terms of the Production Agreement
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.
6. Successors and Assigns. This Agreement shall inure to and be binding
upon the parties hereto and their respective heirs, successors, and assigns.
7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
<PAGE> 3
EFFECTIVE as of the day and year first set forth above.
ASSIGNOR: ASSIGNEE:
Eller McConney L.L.C. a Sunhawk.com Corporation, a
Washington limited liability company Washington corporation
By: By:
--------------------------------- -------------------------------
Its: Its:
-------------------------------- ------------------------------
CONSENT TO ASSIGNMENT:
Music Production International, a
Russian corporation
By:
---------------------------------
Its:
--------------------------------
<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.
-3-
<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:
-4-
<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,
Page 1
<PAGE> 5
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
Page 2
<PAGE> 6
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
-------------------------------- --------------------------------
Page 3
<PAGE> 1
Exhibit 10.12
SUNHAWK.COM CORPORATION
223 Taylor Avenue North, Suite 200
Tel. (206) 728-6063
Fax. (206) 728-6416
LICENSE AGREEMENT
as of December 7, 1999
Maranatha! Music
30230 Rancho Viejo Road
San Juan Capistrano
California 92675
Dear Gentlepersons:
When signed by Maranatha! Music ("Publisher") and Sunhawk.com Corporation
("Sunhawk.com"), the following will constitute our agreement:
1. Publisher grants Sunhawk.com the non-exclusive right to promote,
sell, license pursuant an end-user license agreement, and distribute digital
editions of the copyrighted musical composition(s) described in Schedule "A"
("Compositions") via Sunhawk.com's digital music distribution system including
the Internet website currently located at www.sunhawk.com (said distribution
system and web site hereinafter "Sunhawk.com web site").
- CONTENT: Publisher shall provide Sunhawk.com with copies of the
Compositions for conversion by Sunhawk.com into the Solero
digital music format ("Solero Editions") and distribution via the
Sunhawk.com web site. Publisher shall also supply any cover art
associated with the Composition.
- FORMAT: Each Solero Edition shall include appropriate copyright
information supplied by Publisher, and Sunhawk.com shall include
such copyright information as a part of each download.
- WEBSITE DISPLAY: Sunhawk.com shall display the Solero Editions
through Sunhawk.com's web site which may display and use
Publisher's trademarks, service marks and any and all appropriate
artwork associated with the Composition. Links to the Solero
Editions will be provided to Publisher for use and display on
Publisher's web site. A link to Publisher's web site will be
provided from the Sunhawk.com web site. In connection with the
sale, license and exploitation of the Solero Editions, Publisher
grants Sunhawk.com the non-exclusive right to use and publish the
cover art as well as the names,
<PAGE> 2
likenesses and photographs of the composers and artists
associated with the Compositions together with any other sales
and promotional materials which Publisher may provide to
Sunhawk.com for such use.
- FILE USAGE: Sunhawk.com's current digital distribution method
makes use of Solero Editions which use the Solero(R) Viewer. This
Agreement grants Sunhawk.com all necessary rights to use,
distribute and license the Solero Editions to end-users for use
with the Solero Viewer, including the song preview, display,
print and play features of the Solero Viewer. Sunhawk.com may,
based on anticipated sales for specific Compositions, make the
specific Compositions available in a graphics only format, a
graphics with playback format, or both. Sunhawk.com shall have
the right to provide preview samples of the Solero Editions free
of charge through download, on CDs, or through audio streaming.
Solero Editions shall be distributed using Sunhawk.com
proprietary e-commerce and encryption technology. Use of the
Solero Editions is subject to the end-user license agreement
included in the Solero Viewer as amended from time to time.
2. The territory applicable to this Agreement shall be the World (the
"Territory").
