<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the three month period ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number 333-80849
Sunhawk.com Corporation
-----------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-1568830
---------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
223 Taylor Ave. N., Suite 200, Seattle WA 98109-5017
----------------------------------------------------
(Address of principal executive offices)
(206) 728-6063
--------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
<PAGE> 2
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of December 31, 1999, the
registrant had 0 shares of preferred stock outstanding and 1,399,380 share of
common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
Form 10-QSB
1st Three months ended December 31, 1999
<TABLE>
<CAPTION>
Page
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1.
Balance Sheet 1
Statements of Operations 2
Statements of Stockholders' Equity 3
Statements of Cash Flows 4
Notes to Financial Statements 5 - 14
Item 2.
Management's Discussion And Analysis or
Plan of Operation 15 - 19
PART II: OTHER INFORMATION
SIGNATURES
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
SUNHAWK.COM CORPORATION
Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31, 1999
------------------
<S> <C>
ASSETS
Current assets:
Cash $ 7,943
Accounts Receivable 6,515
Inventory 16,464
Prepaid 13,278
-----------
Total current assets 44,200
-----------
Property and equipment, net 247,637
Other assets:
Digital sheet music masters (net of accumulated amortization
of $44,263 as of December 31, 1999) 437,803
Patents & trademarks, at cost (net of accumulated
amortization of $9,228 as of December 31, 1999) 107,115
Music catalog distribution rights (net of
accumulated amortization of $113,067 as of December 31, 1999) 1,206,051
Deferred offering costs 1,271,185
Deposits 27,234
-----------
Total other assets 3,049,388
-----------
Total assets $ 3,341,225
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of Credit $ 1,000,000
Accounts payable and accrued expenses 932,016
Payable to shareholder 92,155
Payable to Eller McConney LLC 204,166
Notes payable to shareholder 290,000
Accrued interest to shareholder 120,873
-----------
Total current liabilities 2,639,210
-----------
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 at December 31, 1999 3,345,219
Accumulated deficit (2,643,204)
-----------
Total shareholders' equity (deficit) 702,015
-----------
Total liabilities and shareholders' equity (deficit) $ 3,341,225
===========
</TABLE>
See accompanying notes to financial statements.
1
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SUNHAWK.COM CORPORATION
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31,
--------------------------
1999 1998
----------- ---------
<S> <C> <C>
Sales $ 39,556 $ 16,497
Cost of goods sold:
Royalties, materials, shipping, and
credit card processing fees 29,877 10,876
Amortization of digital sheet music
and music catalog distribution rights 50,855 3,044
----------- ---------
Total Cost of Goods Sold 80,732 13,920
----------- ---------
Gross profit (loss) (41,176) 2,577
Selling, general and administrative 986,029 559,113
----------- ---------
Loss from operations (1,027,205) (556,536)
Interest expense on notes payable to
Shareholders 16,290 41,530
----------- ---------
Net loss $(1,043,495) $(598,066)
=========== =========
Net loss per share:
Basic and diluted $ (0.82) $ (0.67)
=========== =========
Weighted average common shares for net
loss per share computations:
Basic and diluted 1,277,880 894,172
=========== =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 5
SUNHAWK.COM CORPORATION
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Shareholders' Total
------------------------- 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
Net loss (unaudited) -- -- (1,043,495) (1,043,495)
--------- ----------- ----------- -----------
Balance, December 31, 1999 (unaudited) 1,399,380 $ 3,345,219 $(2,643,204) $ 702,015
========= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 6
SUNHAWK.COM CORPORATION
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,043,495) $(598,066)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,103 21,440
Amortization 52,398 4,085
Changes in operating assets and liabilities:
Increase in accounts receivable 1,134 (929)
Decrease (increase) in CD-ROMs and printed
sheet music 627 (96)
Decrease (increase) in prepaid expense (8,709) --
Increase in accounts payable and accrued
Expenses 222,749 (7,382)
Increase in payable to Eller McConney
LLC 34,209 18,440
Increase in related party payable 92,155 11,354
Accrued interest on notes payable to
Shareholder 5,479 656,529
----------- ---------
Net cash provided by (used in) operating
activities (615,350) 105,375
----------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment (22,900) (22,455)
Purchase of digital sheet music masters (54,815) (72,619)
Cost of patents and trademarks (10,202) (14,563)
----------- ---------
Net cash used in investing activities (87,917) (109,637)
----------- ---------
FINANCING ACTIVITIES
Proceeds from line of credit 900,000 --
Increase in deferred offering costs (208,090) --
----------- ---------
Net cash provided by financing activities 691,910 --
----------- ---------
Net decrease in cash (10,357) (4,262)
Cash at beginning of period 18,300 59,093
----------- ---------
Cash at end of period $ 7,943 $ 54,831
=========== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 7
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 also sells its technology
solutions to owners of proprietary digital products interested in selling their
content over the Internet. Sunhawk.com's internally developed proprietary
technology, Solero(R), allows customers to view, play, print and store the
encrypted digital sheet music files. This technology can also be applied to
other proprietary digital content.
NAME CHANGE
On June 10, 1999, Sunhawk.com's Articles of Incorporation were amended to change
the company's name to Sunhawk.com Corporation.
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.
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 $13,166 and $3,044 for the three months ended December 31,
1999 and 1998, 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 $1,543 and $1,041 for the three months ended December 31, 1999 and 1998,
respectively. Sunhawk.com periodically evaluates these intangible assets for
impairment.
