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Sunncomm Inc · 10SB12G · On 4/18/01

Filed On 4/18/01 2:46pm ET   ·   SEC File 0-31421   ·   Accession Number 1086715-1-100

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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 4/18/01  Sunncomm Inc                      10SB12G                1:225                                    Volpe Jeffrey

Registration of Securities of a Small-Business Issuer   ·   Form 10-SB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10SB12G     Registration of Securities of a Small-Business       225±   959K 
                          Issuer                                                 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page
2Table of Contents
4Description of Business/Research and Development
6Competition and the Market
"The Problem
"Content Security Technology History
7Type of Competition and Representative Competitors
8What Makes Our Product Valuable?
9Fahrenheit
"Will-Shown
10Patents, Trademarks, Licenses, Franchises, Concessions and Royalty Agreements
"Effect of Existing or Probable Governmental Regulations
"Research and Development
"Employees
11Available Information
"Reports to Security Holders
"Item 2: Management's Discussion and Analysis or Plan of Operation
"Plan of Operation
12Item 3: Description of Property
"Item 4: Security Ownership of Certain Beneficial Owners and Management
14Item 5: Directors and Executive Officers
16Item 6: Executive Compensation
"Option Grants in Last Fiscal Year
17Compensation of Directors
"Employment Agreement With Peter H. Jacobs
18Employment Agreement With John D. Aquilino
"Employment Agreement With William H. Whitmore
"Item 7: Certain Relationships and Related Transactions
"Assignment and Assumption Agreement
19Consulting Agreement
"Management Consulting Services
"Item 8: Description of Securities
20Part Ii
"Item 1: Market for Common Equity and Related Shareholder Matters
21Item 2: Legal Proceedings
22Item 3. Changes in and Disagreements With Accountants
"Item 4: Recent Sales of Unregistered Securities
23Item 5: Indemnification of Directors and Officers
24Part F/S: Financial Statements
47Part Iii: Index to Exhibits
48Signature
77Inventor
84Agreement
100Windows Media Compatible
101Product
"Exhibit 10.05b
"Property
"Exhibit 10.05c
"Licensor
"Licensee
"Exhibit 10.07
"Exhibit 10.08
"Tenant
"Term
103Exhibit 10.09
"Exhibit 10.10
"Participant
"Exhibit 10.11
"Exhibit 10.12
"Exhibit 10.13
"Exhibit 10.14
"Exhibit 10.15
"Assignor
"Assignee
"Guarantor
"Exhibit 10.16
"Exhibit 10.17
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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 SUNNCOMM, INC. (Name of Small Business Issuer in its charter) Nevada 86-0991301 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 668 North 44th Street, Suite 248, Phoenix, Arizona 85008; 602-267-7500 (Address and telephone number of principal executive offices) Securities to be registered under Section 12(b) of the Act: None. Common stock, $0.001 par value per share Securities to be registered under Section 12(g) of the Act:
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1 TABLE OF CONTENTS PART I .......................................................................1 ITEM 1: DESCRIPTION OF BUSINESS .............................................1 SUNNCOMM HISTORY........................... ...............................1 DESCRIPTION OF BUSINESS/RESEARCH AND DEVELOPMENT...........................1 COMPETITION AND THE MARKET.................................................3 The Problem..............................................................3 Content Security Technology History......................................3 Type of Competition and Representative Competitors.......................4 What Makes Our Product Valuable? ........................................5 CONTRACTS ...............................................................5 Fahrenheit ..............................................................6 Will-Shown ..............................................................6 PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS AND ROYALTY AGREEMENTS........................................6 EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ...................7 RESEARCH AND DEVELOPMENT...................................................7 EMPLOYEES..................................................................7 AVAILABLE INFORMATION .....................................................7 REPORTS TO SECURITY HOLDERS ...............................................7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ...........7 PLAN OF OPERATION .........................................................7 ITEM 3: DESCRIPTION OF PROPERTY .............................................8 ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......8 ITEM 5: DIRECTORS AND EXECUTIVE OFFICERS.................................... 9 ITEM 6: EXECUTIVE COMPENSATION .............................................11 OPTION GRANTS IN LAST FISCAL YEAR ........................................12 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES..................................12 COMPENSATION OF DIRECTORS.................................................12 EMPLOYMENT AGREEMENT WITH PETER H. JACOBS ................................12 EMPLOYMENT AGREEMENT WITH JOHN D. AQUILINO ...............................13 EMPLOYMENT AGREEMENT WITH WILLIAM H. WHITMORE ............................13 ITEM 7: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................14 ASSIGNMENT AND ASSUMPTION AGREEMENT ......................................14 CONSULTING AGREEMENT .....................................................14 MANAGEMENT CONSULTING SERVICES ...........................................14 CONSULTING AGREEMENT .....................................................15 ITEM 8: DESCRIPTION OF SECURITIES ..........................................14 PART II .....................................................................15