3. Sunhawk.com shall pay Publisher a royalty for music sold according
to the following formula:
A royalty equal to (a) sixty percent (60%) based on the amount of Net Receipts
for sales of licenses for Solero Editions originating directly from referral
links on the Publisher web site, or (b) fifty percent (50%) based on the amount
of Sunhawk.com's Net Receipts from sales made from Sunhawk.com (or other
Sunhawk.com internet sites) or from referrals from third parties who agree to
link to the Sunhawk.com web site ("Associates"). As used herein, the term "Net
Receipts" means the gross amount of monies actually received by Sunhawk.com, or
credited to Sunhawk.com's account, in respect of sales of the Solero Editions,
less any taxes, discounts, Associate' Fees, credit card and other transaction
fees and/or credits. No royalty shall be payable for promotional units
distributed free of charge. The foregoing royalties include all payments to be
made to writer(s) and/or Publisher(s) and/or arranger(s) (other than arranger(s)
engaged by Sunhawk.com) of the Solero Editions, and/or any other person or
entity, for which payments Sunhawk.com shall not be responsible. The Solero
Viewer end user license agreement provides that the converted Compositions are
licensed for non-commercial use and do not include public performance rights.
The royalties set forth in this Section 3 shall be the only amounts payable to
Publisher for exercise of the rights granted in this Agreement.
4. Sunhawk.com shall remain the owner of the digital files subject to
Publisher's ownership of the copyright in the underlying Compositions.
"Composition" for purposes of this Paragraph 4 shall mean the words and music
only and shall not include the digital files or file format or any software,
code or other material or information provided by
<PAGE> 3
Sunhawk.com to convert the music into the Solero format for digital
distribution, all of which shall remain the property of Sunhawk.com.
5. The costs to convert the Compositions into the Solero Editions
shall allocated as provided in Schedule "B."
6. The rights hereunder granted shall continue for a term of five (5)
years commencing on the date hereof. Thereafter, the rights granted shall
continue on a yearly basis until such time as either Party, by written notice,
notifies the other Party upon ninety (90) days notice that such rights hereunder
are terminated effective as of the anniversary of this Agreement.
7. Sunhawk.com shall render accountings to Publisher quarterly, within
forty-five (45) days following the end of each quarter, accompanied by
appropriate remittances for all sums shown to be due thereunder. Publisher shall
have the right, at Publisher's sole cost and expense, upon thirty (30) days
prior written notice, and not more than once during each calendar year, to cause
an independent CPA or publisher designated representative to conduct an audit at
Sunhawk's office during normal business hours of Sunhawk's books and records
with respect to the Solero Editions of the Compositions. Each accounting
statement shall be conclusive and binding on Publisher in all respects and
Publisher shall be barred from maintaining or instituting any action or
objection to such accounting statement unless Publisher shall give Sunhawk.com a
detailed written objection, stating the basis thereof, within the earlier of (i)
thirty six (36) months following the end of the accounting period which is
subject to dispute, or (ii) twelve (12) months following Publisher's audit of
such accounting period.
8. Publisher warrants and represents that Publisher has the full and
unrestricted right to enter this agreement and to grant all of the rights herein
granted to Sunhawk.com, and that the exercise of such rights by Sunhawk.com in
accordance with this agreement will not infringe upon the copyright or violate
the property, contractual or other rights of any third party.
Publisher further represents and warrants:
(a) The trademark and tradenames which Publisher uses in association with the
Compositions do not infringe any trademark or tradename.
(b) Unless expressly provided otherwise in writing in Schedule "A" to this
Agreement, Publisher is the sole owner and/or Administrator of the Compositions,
and no rights have been granted, or will be granted in the Compositions which
are inconsistent with the rights granted in this Agreement.
Publisher agrees to indemnify and hold Sunhawk.com harmless from and
against any and all claims, losses, liabilities, damages, expenses and costs,
including without limitation reasonable attorneys fees and court costs, which
result (i) from a breach of any of the warranties or representations provided by
Publisher herein, and (ii) any claim of
<PAGE> 4
infringement or violation, or alleged infringement or violation, of any third
party's intellectual property or other rights to the extent the claims arise
from the Compositions and other materials provided by Publisher.