5
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MUSIC CATALOG DISTRIBUTION RIGHTS
Music Catalog Distribution rights are stated at cost less accumulated
amortization. Amortization is calculated on a straight-line basis over the
remaining term of the underlying distribution agreement, approximately eight and
one-half years. Amortization expense is included in the cost of goods sold and
was approximately $37,700 for the three months ended December 31, 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
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 respective music publishers on each digital music title
sold. Total royalty expense incurred during the three months ended December 31,
1999 and 1998 was $13,112 and $4,737, 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
$159,823 and $12,523 during the three months ended December 31, 1999 and 1998,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. There were no research
and development expenses during the three months ended December 31, 1999 and
1998.
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
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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.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (unaudited):
<TABLE>
<CAPTION>
<S> <C>
Computers and equipment $ 415,959
Furniture 57,630
Software 44,535
Other 2,047
---------
520,171
Less accumulated depreciation (272,534)
---------
$ 247,637
=========
</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 the
nonexclusive right to distribute selected digital sheet music from the Warner
Bros. Publications U.S. Inc. music
7
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catalog. As a nonforfeitable part of the consideration and as inducement to
enter into the agreement, Sunhawk.com agreed to issue 99,073 shares of its
common stock to Warner Bros. Publications U.S. Inc., contingent upon either the
closing of a firmly underwritten public offering or the private sale or other
disposition of 15% or more of Sunhawk.com's common stock then authorized and
outstanding.
As a result of the sale of common stock to certain founders on March 31, 1999,
the contingency was removed, the shares were issued to Warner Bros. Publications
U.S. Inc. and became fully vested and non-forfeitable under the terms of the
agreement. The value of the shares of common stock issued to Warner Bros.
Publications U.S. Inc. was measured at the fair value of common stock on
issuance date and capitalized as a long-term asset, which will be amortized over
the remaining life of the distribution agreement.
On December 7, 1999, Sunhawk.com entered into a distribution agreement with
Maranatha! Music (Maranatha). This agreement provided Sunhawk.com with the
non-exclusive right to promote, sell, license and distribute selected digital
sheet music from Maranatha's respective music catalog. The term of the agreement
is approximately five years.
5. NOTES PAYABLE TO SHAREHOLDER
On September 30, 1998, Sunhawk.com entered into two demand notes payable
agreements with a shareholder. On March 31, 1999, the shareholder exchanged
these notes, including interest accrued through September 30, 1998, for 267,968
shares of common stock. Interest accrued during the six-month period ended March
31, 1999 of $113,928 was not converted to shares of common stock and is included
in accrued interest on notes payable to shareholder. On August 17, 1999 and
September 21, 1999, Sunhawk.com entered into note payable agreements in the
amount of $80,000 and $210,000, respectively, with a shareholder. The notes are
due on February 1, 2000, and carry interest at the federal applicable short-term
rate, or approximately 5%. The due date of the notes are being renegotiated with
the shareholder.
6. LINE-OF-CREDIT
On September 29, 1999, Sunhawk.com entered into a $500,000 line-of-credit
agreement with a financial institution. 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. As of December 31, 1999, borrowings totaling $1,000,000 were outstanding.
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
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and McConney 1995 Family Living Trust contributed capital of $1,000,000 by
forgiving the remaining notes payable to shareholder outstanding at that date.
On August 25, 1999, Sunhawk.com's Board of Directors and its shareholders
amended its Articles of Incorporation to decrease the total number of shares of
common stock, which Sunhawk.com has the authority to issue from 20,000,000 to
10,000,000.
On January 12, 2000, Sunhawk.com's Board of Directors and its shareholders
amended it Articles of Incorporation to increase the total number of shares of
common stock, which Sunhawk.com has the authority to issue from 10,000,000 to
30,000,000. This amendment also granted Sunhawk.com the authority to issue
10,000,000 in preferred stock.
REVERSE STOCK SPLIT
On March 30, 1999, Sunhawk.com's Board of Directors approved a transaction to
give one share for every 6.007 shares of common stock, thereby giving effect to
a 1-for-6.007 reverse stock split effective March 31, 1999.
On December 23, 1999, Sunhawk.com's Board of Directors approved a transaction to
give 0.716 shares for every 1 share of common stock, thereby giving effect to a
1.397 to 1 reverse stock split effective December 23, 1999. All outstanding
common and common equivalent shares and per-share amounts in the accompanying
financial statements and related notes to the financial statements have been
retroactively adjusted to give effect to the reverse stock splits.
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.
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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
Options exercised -- 0.00
Options canceled -- 0.00
------- ------
Balance at December 31, 1999 (unaudited) 17,932 $10.77
======= ======
</TABLE>
At December 31, 1999 options to acquire 248,278 shares of common stock were
available for future grant.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
- -------------------------------------------------------------------------
WEIGHTED-AVERAGE
WEIGHTED- REMAINING
EXERCISE NUMBER OF AVERAGE CONTRACTED LIFE
PRICE SHARES EXERCISE PRICE (YEARS)
-------------- --------- -------------- ----------------
<S> <C> <C> <C>
$0.42 7,153 $ 0.42 7.02
$0.43 - 11.33 4,765 11.33 8.20
$11.34 - 22.65 6,014 22.65 8.79
------
17,932
======
</TABLE>
As of December 31, 1999, in connection with the stock option plan, 266,210
shares of common stock were available for future issuance. At December 31, 1999,
4,053 options were exercisable at an exercise price of $2.07 per share.