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2ITEM 1: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ...........15 ITEM 2: LEGAL PROCEEDINGS ..................................................16 ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ......................17 ITEM 4: RECENT SALES OF UNREGISTERED SECURITIES ............................17 ITEM 5: INDEMNIFICATION OF DIRECTORS AND OFFICERS ..........................17 PART F/S: FINANCIAL STATEMENTS .............................................19 PART III: INDEX TO EXHIBITS ................................................20 SIGNATURE ...................................................................20 EXHIBIT 3.01 ................................................................21 EXHIBIT 3.02 ................................................................26 EXHIBIT 4.01 ................................................................41 EXHIBIT 4.02 ................................................................45 EXHIBIT 10.01 ...............................................................50 EXHIBIT 10.01A ..............................................................51 EXHIBIT 10.02 ...............................................................53 EXHIBIT 10.03 ...............................................................56 EXHIBIT 10.04 ...............................................................57 EXHIBIT 10.05A ..............................................................72 EXHIBIT 10.05B ..............................................................79 EXHIBIT 10.05C .............................................................102 EXHIBIT 10.06 ..............................................................116 EXHIBIT 10.07 ..............................................................124 EXHIBIT 10.08 ..............................................................134 EXHIBIT 10.09 ..............................................................171 EXHIBIT 10.10 ..............................................................180 EXHIBIT 10.11 ..............................................................184 EXHIBIT 10.12 ..............................................................187 EXHIBIT 10.13 ..............................................................190 EXHIBIT 10.14 ..............................................................199 EXHIBIT 10.15 ..............................................................207 EXHIBIT 10.16 ..............................................................209 EXHIBIT 10.17 ..............................................................213 [CAPTION] PART I ITEM 1: DESCRIPTION OF BUSINESS --------------------------------- SunnComm History Our predecessor, Compliance Signage, Inc. ("Compliance"), was incorporated in Oregon on August 9, 1993. On April 4, 1996, Compliance changed its name to Ti-Mail, Inc., and increased the number of authorized shares of common stock to 50,000,000.
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3On November 13, 1998, our Company, Desert Winds Entertainment Corporation, a Nevada corporation, was formed in Nevada and subsequently merged with Ti-Mail on December 10, 1998. On December 10, 1998, we entered into a "Plan and Agreement of Reorganization" with the Whitney Corporation whereby all 6,500,000 issued and outstanding shares of Whitney common stock were acquired by us in exchange for an equal number of shares of its common stock, making Whitney a wholly-owned subsidiary of the Company. Michael Paloma, as Chairman, Chief Executive Officer, and President, assumed our primary management at that time. From December 10, 1998, to April 20, 1999, the mailing and shipping product business of Ti-Mail and the entertainment production business of Whitney each continued to be operated independently. On March 1, 2000, Mr. Paloma resigned as Chairman, Chief Executive Officer and President. On April 20, 1999, we divested of all assets and liabilities related to the business and operations of Ti-Mail and agreed to sell all of the assets of Ti-Mail to certain employees in exchange for their assumption of Ti-Mail's liabilities. As a result of this transaction, the Company was no longer involved in the manufacture and sale of packaging products for mailing and shipping. On June 15, 2000, we entered into an Assignment and Assumption Agreement with Desert Entertainment, Inc. ("DEI") (a subsidiary in which we had an interest of 49% of the outstanding shares of common stock) and Michael Paloma, pursuant to which the Company transferred certain assets to DEI and DEI assumed, and Michael Paloma guaranteed, certain liabilities related to those assets. On June 19, 2000, we sold all of the outstanding capital stock of DEI owned by us to Michael Paloma in exchange for the forfeiture of his right to receive 500,000 shares of common stock of the Company. As a result of these transactions, we divested the business of developing, producing and marketing full-scale films, television shows and live casino and theatre shows. Beginning in June, 2000, we changed our focus to become a leading provider of content security technology for digital products worldwide. Description of Business/Research and Development We have developed a proprietary technology that inhibits illegal duplication of digital music recordings through content security processes. The growth of digital music has raised enormous concern from record companies, artists, publishers and producers over the loss of revenue from unauthorized distribution of prerecorded digital product. We intend to significantly reduce the copy-capability of digitally recorded music and programming. The Company's process allows record companies to secure their manufactured audio compact discs, thus significantly reducing the risk that music offered through this medium will be not be illegally duplicated. On May 23, 2000, we entered into an Assignment Agreement with Equity Earnings Corp., d.b.a. Designer Products, an Arizona corporation ("DP"), whereby DP assigned to us all its right, title and interest in and to a proprietary Internet digital rights management system more particularly described in that certain provisional patent application identifiable in the United States Patent and Trademark Office ("USPTO") by Serial No. 60/207,201, filed May 25, 2000. (the "Provisional Patent"). John D. Aquilino, as the "inventor", later assigned all of his rights in this technology to us and we filed a Patent Assignment, which was recorded with the Commissioner of the USPTO. See Exhibit10.01 for a copy of the Patent Assignment. Pursuant to the Assignment Agreement, DP agreed to incur all costs related to developing and delivering to us a working prototype product based upon the Provisional Patent (the "Prototype").