9. Sunhawk.com warrants and represents that Sunhawk.com has the full
and unrestricted right to enter this agreement. Sunhawk.com agrees to indemnify
and hold Publisher harmless from and against any and all claims, losses,
liabilities, damages, expenses and costs, including without limitation
reasonable attorneys fees and court costs, which result from (a) the breach of
any of the warranties or representations provided by Sunhawk.com herein; (b) any
claim of infringement or violation, or alleged infringement or violation, of any
third party's intellectual property or other rights to the extent the claims
arise from materials owned or provided by Sunhawk.com.
10. Each Party's duty to indemnify shall be conditioned upon receiving
prompt notice of the claim. The indemnifying Party shall have the right to
select counsel and control the defense or settlement thereof provided further
that the other Party shall have to participate at its own expense with counsel
of its choosing. Neither Party shall agree to a settlement of the action without
the other Party's written consent.
11. Nothing contained herein is intended to constitute a partnership
or joint venture between the parties hereto, it being understood that the
relationship between Publisher and Sunhawk.com shall be that of independent
contractors.
12. In addition to copyright notices provided by Publisher,
Sunhawk.com shall include the Publisher trademark and the following special
notice on the cover page on each Solero Editions:
NOTICE: Purchasers of a license to this musical file are entitled to
use it for their personal enjoyment and musical fulfillment. However,
any duplication, adaptation, arranging and/or transmission of this
copyrighted music requires the written consent of the copyright
owner(s). Unauthorized uses are infringements of the copyright laws of
the United States and other countries and may subject the user to
civil and/or criminal penalties.
13. Except as provided in the Indemnification Sections 9 and 10 above,
and except in the case of the willful infringement of copyright, trade secret,
trademark or any other intellectual property rights, neither Party shall be
liable to the other Party for any incidental, consequential, special, or
punitive damages of any kind or nature, including, without limitation, the
breach of this Agreement or any termination of this Agreement, whether such
liability is asserted on the basis of contract, tort (including negligence or
strict liability), or otherwise, even if either party has warned or been warned
of the possibility of any such loss or damage.
14. This agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Specifically, the rights and obligations set forth in this Agreement shall
continue with respect to the Compositions notwithstanding any sale, assignment,
licensing or other transfer of rights in the Compositions by Publisher. This is
the entire agreement between Sunhawk.com and
<PAGE> 5
Publisher and may only be modified by an agreement in writing signed by
Sunhawk.com and Publisher. This agreement shall be deemed to have been entered
into, and shall be interpreted in accordance with the laws of California. The
Parties agree to submit any dispute arising from this Agreement to binding
Arbitration in Orange County, California under the rules of the American
Arbitration Association, provided that either party may bring an action for
injunctive relief involving the infringement of intellectual property rights in
Federal Court in Orange County, California.
IN WITNESS WHEREOF, the parties have caused this agreement to be executed as of
the date and year first written above.
AGREED TO AND ACCEPTED:
SUNHAWK.COM CORPORATION MARANATHA! MUSIC
/s/ MARLIN ELLER /s/ RANDY ALWARD
- ------------------------ -----------------------------------
By: Marlin Eller By: Randy Alward
its: President and CEO its: VP, GM
<PAGE> 6
Schedule "A"
COMPOSITIONS
Except as otherwise provided in this Schedule "A", all compositions in
Publisher's sheet music catalogs as of the execution of this Agreement as well
as any new Compositions which are added to Publisher's sheet music catalogs
during the term of this Agreement for which Publisher has the necessary rights
to grant Sunhawk.com the rights set forth in this Agreement. Publisher shall
have the right, in its reasonable discretion, to exclude specific compositions
from this agreement. Publisher agrees to identify said excluded compositions at
the time Compositions are designated as List "A" or List "B" Compositions.
<PAGE> 7
Schedule "B"
CONVERSION COSTS
1) "A" List Compositions. Sunhawk.com will absorb the costs of converting the
"A" List Compositions set forth in the attached schedule. Based upon
anticipated sales, Sunhawk.com may convert a Composition into a graphics
only format, a graphics with playback format, or both. Additional
Compositions may be added to this list from time to time upon written
notice by Sunhawk.com.