10
<PAGE> 13
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 and 1998, consistent with the fair value method of Statement of Financial
Accounting Standards No. 123, Sunhawk.com's net loss for the years ended
December 31, 1999 and 1998 would have been increased to the following pro forma
amount:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
(unaudited)
------------------------
1999 1998
---------- --------
<S> <C> <C>
Net loss:
As reported $1,043,495 $598,066
Pro forma 1,049,671 604,242
Net loss per share, basic and diluted:
As reported $ 0.82 $ 0.67
Pro forma 0.82 0.68
</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% and 6.11% for 1999 and 1998,
respectively; expected life of five years; and dividend yield of 0%.
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 December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended December 31:
<S> <C>
2000 $258,327
2001 344,436
2002 686
--------
Total minimum lease payments $603,449
========
</TABLE>
Total rent expense paid during the three months ended December 31, 1999 and 1998
amounted to $86,130 and $94,372, respectively (unaudited).
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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>
Three Months Ended
December 31, 1999
(unaudited)
------------------
<S> <C>
Income tax benefit based on federal statutory rate of 34% $(355,000)
Unrealized net operating loss benefits 402,000
Other (47,000)
---------
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 used for income tax purposes. Significant components of
Sunhawk.com's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1999
(unaudited)
-----------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards 935,000
Payable to Eller McConney LLC 69,000
Payable to shareholder 31,000
Accrued interest 41,000
Accrued expense 20,000
-----------
Total deferred tax assets 1,096,000
Valuation allowance for deferred tax assets (1,081,000)
-----------
Total deferred tax asset less valuation allowance 15,000
-----------
Deferred tax liabilities:
Depreciation and amortization (10,000)
Prepaid expense (5,000)
-----------
Total deferred tax liability (15,000)
-----------
Net deferred tax asset $ 0
===========
</TABLE>
12
<PAGE> 15
At December 31, 1999, Sunhawk.com had net operating loss carryforwards (NOLs) of
approximately $ 2,750,000, 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 December 31, 1999,
Sunhawk.com owed $204,166 to Eller McConney LLC for these services. The digital
sheet music masters for which production services were provided represented
approximately 62% AND 42% of the digital sheet music acquired by Sunhawk.com
during the three months ended December 31, 1999 and 1998, respectively.
During the three months ended December 31, 1999, Sunhawk.com's Board of
Directors approved entering into a five-year assignment and assumption agreement
with Avtograf, Eller McConney LLC and Music Production International, a Russian
corporation. The assumption and assignment agreement 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 letter
agreement that provides, among other things, the payment to Eller McConney
LLC the amount of $1,000,000. Payment of the principal and interest is based
on the number of pages received and accepted from Music Production
International over a period of five years and is to be paid quarterly in
arrears with a maximum principal payment of $200,000 per annum. In connection
with this agreement, Avtograf will assign to Music Production International
its obligation to provide production services for digital sheet music.
Thereafter, Music Production International will be obligated to provide
production services for digital sheet music for Sunhawk.com at an anticipated
minimum rate of 4,500 pages per month totaling 270,000 pages over a period of
five years, at no additional cost to Sunhawk.com. [The letter agreement
reflecting the 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 has an ownership interest in Music
Production International. This agreement became effective on February 14, 2000.
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
received no compensation for these services from inception of Sunhawk.com
through to September 30, 1999, and began receiving compensation beginning
October 1, 1999.
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<PAGE> 16
12. 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, which closed on January 26, 2000, bore interest at a rate
of 8.5% per annum and were repaid in full from proceeds received from the
initial public offering. A total of 41,680 warrants were granted to the third
parties and are exercisable commencing six months following the closing date of
the offering at the initial public offering price of $12.00. The warrants may be
adjusted for stock splits, recapitalization, or reorganization of Sunhawk.com.
At the closing of the bridge financing, Sunhawk.com paid Joseph Gunnar & Co.,
LLC (i) a commission equal to 7% of the aggregate loan amount; (ii) a
structuring fee equal to 3% of the aggregate loan amount; (iii) reimbursement of
out-of-pocket expenses; and (iv) reimbursement of reasonable fees and
disbursements of counsel to Joseph Gunnar & Co., LLC. The loans were paid in
full on February 22, 2000.
INITIAL PUBLIC OFFERING
Effective February 15, 2000, Sunhawk.com began trading its securities filed
under the Securities Exchange Act of 1933. As part of the initial public
offering, Sunhawk.com issued 1,610,000 million shares of its common stock at an
initial public offering price of $12.00. The offering generated approximately
$19 million in proceeds.
DISTRIBUTION AGREEMENT
On January 5, 2000, Sunhawk.com entered into a distribution agreement with Mel
Bay. This agreement provides Sunhawk.com with the non-exclusive and
non-transferable right to distribute selected digital sheet music from Mel Bay's
music catalog. The term of the agreement is for approximately five years.
CONSULTING AGREEMENTS
On February 15, 2000, Sunhawk.com entered into a Consulting Agreement with a
newly appointed member of Sunhawk.com's advisory board. Pursuant to the
Consulting Agreement, the advisory board member will provide consulting services
to Sunhawk.com, including developing strategic alliances with third parties. As
compensation for the services performed under the Consulting Agreement, the
advisory board member was issued a five-year warrant to purchase 105,000 shares
of Sunhawk.com's common stock. Certain shares underlying this warrant are
subject to Sunhawk.com's stock price achieving specific closing prices over a
period of time.