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4DP further agreed to incur all costs related to converting the Provisional Patent into a utility patent application and pursuing and obtaining approval of said application from the USPTO. Upon the execution of the Assignment Agreement, we transferred to DP 2,000,000 restricted shares of the Company's common stock and delivered 4,000,000 restricted shares of the Company's common stock into escrow. Upon delivery of the Prototype and an assignment from the developer of all right, title and interest related thereto, we have agreed to deliver to DP from the escrow an additional 2,000,000 shares of the Company's restricted common stock. Upon our developing and delivering to market any product based upon or derived from the Prototype, Provisional Patent or any subsequently approved utility patent based thereon, we shall deliver to DP from the escrow an additional 2,000,000 restricted shares of the Company's common stock. We shall pay to DP fifty percent (50%) of any and all royalty revenue generated from the licensing or other commercial exploitation of any such product(s). See Exhibit 10.02. Pursuant to an agreement between Mr. Aquilino, an officer and director of the Company, and DP, Mr. Aquilino owns a right to receive half of the stock and royalty compensation received by DP from the Company pursuant to the Assignment Agreement. Mr. Aquilino has assigned his right to receive his one -half interest in the royalties and the escrowed stock to the Company. See Exhibit 10.03 for a copy of the Assignment of Royalty. Although we believe that future applications may be available for our Internet digital rights management system, we believe that more recently developed technology has greater potential in the optical media market. In August of 2000, we engaged BTEK Software, Inc. ("BTEK") to develop and deliver a technology designed to prohibit the unauthorized duplication of optical media. On March 6, 2001, we memorialized our relationship with BTEK in that certain Master Development Agreement ("MDA") whereby BTEK completed and delivered to us a technology we refer to as "Digital Content Cloaking (tm) Technology, Version 1.0 ("DC2(tm)")", together with all right, title and interest in and to the technology. The Company intends to market DC2(tm) under the tradename "MediaCloQ". The MDA provides that BTEK shall receive an aggregate of 1,175,000 shares of restricted common stock of the Company, a royalty of one percent (1%) of the net factory sales price on all sales of products incorporating MediaCloQ(tm) and a cash payment. See Exhibit 10.04. A provisional patent application was filed with the USPTO with respect to DC2(tm). MediaCloQ(tm) content security features are not resolvable using any single solution, greatly reducing the probability of loss to illegal duplication. We intend to charge a royalty to recording companies to incorporate MediaCloQ(tm) into their products. Presently, MediaCloQ(tm) secures audio compact discs ("CDs") from unauthorized duplication. We are seeking to develop proprietary technology applications for additional optical media formats, including CD Rom (i.e. software programs on compact discs) , DVD (digital virtual disc), DVDA (digital virtual disc audio) and VCD (video compact disc). On or about April 17, 2001, pursuant to a license agreement between the Company and Fahrenheit Entertainment, Inc.
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5(see "Contracts" below), Music City Records will commercially release the latest CD by country music recording legend Charley Pride incorporating MediaCloQ(tm). We have selected Microsoft Windows Media Rights Manager Software Development Kit7(r) (the "Microsoft Windows MRM") to couple with MediaCloQ(tm) to protect on-line downloads from unauthorized duplication, pursuant to a license agreement with Microsoft(r) . See Exhibit 10.05. Competition and the Market The Problem Music publishing is the business of acquiring and developing rights in musical compositions. The U.S. Copyright Act confers upon songwriters the exclusive legal right to control the public dissemination of their songs and to receive compensation for the use of their songs. Generally, the right to receive copyright royalties extends for the life of the songwriter plus 50 years following his or her death. Income generated by the use of a song is oftentimes split between the songwriter and publisher, with the publisher in most instances responsible for promoting the use of the song, collecting income on behalf of the songwriter and for distributing his or her share. Music publishers earn their revenue from licensing the right to use songs in their catalog - a right they have to the exclusion of all others. Every time a song is used or performed, the owner of the copyright must grant permission, a license must be issued and a payment must be made. The more a song gets performed or used the more income is generated for the publisher and songwriter. Digital technology brings music to a wider public, affords niche artists access to their audiences, makes music widely available, and distributes old, new and unusual music at affordable prices. A major problem faced by the music publishing and recording industry is "music piracy." Music piracy generally refers to the illegal duplication and distribution of video and sound recordings, and includes four specific forms: 1. Illegally copied recordings are the unauthorized duplication of only the sound of legitimate recordings, as opposed to all the packaging, i.e., the original art, label, title, sequencing, combination of titles, etc. 2. Counterfeit recordings are unauthorized recordings of the prerecorded sound as well as the unauthorized duplication of original artwork, label, trademark and packaging. 3. Bootleg recordings (or underground recordings) are the unauthorized recordings of a live concert or a musical broadcast on radio or television. 4. Online piracy is the unauthorized uploading of a copyrighted sound recording and dissemination to the public, even if the recording is not resold. Content Security Technology History Before 1986, the government and large companies were the only real users of content security technology. In 1986, "Pretty Good Privacy" ("PGP") was introduced, a 128-bit public key encryption program.