2) "B" List Compositions. Sunhawk.com will absorb the costs of converting "B"
List Compositions provided that the total royalty payable to Publisher on
Net Receipts shall be reduced by 50% until Sunhawk.com has recouped its
actual conversion costs for the Composition, said costs not to exceed
$20.00 per page. Publisher and Sunhawk.com shall mutually agree from time
to time as to which of the Compositions will be converted as "B" List
Compositions and whether the Compositions shall be converted into a
graphics only format, a graphics with playback format, or both. Said
Compositions shall be added by way of amendments to this Agreement, signed
by both parties.
Once identified as a List "A" or "B" List Title, Sunhawk.com will begin
converting Compositions upon receipt of copies of printed copies of the pieces
and appropriate copyright notices.
<PAGE> 8
"A" List Compositions
<PAGE> 1
EXHIBIT 10.13
MUSIC CONVERSION AGREEMENT
This Agreement is made as of November 1, 1998 (the "Effective Date") by and
between Eller-McConney LLC, with it principal place of business at 223 Taylor
Avenue North, Suite 200, Seattle Washington 98109 ("EM") and Avtograf, a Russian
Joint Stock Company with its principal place of business at CJSC Printing
Office, Avtograf, Postyshev St. 2 Chelyabinsk, Russia 454000 ("Engraver").
RECITALS
A. Engraver wishes to engrave sheet music for EM in accordance with the terms
set forth herein using Sunhawk Corporation's ("Sunhawk's") Solero(TM) Music
Editor software.
B. EM wishes to retain Engraver to engrave the sheet music.
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements set forth herein, EM and Engraver agree as follows:
SECTION 1
DEFINITIONS
1.1 Music Title. "Music Title" means a specific printed music
composition which may consist of one or more pages. (For example, two pages of
sheet music for "Fur Elise.")
1.2 Source File. "Source File" (also called "Work Space") means a single
page of music in digital form which has been prepared by scanning the Music
Title and converting it into a format which can be used by the Solero Editor
software.
1.3 Source Materials. "Source Materials" means any copies of Music
Titles in original sheet music form, audio recordings, or other source materials
which are provided to Engraver concerning the Music Title.
1.4 Specifications. "Specifications" for the Final File shall be as set
forth in Schedule "A" of this Agreement. The Specifications includes examples,
quality standards and a description of the features and characteristics which
the Final File must have before EM will accept it.
1.5 Solero Editor. "Solero Editor" means the Sunhawk Solero Music Editor
software as well as any templates, editing tools, documentation, instruction
files, instruction manuals, and any other files, programs or other materials
provided for use in converting the Source Files into Final Files.
1.6 Engraving Work. "Engraving Work" means the music engraving and any
editing changes, modifications, conversions, and additions which are prepared by
Engraver from the Source Files and Source Materials using the Solero Editor.
1.7 Final File. "Final File" means the file which is prepared by
Engraver using the Source Materials, Source File(s) and the Solero Editor which
Engraver believes in good faith to conform to the Specifications. The Final File
will contain a combination of Engraving Work provided by Engraver, and
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Source File and Source Materials provided by EM or Sunhawk from which Engraver
produced the Engraving Work. A Final File will contain one or more Pages.
1.8 Page. "Page" means a page of music in a Final File which is
considered by the Solero Editor software to be a full page of music.
SECTION 2
CONVERSION AND DELIVERY OF DELIVERABLES
2.1 Conversion; Progress Reports. Engraver shall convert the Source
Files into Final Files in accordance with the Specifications. Engraver will
regularly report on the status of engraving work and promptly notify EM upon the
discovery of any problem that may delay development work. While EM agrees to
provide reasonable technical support for the Solero Editor, Engraver
acknowledges that it is its responsibility to become proficient in the use of
the Solero Editor. The use of the Solero Editor software is subject to
Engraver's acceptance of the terms and conditions of the separate "Combined
Solero Editor and Viewer License Agreement."