On February 18, 2000, Sunhawk.com entered into a Consulting Agreement with a
newly appointed member of its board of directors. Pursuant to the Consulting
Agreement, the board member will provide consulting services to Sunhawk.com
including introducing Sunhawk.com to content owners who could benefit from
Sunhawk.com's technology. As compensation for the services performed under the
Consulting Agreement, the board member was issued a five-year warrant to
purchase 120,000 shares of Sunhawk.com's common stock. Certain shares
underlying this warrant are subject to Sunhawk.com's stock price achieving
specific closing prices over a period of time.
Both Consulting Agreements are subject to performance criteria and may be
cancelled by providing sixty (60) days notice. The warrants may be adjusted for
stock splits, recapitalization, or reorganization of Sunhawk.com and are
exercisable at the initial public offering price of $12.00.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Sunhawk.com Corporation was incorporated in August 1992 and began
distributing and selling digital sheet music over the Internet in March 1997.
From the date of incorporation until March 1997, our operating activities
consisted principally of the following:
- creating our digital sheet music catalog;
- 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 December 31, 1999, we sold approximately
27,143 digital sheet music products and approximately 2,217 traditional printed
sheet music products and CD-ROMs. Through December 31, 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. Our contracts with
publishers require us to remit the appropriate royalty to the respective
publisher. Royalty payments range from 10% to 70% and are based on actual sales,
less credit card processing fees and shipping costs, if any. Materials costs
consist of CD-ROMs and the cost of printed sheet music books. Shipping costs and
credit card processing fees include costs related to the shipping of traditional
printed sheet music and the processing of credit card payments for printed and
digital sheet music.
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<PAGE> 18
Amortization of the cost of producing digital masters relates to the
digital sheet music and is based on the shorter of estimated useful lives or the
term of the distribution contracts for the digital masters. Amortization of the
music catalog distribution rights began in the quarter ended June 30, 1999,
resulting in an increase in cost of goods sold. The amortization of music
catalog distribution rights is approximately $38,000 per quarter through the
remaining term of the Warner Bros. Publications U.S. Inc. contract, which ends
December 31, 2007.
We expect that our cost of goods sold will increase significantly as we
accelerate our production of digital sheet music and enter into additional
strategic partnerships to further develop and expand our catalog of digital
sheet music and recorded music.
Selling expenses consist primarily of promotional and advertising
expenditures, including payroll and payroll-related expenses. We have incurred
little advertising expenditures to date as we have focused our efforts on
creating our digital sheet music catalog and securing strategic alliances and
the rights to digitize sheet music. We expense all advertising costs as
incurred, and we expect selling expenses to increase significantly as we seek to
increase the number of Solero(R) Viewers downloaded from our web site or
distributed on CD-ROMs and enhanced CDs, drive customer traffic to our web site,
enhance our brand name awareness and otherwise promote the sale of our products.
General and administrative expenses consist primarily of management salaries and
expenses, insurance premiums, rent, telephone costs, travel expenses for general
business, legal and professional fees, staff salaries, other payroll expenses
and other related expenses for general corporate functions.
To date we have incurred and expect to continue to incur substantial costs
in order to:
- expand our sheet music catalog;
- produce, distribute and sell digital and printed sheet music;
- develop our technologies;
- acquire patents and other intellectual property rights;
- acquire the rights to sheet music;
- secure and maintain relationships with, among others, Warner Bros.
Publications U.S. Inc. and EMI Christian Music Publishing;
- further develop our operational infrastructure and web site;
- distribute and sell certain recorded music;
- increase the size of our staff;
- extend our technology into other content areas;
- further develop and extend the application of our DRM and encryption
technologies;
- expand our sales, marketing and business development efforts; and
- upgrade our software and hardware.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1998
16
<PAGE> 19
Sales
Sales for the three months ended December 31, 1999, were $39,556
compared to $16,497 for the three months ended December 31, 1998. This increase
in sales resulted from providing a wider selection of music titles in our
Solero(R) format and increased advertising of our product. In addition, in order
to increase customer traffic to our web site, we offered a variety of
promotional features on our web site and provided special services for our
strategic partners.
Cost of goods sold
Cost of goods sold for the three months ended December 31, 1999 were
$80,732 compared to $13,920 for the three months ended December 31, 1998. The
increase in cost of goods sold was primarily due the amortization of
approximately $38,000 of the music catalog distribution rights. Amortization of
these rights did not commence until third quarter of fiscal year 1999. The
increase was also due to an increase during the three months ended December 31,
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 three months ended December 31, 1999 increased as the
number of digital sheet music titles produced during that period increased. For
the three months ended December 31, 1999, royalty payments accounted for
$13,112, or 33.1% of sales. Costs associated with the amortization of digital
sheet music masters accounted for $13,166, or 33.3% of sales and costs
associated with the amortization of music catalog distribution rights were
$37,689, or 95.3% of sales. For the three months ended December 31, 1998,
royalty payments accounted for $4,737, or 28.7% of sales, and costs associated
with the amortization of digital sheet music masters accounted for $3,044, or
18.5% of sales.
Selling, general and administrative expenses
Selling expenses for the three months ended December 31, 1999, were
$189,372, including advertising costs of $159,823, compared to $20,909, with
advertising costs of $12,523, for the three months ended December 31, 1998.