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6PGP is now available both in commercial and free products and is one of the most widely used content security programs on the Internet. Industry vendors are beginning to adopt elliptic curve cryptography (ECC), which uses complex mathematical functions to scramble audio and video content. ECC offers security more difficult to penetrate in a smaller key length, and is generally regarded as being faster and requiring less processing power. The ECC technology is available free of charge. Modern content security is achieved with algorithms that use a "key" to encrypt and decrypt messages by turning text or other audio and video content into digital gibberish and then by restoring it to its original form. The longer the "key," the more computing required to "crack" the code. To decipher an encrypted message by trial and error, one would need to try every possible key. Computer keys are made of "bits" of information, binary units of information that can have the value of zero or one. An eight-bit key has 256 (two to the eighth power) possible values. A 56-bit key creates 72 quadrillion possible combinations. If the key is 128 bits long, or the equivalent of a 16-character message on a personal computer, to crack the code by trial and error would be 4.7 sextillion (4,700,000,000,000,000,000,000) times more difficult than deciphering a 56-bit key. Given the current power of computers, a 56-bit key is considered penetrable. To penetrate a 128-bit key, one would need access to an enormous amount of computing power. Type of Competition and Representative Competitors The content security industry is characterized by rapid technological change, frequent innovations, and evolving operating platforms. To remain competitive, we must plan to regularly enhance the functionality of our proprietary technology and introduce new programs while reducing our research and development costs. Even if successful, alternative technologies may develop, which, if they achieve widespread market acceptance, could supplant our technology and make it obsolete. Our failure to respond to any of these market pressures would adversely affect our business, results of operations and financial condition. There are a number of companies that are more established, benefit from greater market recognition, and have substantially greater financial, development, manufacturing and marketing resources than us. Our ability to compete successfully in the rapidly evolving area of content security depends on factors both within and outside our control, including: * performance and price; * features and functionality; * adaptability of products to specific applications; * support of product differentiation by our customers; * length of development cycle; * support for new communications standards and protocols; and * technical service and support. Our failure to compete successfully as to any of these or other factors could materially and adversely affect us.
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7Security measures either (i) mark copied material as authentic, i.e., digital watermarking; (ii) modify the content available by reducing the quality of the music or attaching advertising material to tracks; or (iii) prevent altogether the unauthorized duplication of copy-written material. Our MediaCloQ(tm) proprietary technology adopts this latter strategy of barring duplication. Other means of barring duplication include: systems using on-line "musical" currency and other micropayment systems, long key encryption, public key cryptography systems (e.g., Motorola's CipherNET(r) or the prospective public domain Advanced Encryption Standard), hardware-based protection (chips, computers, peripherals, secure containers), portable flash memory devices, and compression codices. In management's judgment, all of these technologies are inferior to our MediaCloQ(tm). They are either too cumbersome, too expensive, require additional hardware, or significantly degrade the music quality. The best-known competitor of the Company is TTR Technologies, Inc., a publicly traded Israeli development stage company that is in the process of developing and designing anti-piracy software technologies that purport to provide copy protection for music distributed on CDs. The company's proprietary product SafeAudio(tm) Toolkit is purported to be designed to prevent unauthorized CDs from operating as intended. While not a direct competitor, the Secure Digital Music Initiative ("SDMI)"is a forum of more than 180 companies and organizations whose goal is to develop a voluntary, open framework for playing, storing, and distributing digital music in a protected form. Member companies develop security measures in a wide array of technological solutions. To the knowledge of management, none of the companies within the SDMI consortium have technology which is directly competitive with ours. What Makes Our Product Valuable? MediaCloQ(tm) provides content security qualitatively different from other technologies. A shrink-wrapped audio compact disc purchased off-the-shelf that is manufactured incorporating MediaCloQ(tm) cannot be digitally copied. Incorporating MediaCloQ(tm) causes no degradation in sound quality. A recording studio simply provides the recording to the mastering facility, while requesting the mastering facility to incorporate MediaCloQ(tm) during the manufacturing process. The mastering facility can easily update its encoders to enable the incorporation of MediaCloQ(tm). In a simplified scenario, the digital content - a song, for example - is created and made ready for duplication in the form of CDs. During the mastering process, a glass master containing the digital sound recording is created to mass -produce CDs. During the pre-mastering and encoding phase, just prior to the creation of the glass master, MediaCloQ(tm) is applied to the glass master, which "cloaks" the digitally recorded content from duplication equipment such as PC CD-ROM audio CD simulators, CD replicators or other digital duplication devices. In addition to cloaking the content, MediaCloQ(tm) adds a standard data track containing a MediaCloQ(tm) Enhanced Table of Contents ("TOC") that is different from the Redbook TOC as part of the 908 Redbook standard. This Enhanced TOC contains recording, track and author data as well as encryption data that allows the user to download the Microsoft Windows MRM protected versions of the WM8 files associated with the original CD's TOC directly from the Company's website for use on the user's PC or portable device. These files are protected with the Microsoft Windows MRM solution and can only be played on the device for which such files are authorized.