2.2 ALL DEVELOPMENT WORK WILL BE PERFORMED BY PERSONS WHO HAVE SIGNED
CONFIDENTIALITY AND EMPLOYMENT/INDEPENDENT CONTRACTOR'S AGREEMENTS THAT ARE
ACCEPTABLE TO EM. Upon request, Engraver will provide EM with copies of all such
signed agreements.
2.3 Delivery. Engraver shall deliver Pages within the times specified in
the Delivery Schedule "B" which lists the Pages contracted for and the deadlines
for their delivery. Failure to deliver Pages on the dates set forth in the
Delivery Schedule shall be deemed a material breach of this Agreement.
2.4 Delivery of Source Materials. Upon request by EM, Engraver shall
either deliver to EM, or destroy, all corresponding Source Files and Source
Materials.
SECTION 3
TESTING AND ACCEPTANCE; EFFECT OF REJECTION
Testing and Acceptance Procedure. All Final Files shall be
thoroughly reviewed by Engraver and all corrections shall be made prior to
delivery to EM. Upon receipt of a Deliverable, EM will, in its sole discretion
either: i) accept the Final File and make the payment set forth in Schedule "B";
or, ii) provide Engraver with written notice of the aspects in which the Final
File contains errors or does not conform to the Specifications and request that
Engraver correct said Final File.
SECTION 4
OTHER OBLIGATIONS OF ENGRAVER
Product Quality. Engraver agrees that the Final Files will be of
high quality and will conform in all respects to the Specifications. Engraver
agrees to fix at its own expense any errors which may be discovered in any Final
File for a period of one year after the date of acceptance of the Final File by
EM. Engraver further agrees to inform EM promptly of any known errors in the
Final Files.
SECTION 5
PROPERTY RIGHTS
2
<PAGE> 3
5.1 Property Rights. Assignment of Rights. Engraver acknowledges and
agrees that Sunhawk owns all rights in the Solero Editor, Source Files, Source
Materials and any other materials or information provided to Engraver, subject
to the ownership of any underlying music by Sunhawk's music publisher licensors.
Engraver agrees to transfer and assign, and hereby transfers and assigns
to EM all its exclusive material copyrights, patent, trademark, trade secret and
other intellectual property rights, no matter when acquired, in the Engraving
Work (collectively "Proprietary Materials").
Title to all mentioned rights in the Engraving Work shall remain with
EM. Except as expressly provided in this Agreement in order for Engraver to
convert the Source Files into Final Files, no license or other rights in the
Proprietary Materials is granted hereby.
Except as necessary to prepare the Final Files for EM, Engraver shall
have no right to copy, license, sell, distribute or otherwise use the Source
Files, Source Materials, Final Files, or Engraving Work.
5.2 During and after this Agreement, Engraver will assist EM to
establish original ownership of all such exclusive material rights in the
Engraving Work on the part of EM. Engraver will assist EM in the filing of
registrations in Sunhawk's name and will assist EM to secure maintain and defend
all copyrights, patent rights, trademarks, trade secret rights and other
proprietary rights in and to the Engraving Work. Engraver will sign any
additional assignments or agreements which may be required in order to assign
and transfer all exclusive material rights which Engraver may possess in the
Engraving Work to EM.
5.3 EM may modify the Engraving Work according to the purpose of its
creation or within the scope of its business activity.
5.4 Engraver authorizes EM publish the Engraving Work in any form.
Engraver authorizes EM to use the Engraving Work without indication of
Engraver's name. Engraver authorizes EM to use the Engraving Work with
indication of EM's or Sunhawk's name.
SECTION 6
CONFIDENTIALITY
6.1 Confidential Information. The terms of this Agreement, Source Files,
Solero Editor, Source Materials, Working Materials, and Final Files, and any
other source code, computer program listings, techniques, algorithms and
processes and technical and marketing plans or other sensitive business
information, including all materials containing said information, which are
supplied by the Sunhawk to Engraver or developed by Engraver in the course of
conversion is the confidential information ("Confidential Information") of
Sunhawk.