Selling expenses for both periods consisted primarily of expenditures incurred
in connection with advertising, attending trade shows, expansion of our web site
and payroll-related expenses. In the third quarter of 1999, we initiated our
strategic marketing plan. As part of this plan, we experienced a significant
increase in advertising and marketing consultant costs as part of the new
strategic marketing plan. General and administrative expenses for the three
months ended December 31, 1999 were $986,029 compared to $559,113 for the three
months ended December 31, 1998. The increase was primarily due to the expansion
of our production capabilities to grow our digital sheet music catalog,
professional fees, hiring key management personnel, and increases in corporate
facility expenses necessary to operate the business.
Interest expense on notes payable to shareholder
Interest expense for the three months ended December 31, 1999, was
$16,290 compared to $41,530 for the three months ended December 31, 1998. The
decrease in interest expense was primarily due to the conversion of loans made
to us by the Eller and McConney 1995 Family Living Trust, into common stock on
March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
17
<PAGE> 20
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 December 31, 1999, we had cash of $7,943 and a
working capital deficiency of $2,593,077.
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,
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 and were paid in full, including
interest on February 22, 2000.
On February 15, 2000, we issued 1,610,000 shares of common stock in an
initial public offering at the price of $12.00 per share. The offering generated
approximately $19 million in proceeds.
Net cash used in operating activities totaled $615,350 for the
three months ended December 31, 1999 compared with net cash provided by
operating activities of $105,375 for the three months ended December 31, 1998.
The increase in net cash used in operating activities for the three months ended
December 31, 1999, as compared to the prior year, was primarily attributable to
increases in advertising, the expansion of our production capabilities to grow
our digital sheet music catalog, professional fees, hiring key management
personnel, and increases in corporate facility expenses necessary to operate the
business.
Net cash used in investing activities was $87,917 for the three months
ended December 31, 1999 compared to $109,637 for the three months ended December
31, 1998. The decrease in cash used in investing activities for the three months
ended December 31, 1999, as compared to the prior year, was primarily due to the
decrease in the acquisition digital sheet music masters, and patents and
trademarks.
Net cash provided by financing activities was $691,910 for the three
months ended December 31, 1999 compared to $0 for the three months ended
December 31, 1998. The increase in net cash for financing activities for the
three months ended December 31, 1999, as compared to prior year, was primarily
derived from proceeds from the drawing down of the line of credit. This was
offset by an increase of $208,090 in deferred offering costs for the three
months ended December 31, 1999 compared to the prior year.
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<PAGE> 21
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.
YEAR 2000 COMPLIANCE
Although we have not experienced any Year 2000 problems, it is possible
that Year 2000-related issues may cause problems or disruptions. While we
believe that all of our systems are Year 2000 compliant, we cannot assure you
that we will not discover a problem during 2000 that needs to be upgraded,
modified or replaced. In addition, we depend on a number of third-party vendors
to provide both information and non-information technology systems and services.
While we believe that our material third-party systems and services are Year
2000 compliant, we cannot be sure that we will not experience any problems
during 2000. We also cannot provide any assurance that governmental agencies,
utility companies, Internet access companies and others outside of our control
will not experience any future Year 2000 problems.
We believe that the Year 2000 issue will not have a material adverse
effect on our business, financial condition or operating results. However,
despite all of our efforts to-date towards insuring Year 2000 compliance, latent
issues may still surface in the future that require upgrades, modifications or
replacement, all of which could be time-consuming and expensive. In addition,
there can be no assurance that utility companies, Internet access companies and
our third-party vendors will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure such as a
prolonged Internet, telecommunications or electrical failure.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
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<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10.1 Letter agreement with Osmond Kilkenny, member of the
board of directors dated February 18, 2000.
Exhibit 10.2 Letter agreement with Scott Svenson, member of the
advisory board dated February 15, 2000.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Sunhawk.com Corporation
-----------------------
(Registrant)
Date March 30, 2000 /s/ Marlin Eller
-------------- -------------------------------------
Marlin Eller, Chief Executive Officer
Date March 30, 2000 /s/ Tricia Parks-Holbrook
-------------- ----------------------------------------------
Tricia Parks-Holbrook, Chief Financial Officer
20
<PAGE> 1
Exhibit 10.1
[Letterhead of Sunhawk.com Corporation]
February 14, 2000
Osmond J. Kilkenny
44 James Place E
Dublin 2, Ireland
Dear Mr. Kilkenny:
Sunhawk.com Corporation, a Washington corporation (the "Company"),
hereby confirms with this letter agreement ("Letter Agreement") its
understanding with you ("Consultant") concerning the consulting services that
you will provide the Company, as follows:
1. Services to be Rendered by Consultant.
During the term of this Letter Agreement, Consultant shall provide
consulting services to the Company at such times as Consultant and the Company
shall reasonably agree, provided that Consultant shall provide the consulting
services for not less than two (2) full business days each month. The consulting
and business development services to be provided shall consist of the following:
(a). Serving as member of the board of directors and attending in person
at least one board meeting each quarter;
(b). Introducing Consultant's significant contacts in the music industry
in order to assist the Company in licensing or otherwise securing music content
from successful and nationally recognized artists and other musicians, music
publishers, records labels, and other digital content related entities;
(c). Creating, forming and leading an advisory board consisting of three
or more senior level music industry executives and business leaders, including
Scott Svenson, designed to advise the Company regarding the establishment and
enhancement of the Company's technology and stature in the market place
("advisory board");
(d). Initiating, generating and, where appropriate or reasonable,
attending meetings between the Company and content providers, including the
parties set forth in subparagraph (b) above; and
(e). Providing such other duties and responsibilities as the parties
shall hereafter agree.