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8In some instances, the digital content rights holder has the option to make certain rights available to end-users, such as the ability to transfer the digitally distributed file to a portable media player device, such as a Rio(tm) MP3(tm) player. Once transferred, the newly created file can then be further restricted to only play or delete, thereby remaining secure, even on additional devices. This option allows for consumers to use protected content on mobile devices while protecting the rights of the digital content rights holders. Because our cloaking process is applied at the glass mastering stage, we believe that it provides greater security to the digital content from skilled hackers, permits efficient and convenient incorporation into production lines, and allows quality assurance prior to mass production. Contracts The Company intends to actively market MediaCloQ(tm) to major and independent recording companies on a national and international basis. The Company has executed the following contracts. Fahrenheit On December 1, 2000, we entered into a one-year license agreement with Fahrenheit Entertainment, Inc., ("Fahrenheit") an independent record label, granting Fahrenheit a royalty-free, nonexclusive, nontransferable worldwide license to incorporate MediaCloQ(tm) into its products. In exchange, Fahrenheit has agreed to act as a technology partner during the term of the agreement. Fahrenheit must ship 25,000 CD units per month. See Exhibit 10.06. On or about April 17, 2001, pursuant to this license and in coordination with Fahrenheit, Music City Records shall commercially release the latest CD by country music recording legend Charley Pride entitled "A Tribute to Jim Reeves", which incorporates MediaCloQ(tm). This agreement does not pay any royalties to us. Will-Shown On December 5, 2000, we entered into a license agreement with Will-Shown Technology Company, Ltd. ("Will-Shown"), granting Will-Shown a nonexclusive, nontransferable worldwide license to incorporate MediaCloQ(tm) into its CD products. The license is exclusive only as it relates to artists that Will-Shown promotes and distributes pursuant to a written exclusive recording agreement with such artists. As a condition to Will-Shown's rights arising under this license, Will-Shown must pay a $40,000 advanced royalty, and will pay a three percent (3%) royalty on the net factory sales price on each unit sold incorporating MediaCloQ(tm) , but in no event shall we receive a royalty of less than twenty cents ($0.20) for each unit sold. Payment shall be calculated on a monthly basis and shall be paid within thirty (30) days from the end of each prior month. The initial term of the license is seven (7) years with three (3) consecutive option periods of two (2) years each, beginning at the end of the initial term. Each option is subject to meeting the minimum performance requirements described above. See Exhibit 10.07. Will-Shown has not yet paid the advanced royalty of $40,000, and the Company and Will-Shown have each mutually agreed to defer the effective date of the license agreement so we may focus our efforts on the domestic market.
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9Although we intend to enter into additional contracts to distribute our products, there is no assurance that we will be successful in consummating any additional agreements. Patents, Trademarks, Licenses, Franchises, Concessions and Royalty Agreements "Digital Content Cloaking(tm)", "DC2(tm)", "MediaCloQ(tm)" and "SunnComm(tm) " are trademarks of SunnComm, Inc. in the United States and other countries. Otherwise, all trademarks and tradenames referred to in this Form 10-SB are the property of their respective owners. We expect to rely on a combination of copyright, trademark, patent and trade secret laws, and restrictions on disclosure to protect our intellectual property rights. Although we attempt to protect our intellectual property rights, we may be unable to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect the Company's proprietary rights as fully as in the United States. In addition, other persons or companies may allege that our products infringe upon their proprietary rights. Any assertion that our products infringe upon their proprietary rights would force us to defend ourselves or our customers, manufacturers or suppliers against alleged infringement of intellectual property rights. We could incur substantial costs to prosecute or defend this litigation. If we were found to have infringed upon another person's proprietary rights and were unable to develop non-infringing technology or license the infringed technology on acceptable terms and on a timely basis, we could be forced to stop using the infringed technology and our business, results of operations and financial condition would be materially adversely affected. Effect of Existing or Probable Governmental Regulations Federal patent, trademark and copyright laws protect our technology and preserve much of the net present value in the Company. If the Federal government changes the effect or import of the current intellectual property regime, in response to content security developments or otherwise, we could be materially adversely affected. The costs and effects of compliance with environmental laws are minimal. Research and Development While we intend to market a product for which extensive research and development costs have been expended, in 1999 those costs had been borne by the developers with whom we have contracted. In 2000, however, we incurred $127,500 in research and development expenses. Employees We anticipate the establishment of a technical and support department that we expect will grow to five (5) employees. The establishment of the sales and marketing departments will initially employ three (3) people. General and administrative operations are expected to employ approximately ten (10) in-house personnel. We currently employ eight (8) and expect to employ fifteen (15) to twenty (20) people within twelve (12) months. We currently contract with three (3) independent contractors.