6.2 Restrictions on Use. Engraver agrees that except as authorized in
writing by EM: (i) Engraver will preserve and protect the confidentiality of all
Confidential Information; (ii) Engraver will not disclose to any third party,
the existence, source, content or substance of the Confidential Information or
make copies of Confidential Information; (iii) Engraver will not deliver
Confidential Information to any third party, or permit the Confidential
Information to be removed from Engraver's premises; (iv) Engraver
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<PAGE> 4
will not use Confidential Information in any way other than to develop the Final
Files as provided in this Agreement; (v) Engraver will not disclose, use or copy
any third party information or materials received in confidence by Engraver for
purposes of work performed under this Agreement; and (vi) Engraver shall require
that each of its employees who work on or have access to the materials which are
the subject of this Agreement sign a suitable confidentiality and
work-for-hire/assignment agreement and be advised of the confidentiality and
other applicable provisions of this Agreement.
6.3 Return of Source Materials. Upon EM's acceptance of a Final File for
a Music Title, Engraver shall provide EM with all copies and originals of the
Source File, Source Materials, Working Materials and Final File for the Music
Title. Not later than seven (7) days after the termination of this Agreement for
any reason, or if sooner requested by EM, Engraver will return to EM all
originals and copies of the Proprietary Materials and Confidential Information,
as well as any other materials provided to Engraver, or created by Engraver
under this Agreement.
6.4 Third Party Confidential Information. Engraver will not disclose to
EM or induce EM to use any confidential information or trade secrets belonging
to any third party.
SECTION 7
WARRANTIES, COVENANTS AND INDEMNIFICATION
7.1 Warranties and Covenants of Engraver. Engraver represents, warrants
and covenants to EM the following:
(a) Engraver has the full power to enter into this Agreement and perform
the services provided for herein, and that such ability is not limited or
restricted by any agreements or understandings between Engraver and other
persons or companies;
(b) Any information or materials developed for, or any advice provided
to EM, shall not rely or in any way be based upon confidential or proprietary
information or trade secrets obtained or derived by Engraver from sources other
than EM.
(c) The conversion and other work performed by Engraver under this
Agreement shall be in compliance with the Specifications.
7.2 Engraver's Indemnity. Engraver agrees to indemnify, hold harmless
and defend EM from all claims, defense costs (including reasonable attorneys'
fees), judgments and other expenses arising out of or on account of the
conversion work which it performs under this Agreement, including without
limitation claims of the breach of any covenant or warranty set forth in Section
7.1 above.
7.3 Conditions to Engraver's Indemnity. Engraver's obligation to
indemnify is conditioned on EM's notifying Engraver promptly of any claim as to
which indemnification will be sought and providing Engraver reasonable
cooperation in the defense and settlement thereof.
7.4 EM's Indemnification. EM agrees to indemnify, hold harmless and
defend Engraver from all claims, defense costs (including reasonable attorneys'
fees), judgments and other expenses arising out of the breach of the following
Covenants and Warranties:
4
<PAGE> 5
(a) EM possesses full power and authority to enter into this Agreement
and to fulfill its obligations hereunder.
(b) The performance of the terms of this Agreement and of EM's
obligations hereunder shall not breach any separate agreement by which EM is
bound.
7.5 Conditions to EM's Indemnity. EM's obligation to indemnify is
conditioned on Engraver's notifying EM promptly of any claim as to which
indemnification will be sought and providing EM reasonable cooperation in the
defense and settlement thereof.
SECTION 8
CONVERSION FEES
8.1 Payments. EM shall pay Engraver according to the payment schedule
set forth in Schedule "B" upon EM's acceptance of each Final File. "Acceptance"
shall mean the decision, made in EM's sole discretion, that the Final File
conforms to the Specifications. Payment will be based on the number of Pages
accepted by EM. No conversion fee shall be payable on Pages which are
conversions of title pages. Since a Page may be larger or smaller than the
original printed Music Title page, fees are payable on the number of Pages
accepted, and not on the number of pages in the original printed Music Title.