<PAGE> 2
The consulting services will be performed principally at Consultant's
then principal residence; provided that Consultant shall upon reasonable request
from time to time meet with principals of the Company, or attend meetings in
accordance with the consulting services to be provided herein at a mutually
convenient location, including the Company's principal offices, or such other
location or locations as the parties shall so agree.
2. Compensation.
(a). As compensation for the consulting services to be performed
pursuant to this Letter Agreement, the Company shall issue to Consultant
five-year warrants, pursuant to a warrant agreement to be attached hereto as
Exhibit A, to purchase 120,000 shares of the common stock of the Company (as
adjusted for stock splits and the like) at an exercise price per share equal to
the initial public offering price of the common stock of the Company.
(b). Warrants with respect to 30,000 shares of common stock shall vest
upon execution of this Letter Agreement and warrants with respect to 2,500
shares of the common stock of the Company shall vest on the first day of each
calendar month over the next 12 months thereafter, commencing on March 1, 2000.
(c). Warrants with respect to the balance of the shares of common stock
(e.g., 60,000) shall vest at any time during the twelve (12) month period
commencing on the first anniversary of this Letter Agreement, if the average
closing price over any fifteen (15) trading-day period of the common stock of
the Company is equal to or exceeds the following:
<TABLE>
<CAPTION>
Average Closing Price Warrants to be Vested
--------------------- ---------------------
<S> <C>
$24.00 12,000
$30.00 24,000
$36.00 36,000
$42.00 48,000
$48.00 60,000
</TABLE>
For example, if at any time the average closing price during any 15-day
trading period during the applicable 12-month period is equal to $48.00,
warrants with respect to 60,000 shares of the common stock of the Company shall
immediately vest.
(d). The closing price means the closing bid price for the common stock
of the Company as reported in the Wall Street Journal, or, if not applicable,
such other national publication as the parties shall so select. A trading day is
any business day that the common stock of the Company is actively traded and the
results of which are reported.
(e). Notwithstanding the above, all unvested warrants shall immediately
vest upon a "change of control." A change of control shall mean a sale of all or
substantially all of the Company's assets, or any merger or consolidation of the
Company with or into another corporation, other than a merger or consolidation
in which the holders of more than 50% of the shares of capital stock of the
Company outstanding immediately prior to such transaction continue to hold
(either by the voting securities remaining outstanding or by their being
2
<PAGE> 3
converted into voting securities of the surviving entity) more than 50% of the
total voting power represented by the voting securities of the Company, or such
surviving entity, outstanding immediately after such transaction.
3. Expense Reimbursement.
The Company shall reimburse Consultant for all reasonable out-of-pocket
expenses incurred by Consultant in the performance of Consultant's duties
pursuant to this Letter Agreement not to exceed $2,500 per month, unless
approved by the Company, and, in addition thereto, reasonable business-class
travel and lodging expenses incurred by Consultant in traveling, as agreed with
the Company.
4. Term.
(a). The term of this Letter Agreement shall be twenty four months (24)
months. This Letter Agreement shall terminate upon any of the following: (i)
expiration of the term; (ii) the mutual agreement of the parties; (iii) sixty
(60) days notice by Consultant; or (iv) sixty (60) days notice by the Company,
for any reason other than bad faith. Bad faith includes the termination of this
Letter Agreement, the principal purpose of which is to terminate the continued
vesting of Consultant and is unrelated to the failure by Consultant to perform
the consulting services or to otherwise achieve the objectives of the parties
sought by this Agreement.
(b). Should Consultant contend that Consultant was terminated in bad
faith, then the Company and Consultant shall enter immediately into binding
arbitration pursuant to the American Arbitration Rules in effect as of the
effective date of this Letter Agreement, the cost of which shall be borne by the
nonprevailing party.
(c). If this Letter Agreement is terminated prior to the vesting of all
of the options set forth in paragraph 2 above, any unvested options shall be
immediately forfeited and terminated as of the date of termination of this
Letter Agreement. All vested options shall be exercisable by Consultant at any
time and from time to time within five (5) years from the date of this Letter
Agreement. The Company shall remain liable for the reimbursement of any expenses
incurred by Consultant pursuant to paragraph 3 hereof prior to the date of
termination of this Letter Agreement.
5. Performance Review.
Consultant and the chairman or chief executive officer of the Company,
or such other senior officer as the Company shall provide, shall meet from time
to time at the request of the Company, preferably not less than semi-annually,
to review and discuss Consultant's performance under this Letter Agreement.
6. Confidentiality.
Consultant recognizes and acknowledges that during the course of
Consultant's employment Consultant shall have access to certain information not
generally known to the
3
<PAGE> 4
public relating to the business of Company, including the terms of this Letter
Agreement ("Confidential Information"). Consultant agrees not to, directly or
indirectly, use or disclose to anyone, either during the term of this Letter
Agreement or after the termination of this Letter Agreement, except in the
performance of his duties as described in this Letter Agreement or with the
Company's prior written consent, any Confidential Information of the Company,
including the terms of this Letter Agreement, and upon termination of this
Letter Agreement for any reason whatsoever, to turn over to the Company all
documents and records containing any Confidential Information.