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10Available Information The public may read and copy any materials we file with the Securities and Exchange Commission (the "SEC") at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800- SEC-0330. If we elect to file electronically, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is <http://www.sec.gov>. Our Internet address is <http://www.sunncomm.com>. Information contained on our website is not part of this Form 10-SB or any other securities disclosure. Reports to Security Holders The SEC's proxy rules and regulations require us to send an annual report to security holders, which we will issue in accordance with those rules. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ----------------------------------------------------------------- Plan of Operation Until we enter into a distribution contract which provides royalty payments of a sufficient amount to support our operating costs, we will continue to rely on the sale of debentures to finance our operations. Although we are actively seeking record companies and other distributors of digital content to sell products with our technology incorporated, we have not consummated any agreement providing any royalties. We are uncertain as to the time required to educate the market as to the viability and availability of our products. We anticipate that to meet our payroll obligations, we will need approximately $35,000 per month for the year ended March 31, 2002. There is no assurance that this estimate may not increase particularly if we need to allocate a greater amount to ongoing research and development costs to upgrade our technology. Most of the proceeds we receive will pay salaries of employees, which we anticipate to increase from eight (8) to approximately fifteen (15) or twenty (20) and to independent contractors for research and development costs. We believe that we will not need to purchase any equipment as we anticipate that our revenues will come from the licensing of our technology and we do not anticipate upgrading our computer hardware during the coming year. Our anticipated revenues will be based on the sale of products by our customers to consumers, and will be affected by the seasonal buying trends typically found in the consumer-entertainment retail industry. For example, revenues, if realized, are likely to be higher during the Christmas buying season, but lower in the quarter immediately following. In fiscal 2000 (ending September 30), we raised $455,000 from the sale of convertible debentures and $87,700 from the sale of unregistered common stock, all of which was raised after March 12, 2000. From October 1, 2000, through March 31, 2001, we raised an additional $719,492 from the sale of convertible debentures and $243,900 from the sale of unregistered common stock.
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11We expect to use the proceeds of financing activities to complete the research and development, beta testing, and rollout of our proprietary content security technology for CD Rom, DVD, DVDA, VCD and other digital media. ITEM 3: DESCRIPTION OF PROPERTY -------------------------------- We currently own no real property and do not invest in real property. Our principal place of business is leased pursuant to a long-term, non-cancelable seventy-two (72) month operating lease for office space in Phoenix, Arizona, which commenced on July 1, 2000. Future minimum lease rentals aggregate $813,853 through September 30, 2005. The lease provides for one five-year lease renewal at market rates. The following is a summary of the minimum lease rentals payable for each of the next five (5) years as of the end of the fiscal year. Year Rent ---- ---- 2001 $136,147 2002 $187,548 2003 $197,709 2004 $209,289 2005 $ 83,160 ------------------------ For a total of $813,853 See Exhibit 10.08 for more information. ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ---------------------------------------------------------------------- The following table sets forth certain information regarding the beneficial ownership of the Company's common stock as of March 31, 2000, by: * all Directors; * each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the outstanding common stock; * each executive officer named in the Summary Compensation Table below; and * all Directors and executive officers as a group. The number of shares beneficially owned by each Director or executive officer is determined under the SEC rules, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under the SEC rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power. In addition, beneficial ownership includes any shares that the individual has the right to acquire within sixty (60) days of March 31, 2000, through the exercise of any stock option or other right. Unless otherwise indicated, each person listed below has sole investment and voting power (or shares such powers with his or her spouse).
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12 [Enlarge/Download Table] In certain instances, the number of shares listed includes, in addition to shares owned directly, shares held by the spouse or children of the person, or by a trust or estate of which the person is a trustee or an executor or in which the person may have a beneficial interest. Number of Shares of Common Stock Beneficially Owned Vested Name and Address of Beneficial Owner Shares Options(1) Total Percent(2) ------------------------------------ -------------------------------------------- Peter H. Jacobs 668 North 44th Street, Suite 248 Phoenix, Arizona 85008 5,666,666 4,000,000 9,666,666 20.47% John D. Aquilino 668 North 44th Street, Suite 248 Phoenix, Arizona 85008 4,066,666 2,000,000 6,066,666 13.41% Stephen F. Burg 668 North 44th Street, Suite 248 Phoenix, Arizona 85008 2,466,666 1,500,000 3,966,666 8.87 % William H. Whitmore 668 North 44th Street, Suite 248 Phoenix, Arizona 85008 25,000 700,000 725,000 1.65% ------------------------------------ -------------------------------------------- All Directors and Executive Officers as a group 12,224,998 8,200,000 20,424,998 39.71% Michael Paloma(3) 2,380,000 0 2,380,000 5.50% (1) Including 2,000,000 options issued to Mr. Jacobs under his Employment Agreement described below. The balance of options were issued pursuant to Incentive Stock Option Agreements described below. (2) Assuming that all of the options listed had been exercised. (3) Mr. Paloma was a director of the Company until March 2000.