8.2 Compliance with Laws. Engraver will comply with all applicable laws
and regulations in performing the services under this Agreement. EM shall have
the right to make deductions and withholdings from amounts payable to Engraver
if required to do so by any governmental agency. Engraver shall be responsible
for any taxes, duties or other fees or costs associated with the performance of
its obligations under this Agreement.
SECTION 9
TERMINATION
9.1 Termination for Non-Performance or Delay. In the event Engraver
materially breaches this Agreement and fails to cure said breach within seven
(7) days of notice of the material breach, EM shall have the right to terminate
this Agreement effective as of the end of the seven (7) day notice period. EM
will have the right, in addition to all of its other rights, to require that
Engraver deliver to EM all of Engraver's work in progress, including all
originals and copies thereof, as well as any other materials provided to
Engraver, or created by Engraver under this Agreement. EM shall have the right
to terminate this Agreement without cause upon sixty (60) days written notice.
Payment of any Delivery Schedule milestones under Schedule "B" which have been
met shall be deemed payment in full for all obligations of EM under this
Agreement, including full payment for all Working Materials, Final Files and all
other materials and work relating to the portion of this Agreement which has
been completed as of the time of termination.
SECTION 10
GOVERNING LAW; JURISDICTION AND VENUE
Governing Law; Venue. Governing Law; Venue. 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. Engraver consents to the personal
and exclusive jurisdiction and venue of the state and federal courts located in
Seattle, Washington. Engraver also consents that EM may at its election submit
any dispute
5
<PAGE> 6
arising from this Agreement to binding Arbitration under the rules of the
American Arbitration Society. Said Arbitration shall be held in Seattle,
Washington. Engraver acknowledges that EM shall be entitled to injunctive or
other equitable relief for the breach or infringement, or threatened breach or
infringement of its proprietary rights from the court or arbitrator.
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Notices. For purposes of all notices required or permitted to be
given hereunder, the addresses of the parties hereto shall be as indicated
below. All notices shall be in writing and shall be deemed to have been duly
given if sent by facsimile, the receipt of which is confirmed by return
facsimile or email, or sent by first class registered or certified mail or
equivalent, return receipt requested, addressed to the Parties at their
addresses set forth below:
If to Engraver: Avtograf
CJSC Printing Office
Avtograf
Postyshev St. 2
Chelyabinsk, Russia 454000
If to EM: Eller-McConney LLC
800 15th Avenue East,
Seattle Washington 98112 USA
Attn: Mary McConney
11.2 Entire Agreement. Except for the Combined Solero Editor and Viewer
Agreement, this Agreement, including the attached Schedules which are
incorporated herein by reference as though fully set out, contains the entire
understanding and agreement of the Parties with respect to the subject matter
contained herein, supersedes all prior oral or written understandings and
agreements relating thereto except as expressly otherwise provided by this
Agreement, and may not be altered, modified or waived in whole or in part,
except in writing, signed by duly authorized representatives of the Parties.
11.3 Force Majeure. Neither Party shall be held responsible for damages
caused by any delay or default due to any contingency beyond its control
preventing or interfering with performance hereunder.
11.4 Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction (or arbitrator) to be contrary to any law, the
remaining provisions shall remain in full force and effect as if said provision
never existed.
11.5 Contract Assignment. This Agreement is personal to Engraver.
Engraver may not sell, transfer, sublicense, hypothecate or assign its rights
and duties under this Agreement without the written consent of EM. This
Agreement shall inure to the benefit of EM, its successors and assigns. EM may
transfer its rights to the Proprietary Materials to any other persons or legal
entities without Engraver's consent.
11.6 Waiver and Amendments. No waiver, amendment, or modification of any
provision of this Agreement shall be effective unless consented to by both
Parties in writing. No failure or delay by either
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<PAGE> 7
Party in exercising any rights, power, or remedy under this Agreement shall
operate as a waiver of any such right, power, or remedy.