7. Notices.
All notices to be given hereunder shall be deemed duly given when
delivered by hand in writing, sent by facsimile with written confirmation of
receipt or when received if sent by a nationally recognized overnight delivery
service as follows:
If to the Company:
Sunhawk.com Corporation
5106 46th Avenue NE
Seattle, WA 98105
Facsimile: (206) 728-5929
With a copy to:
David Otto
999 Third Avenue
Suite 3210
Seattle, Washington 98104
Facsimile: (206) 262-0297
If to Consultant:
Osmond J. Kilkenny
44 James Place E
Dublin 2, Ireland
Facsimile: (353) 1661-4101
With a copy to
Peterson Russell Cofano, PLLC
10900 NE 4th Street, Suite 870
Bellevue, Washington 98004
Attn: Patrick Moran
Facsimile (425) 451-0714
4
<PAGE> 5
8. Assignment.
This Letter Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors, heirs and assigns. No rights or
obligations of Consultant pursuant to this Letter Agreement may be assigned or
transferred; provided, however, Consultant may assign to family members or
entities consisting of family members any vested warrants under this Letter
Agreement.
9. Entire Agreement; Amendments.
This Letter Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to
the subject matter hereof. This Letter Agreement may not be amended orally, but
only by an agreement in writing signed by the parties hereto.
10. Governing Law; Counterparts.
This Letter Agreement shall be governed by and construed in accordance with
the laws of the State of Washington without regard to conflicts of law
principles. This Letter Agreement may be executed in counterparts and the
executed counterparts shall together constitute a single instrument.
11. Attorney's Fees.
In the event of litigation to enforce this Letter Agreement, the
prevailing party will be entitled to recover its reasonable attorneys' fees as
determined by the court.
12. Arbitration.
Any disputes arising out of or from this Letter Agreement or any exhibit
referenced herein shall be submitted to binding arbitration for resolution in
Seattle, Washington pursuant to the American Arbitration Rules in effect as of
the effective date of this Letter Agreement.
Very truly yours,
Sunhawk.com Corporation.
By: /s/ Marlin J. Eller
------------------------------------
Name: Marlin J. Eller
Title: Chairman and CEO
The foregoing is hereby confirmed and
accepted as of February 18, 2000.
5
<PAGE> 6
/s/ Osmand J. Kilkenny
- ---------------------------------
Osmond J. Kilkenny
6
<PAGE> 1
Exhibit 10.2
[Letterhead of Sunhawk.com Corporation]
February 14, 2000
Scott Svenson
PO Box 164,
Medina, Washington 98039-0164
Dear Mr. Svenson:
Sunhawk.com Corporation, a Washington corporation (the "Company"),
hereby confirms with this letter agreement ("Letter Agreement") its
understanding with you ("Consultant") concerning the consulting services that
you will provide the Company, as follows:
1. Services to be Rendered by Consultant.
During the term of this Letter Agreement, Consultant shall provide
consulting services to the Company at such times as Consultant and the Company
shall reasonably agree, provided that Consultant shall provide the consulting
services for not less than one (1) full business day each month. The consulting
services to be provided shall consist of the following:
(a). Serving as a member of the Company's board of advisors and
assisting in the identification and recruitment of other board of advisor
members; (b). Advising and where appropriate assisting in the development of the
Company's executive management team, corporate infrastructure, and commercial
business strategy;
(c). Introducing, developing and evaluating third-party candidates for
strategic alliances or partnerships with the Company;
(d). Identifying, developing and evaluating potential investment and
corporate financing opportunities for the Company; and
(e). Providing such other duties and responsibilities as the parties
shall hereafter agree.
The consulting services will be performed principally at Consultant's
then principal residence; provided that Consultant shall upon reasonable request
from time to time meet with principals of the Company, or attend meetings in
accordance with the consulting services to be provided herein at a mutually
convenient location, including the Company's principal offices, or such other
location or locations as the parties shall so agree.
<PAGE> 2
2. Compensation.
(a). As compensation for the consulting services to be performed
pursuant to this Letter Agreement, the Company shall issue to Consultant
five-year warrants, pursuant to a warrant agreement to be attached hereto as
Exhibit A, to purchase 105,000 shares of the common stock of the Company (as
adjusted for stock splits and the like) at an exercise price per share equal to
the initial public offering price of the common stock of the Company.
(b). Warrants with respect to 26,250 shares of common stock shall vest
upon execution of this Letter Agreement and warrants with respect to 2,188
shares of the common stock of the Company shall vest on the first day of each
calendar month over the next 12 months thereafter, commencing on March 1, 2000.
(c). Warrants with respect to the balance of the shares of common stock
(e.g., 52,500) shall vest at any time during the twelve (12) month period
commencing on the first anniversary of this Letter Agreement, if the average
closing price over any fifteen (15) trading-day period of the common stock of
the Company is equal to or exceeds the following:
<TABLE>
<CAPTION>
Average Closing Price Warrants to be Vested
--------------------- ---------------------
<S> <C>
$24.00 10,500
$30.00 21,000
$36.00 31,500
$42.00 42,000
$48.00 52,500
</TABLE>
For example, if at any time the average closing price during any 15-day
trading period during the applicable 12-month period is equal to $48.00,
warrants with respect to 52,000 shares of the common stock of the Company shall
immediately vest.
(d). The closing price means the closing bid price for the common stock
of the Company as reported in the Wall Street Journal, or, if not applicable,
such other national publication as the parties shall so select. A trading day is
any business day that the common stock of the Company is actively traded and the
results of which are reported.