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13 [Enlarge/Download Table] ITEM 5: DIRECTORS AND EXECUTIVE OFFICERS Other Directorships Held In Reporting Name Age Position Term of office; periods of service Companies ---- --- -------- ---------------------------------- ------------- Peter H. Director, As an officer, Mr. Jacobs has entered Jacobs 52 President and an Employment Agreement for 5 years, Chief Executive beginning June 1, 2000. As a director, Officer began service on March 8, 2000, and was elected to another term at the annual shareholder meeting held on November 7, 2000. John D. Aquilino 35 Chairman, Chief As an officer, Mr. Aquilino has entered an Technology Employment Agreement for 2 years, beginning Officer June 1, 2000. As a director, began service on June 9, 2000, and was elected to another term at the annual shareholder meeting held on November 7, 2000. Stephen F. Burg 63 Director, As a director, began service on June 9, 2000, Xechem Corporate and was elected to another term at the annual Pharmaceuticals Secretary shareholder meeting held on November 7, 2000. (ZKEM) and Treasurer Wolfstone Corporation (WSCO) William H. Whitmore 41 Vice President As an officer, Mr. Whitmore has entered an Employment Agreement for 2 years, beginning January 26, 2001.
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14
Peter H. Jacobs, age 52, is a Director and is the President and Chief Executive Officer of the Company. After serving in the Army during the Vietnam Era, Mr. Jacobs studied math and political science at the University of Oregon. Mr. Jacobs has over twenty (20) years of executive level telecommunications and technology experience, with over twelve (12) years of experience, from 1986 to September 1998, as the President of a nationwide public telecommunications company, Fone America, Inc. At Fone America he was responsible for the conception, development, and "roll-out" of important telecommunications products, including the introduction of the prepaid calling card in the United States, national "flat-charging" of long distance phone calls, and the successful "roll-out" of thousands of advanced vending machines nationwide in an extremely short period of time. From 1998 to February, 2000, he became the principle consultant to, and significant shareholder in, Sunrise Communications, LLC, an Oregon limited liability corporation. Mr. Jacobs has owned and managed several high technology firms, including StellarVision International, which pioneered satellite-fed, pay-per-day movies in hotels without the need of set-top converters. In March 2000, he joined SunnComm. He has owned and marketed low power television stations in San Diego, among other cities. Mr. Jacobs has authored and published a book on satellite television for non-technical readers, entitled "Everything You Wanted to Know About Satellite Television," and earlier in his career, was an on-air personality for WHBI-FM, a local New York area radio station. He helped finance his college education by producing live concerts in his own production company. He resides in Fair Oaks, California. John D. Aquilino, age 35, is a Director, Chairman, and the Chief Technology Officer. He has spent ten (10) years performing in major venues throughout the U.S. and abroad with his musical group, ICON, and subsequently was involved in the business of the music industry, A&R (artist and repertoire), and production. Mr. Aquilino's previous experience includes artist production and development for Capital Records, EMI Records, Atlantic Records and Mega Force Records, in his capacity as President of Scorpio Entertainment, an Arizona sole proprietorship, from 1990 to January 2000. In addition, Mr. Aquilino has worked with such artists as Frank Sinatra, Gladys Knight, Stevie Wonder, Billy Squire, and Quiet Riot, among others. He resides in Mesa, Arizona. Stephen F. Burg, age 63, is a Director and is the Secretary of the Company. He holds a Bachelor's degree in business from Boston University. After twenty (20) years of senior management within a public corporate environment (Evans Products Company NYSE), he formed S.B. Corporate Consulting, Inc., in 1986. Mr. Burg's company offers corporate growth strategies for public and private companies, and provides services to clients in restructuring an operating base; guidance in how to prepare for raising of equity financing through public investment; and assisting in identifying and acquiring additional assets or other companies or products. Among the clients SB Corporate Consulting, Inc., has represented are Xechem International, Inc. (ZKEM), a development stage biopharmaceutical company that is traded on the OTC-BB as ZKEM, based in New Brunswick, NJ (Mr. Burg is an active board member for the past five (5) years). At Wolfstone Corporation (WSCO), Mr. Burg assisted in corporate development, and now serves on the board of directors. He resides in Fairfield, California. William H. Whitmore, age 41, is Vice President of Marketing and Communications. Mr. Whitmore attended Northern Arizona University where he studied business administration and computer science.