11.7 Agency. The Parties are separate and independent legal entities.
Engraver is performing services for EM as an independent contractor. Nothing
contained in this Agreement shall be deemed to constitute either Engraver or EM
an agent, representative, partner, joint venturer or employee of the other party
for any purpose. Neither Party has the authority to bind the other or to incur
any liability on behalf of the other, nor to direct the daily work activities of
the other. EM shall however have the right to provide support in the use of its
Editor software, suggestions on procedures for creating Final Files, and
comments and corrections on the Final Files which are submitted for approval.
11.8 Limitation on Liability; Remedies. Except as provided in Section 7
above, and except in the case of the infringement or violations of copyright,
trade secret, trademark or any other intellectual property rights, neither party
shall be liable to the other party for any incidental, consequential, special,
or punitive damages or lost profits of any kind or nature, arising from the
breach or termination of this Agreement, even if either party has warned or been
warned of the possibility of any such loss or damage.
11.9 This Agreement is executed in Russian and English in identical
duplicates of equal legal force except in the case of the conflict of Russian
and English version, in which case the English version controls. Each party has
one English and one Russian original of this Agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date set
forth above.
Avtograf Eller-McConney, LLC
By: By
-------------------------------- --------------------------------
-------------------------------- --------------------------------
Its: Its:
----------------------------- -----------------------------
7
<PAGE> 8
SCHEDULE A
SPECIFICATIONS
1. The Final Files shall conform to the Sunhawk Style Manual and any revisions
or updates which are issued during the term of this Agreement.
2. The Final Files will be of a quality consistent with that prepared and
published by Sunhawk.
3. The Final Files shall conform to the quality of sample files (for both a
visual and audio quality) and printed music provided by Sunhawk, including the
"Good and Bad" files, "Samples" and "Showcase Pages" located at
https://store.sunhawk.com/Pages/reference.
4. The Final File shall conform to any style or corrections memos which may be
issued by Sunhawk.
5. For each Final File submitted, Engraver will provide EM with the name of the
Engraver employee who did the final quality review ("slotted") of the Final
File.
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SCHEDULE B
DELIVERY AND PAYMENT SCHEDULE
Delivery Schedule
1,500 pages during the month of November 1998.
2,500 pages during the month of December 1998
5,000 pages per month beginning January 1, 1999 and ending December 31, 2004
Payment upon Acceptance
$10.00 per Page accepted until March 31, 1999.
$ 7.00 per Page from April 1, 1999 until December 31, 2004.
The price for "scans," guitar-tab, lyric sheets and other forms of music other
than full score shall be separately negotiated.
(The parties acknowledge that in addition to the Pages listed above, Engraver
has delivered, and EM has accepted 1,294 pages.)
EM shall pay the salary of one person for the two weeks during onsite training.
The cost of additional onsite training will be borne by Engraver at a fee to be
separately negotiated. Engraver shall be responsible for all travel,
accommodations, salaries (other than the two-week onsite training) and other
expenses associated with onsite training.
Non-competing--help to convert. Not make money on the third party exploitation.
Help them to convert into other formats.
9
<PAGE> 1
EXHIBIT 10.14
LETTER AGREEMENT
FEBRUARY _____, 2000
As part of the Assignment and Assumption Agreement of the Right to Receive Sheet
Music, it is agreed that Sunhawk.com will pay Eller McConney LLC $1,000,000
subject to the receipt and acceptance of a sufficient number of pages of sheet
music. Payment of the $1,000,000 is based on the number of pages received and
accepted from Music Production International over a period of five years and is
to be paid quarterly in arrears with a maximum principal payment of $200,000 per
annum. In connection with this agreement, Avtograf, a Russian Joint Stock
Company will transfer to Music Production International, a Russian Company, its
obligation to provide production services for digital sheet music.
Agreed and Accepted,
- ----------------------------------- ------------------------------------
Sunhawk.com Corporation Eller McConney LLC
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated November 24,
1999, except for note 7 (sixth paragraph) as to which the date is December 23,
1999 and note 7 (fourth paragraph), as to which the date is January 12, 2000,
and note 13 as to which the date is January 26, 2000 in Amendment No. 6 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
February 10, 2000