(e). Notwithstanding the above, all unvested warrants shall immediately
vest upon a "change of control." A change of control shall mean a sale of all or
substantially all of the Company's assets, or any merger or consolidation of the
Company with or into another corporation, other than a merger or consolidation
in which the holders of more than 50% of the shares of capital stock of the
Company outstanding immediately prior to such transaction continue to hold
(either by the voting securities remaining outstanding or by their being
converted into voting securities of the surviving entity) more than 50% of the
total voting power represented by the voting securities of the Company, or such
surviving entity, outstanding immediately after such transaction.
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<PAGE> 3
3. Expense Reimbursement.
The Company shall reimburse Consultant for all reasonable out-of-pocket
expenses incurred by Consultant in the performance of Consultant's duties
pursuant to this Letter Agreement not to exceed $2,500 per month, unless
approved by the Company, and, in addition thereto, reasonable business-class
travel and lodging expenses incurred by Consultant in traveling, as agreed with
the Company.
4. Term.
(a). The term of this Letter Agreement shall be twenty four months (24)
months. This Letter Agreement shall terminate upon any of the following: (i)
expiration of the term; (ii) the mutual agreement of the parties; (iii) sixty
(60) days notice by Consultant; or (iv) sixty (60) days notice by the Company,
for any reason other than bad faith. Bad faith includes the termination of this
Letter Agreement, the principal purpose of which is to terminate the continued
vesting of Consultant and is unrelated to the failure by Consultant to perform
the consulting services or to otherwise achieve the objectives of the parties
sought by this Agreement.
(b). Should Consultant contend that Consultant was terminated in bad
faith, then the Company and Consultant shall enter immediately into binding
arbitration pursuant to the American Arbitration Rules in effect as of the
effective date of this Letter Agreement, the cost of which shall be borne by the
nonprevailing party.
(c). If this Letter Agreement is terminated prior to the vesting of all
of the options set forth in paragraph 2 above, any unvested options shall be
immediately forfeited and terminated as of the date of termination of this
Letter Agreement. All vested options shall be exercisable by Consultant at any
time and from time to time within five (5) years from the date of this Letter
Agreement. The Company shall remain liable for the reimbursement of any expenses
incurred by Consultant pursuant to paragraph 3 hereof prior to the date of
termination of this Letter Agreement.
5. Performance Review.
Consultant and the chairman or chief executive officer of the Company,
or such other senior officer as the Company shall provide, shall meet from time
to time at the request of the Company, preferably not less than semi-annually,
to review and discuss Consultant's performance under this Letter Agreement.
6. Confidentiality.
Consultant recognizes and acknowledges that during the course of
Consultant's employment Consultant shall have access to certain information not
generally known to the public relating to the business of Company, including the
terms of this Letter Agreement ("Confidential Information"). Consultant agrees
not to, directly or indirectly, use or disclose to anyone, either during the
term of this Letter Agreement or after the termination of this Letter
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<PAGE> 4
Agreement, except in the performance of his duties as described in this Letter
Agreement or with the Company's prior written consent, any Confidential
Information of the Company, including the terms of this Letter Agreement, and
upon termination of this Letter Agreement for any reason whatsoever, to turn
over to the Company all documents and records containing any Confidential
Information.
7. Notices.
All notices to be given hereunder shall be deemed duly given when
delivered by hand in writing, sent by facsimile with written confirmation of
receipt or when received if sent by a nationally recognized overnight delivery
service as follows:
If to the Company:
Sunhawk.com Corporation
5106 46th Avenue NE
Seattle, WA 98105
Facsimile: (206) 728-5929
With a copy to:
David Otto
999 Third Avenue
Suite 3210
Seattle, Washington 98104
Facsimile: (206) 262-0297
If to Consultant:
Scott Svenson
PO Box 164,
Medina, Washington 98039-0164
With a copy to
Peterson Russell Cofano, PLLC
10900 NE 4th Street, Suite 870
Bellevue, Washington 98004
Attn: Patrick Moran
Facsimile (425) 451-0714
8. Assignment.
This Letter Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors, heirs and assigns. No rights or
obligations of Consultant pursuant to
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<PAGE> 5
this Letter Agreement may be assigned or
transferred; provided, however, Consultant may assign any warrants under this
Letter Agreement.
9. Entire Agreement; Amendments.
This Letter Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to
the subject matter hereof. This Letter Agreement may not be amended orally, but
only by an agreement in writing signed by the parties hereto.
10. Governing Law; Counterparts.
This Letter Agreement shall be governed by and construed in accordance
with the laws of the State of Washington without regard to conflicts of law
principles. This Letter Agreement may be executed in counterparts and the
executed counterparts shall together constitute a single instrument.
11. Attorney's Fees.
In the event of litigation to enforce this Letter Agreement, the
prevailing party will be entitled to recover its reasonable attorneys' fees as
determined by the court.
12. Arbitration.
Any disputes arising out of or from this Letter Agreement or any exhibit
referenced herein shall be submitted to binding arbitration for resolution in
Seattle, Washington pursuant to the American Arbitration Rules in effect as of
the effective date of this Letter Agreement.
Very truly yours,
Sunhawk.com Corporation.
By: /s/ Marlin J. Eller
-----------------------------------
Name: Marlin J. Eller
Title: Chairman and CEO
The foregoing is hereby confirmed and accepted as of February 15, 2000.
/s/ Scott Svenson
- -------------------------------
Scott Svenson
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