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15He previously served as Executive Vice President for Ekid Network, Inc., a media content company for children. While in this position, Mr. Whitmore managed all aspects of administration, technical development and marketing for the company, which produced educational animated software that enabled children to safely access the Internet. Concurrently, he was the representative for the investment group that funded the company and numerous other projects. Mr. Whitmore managed an extensive portfolio that included restaurants, real estate and one-stop Internet ventures. Prior to joining Ekid Network, Mr. Whitmore was the Vice President of Operations for TCGB, a manufacturer and distributor of unique products for the children's beverage market. In this role, he worked closely with the production and marketing team managing all aspects of product development, purchasing and procurement, shipping and receiving, logistics, customer service and administration. ITEM 6: EXECUTIVE COMPENSATION The following table sets forth certain compensation paid or accrued by the Company to certain employees. Summary Compensation Table -------------------------- Annual Restricted Stock Name and Principal Position Year Salary ($) Award (1) --------------------------- ---- ---------- ---------------- Peter H. Jacobs, CEO 2000 125,000 $702,000 John D. Aquilino, CTO 2000 75,000 $299,000 Stephen F. Burg, Sec. 2000 104,000 $234,000 --------------------------- ---- ---------- ---------------- (1) On May 25, 2000, a disinterested majority of the board approved a resolution allocating to Mr. Jacobs, Mr. Aquilino and Mr. Burg 5,400,000, 2,300,000 and 1,800,000 shares, respectively, of the Company's common stock as compensation for putting together a qualified operating team for the Company. On that date the closing price of the Company's stock was $0.17, the value of which has been discounted approximately 20% to $0.13, as this stock is restricted. [Enlarge/Download Table] Option Grants in Last Fiscal Year --------------------------------- Individual Grants Number of Percent of Total Securities Options/SARs underlying Granted to Options/ SARs Employees to Exercise or Base Granted Fiscal Price Expiration (1)(b) Year(c) ($/.Sh)(d) Date(c) ----------------------------------------------------------------------------------------------- Peter H. Jacobs 2,000,000(1) 25.81 $0.20 June 1, 2005 Peter H. Jacobs 2,000,000(2) 25.81 $0.20 November 28, 2010 John D. Aquilino 2,000,000(3) 25.81 $0.20 November 28, 2010 Stephen F. Burg 1,500,000(4) 19.35 $0.20 November 28, 2010 (1) Mr. Jacobs received these options pursuant to the terms of his Employment Agreement (see Exhibit 10.09).
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16(2) Mr. Jacobs received these options pursuant to the terms of his Incentive Stock Option Agreement (see Exhibit 10.10). (3) Mr. Aquilino received these options pursuant to the terms of his Incentive Stock Option Agreement (see Exhibit 10.11). (4) Mr. Burg received these options pursuant to the terms of his Incentive Stock Option Agreement (see Exhibit 10.12).
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option [Enlarge/Download Table] Number of Unexercised Value of Unexercised In-the Options at Money Options Shares Value Fiscal Year End at Fiscal Quarter Ended Acquired on Realized Exercisable/ December 31, 2000 Name Exercise(#) ($) Unexercisable ----------------------------------------------------------------------------------------------- Peter H. Jacobs n/a n/a 4,000,000 / 0 $400,000 / 0 John D. Aquilino n/a n/a 2,000,000 / 0 $200,000 / 0 Stephen F. Burg n/a n/a 1,500,000 / 0 $150,000 / 0 (1) The share price on December 29, 2000, was $0.30. Compensation of Directors Each Director holds office until the next annual meeting of shareholders, or until their successors are elected and qualified, whichever is later. Outside Directors are compensated for expenses incurred in the performance of the Company's business at the rate of $1,000 per month. Employment Agreement with Peter H. Jacobs The Company's employment agreement with Peter H. Jacobs requires him to act as its Chief Executive Officer and President from June 1, 2000, and continuing for a period of five (5) years, unless automatically renewed or earlier terminated. His initial annual base salary is $125,000, subject to annual upward-only adjustment, and includes the grant of an incentive bonus and stock options. Pursuant to this agreement, he has received options to acquire up to 2,000,000 shares of the common stock of the Company at a price of $0.20 each, exercisable until the end of the term of the employment agreement. Other benefits include health, medical and life insurance, living accommodations for a period of one (1) year, weekly travel expenses between Sacramento and Phoenix, an automobile, ordinary and necessary business expenses, a retirement or pension plan, if and when implemented by the Company, and twelve (12) days paid vacation during the first year under the Company's vacation policy.1 The Company may end Mr. Jacobs' employment for "cause," in which case any unexercised stock options shall automatically expire and his salary shall terminate. The Company may also terminate Mr. Jacobs' employment at any time, without cause, as in the case of a change of control of the Company, in which case the Company shall pay a separation bonus payment in an amount equal to 2.99 times his annual base
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17salary at the time of termination and his salary shall continue to be due until the end of the term of the agreement. If, at the end of the initial term, Mr. Jacobs' employment is not renewed by the Company, he shall be entitled to receive a separation bonus in an amount equal to 2.99 times his annual base salary at the time of such termination. Mr. Jacobs has entered into a covenant not to compete with the Company, which is coterminous with the Employment Agreement. All of Mr. Jacobs' inventions or creations conceived while the Company employs Mr. Jacobs will belong to the Company. See Exhibit 10.09. Employment Agreement with John D. Aquilino The Company's employment agreement with John D. Aquilino requires him to act as its Chairman and Chief Technology Officer from June 1, 2000, and continuing for a period of two (2) years, unless automatically renewed or earlier terminated. His initial annual base salary is $75,000, subject to annual upward-only adjustment, complimented by an incentive bonus and stock options. Other benefits include health, medical and life insurance, business-related travel expenses, ordinary and necessary business expenses, a retirement or pension plan, and twelve (12) days paid vacation during the first year under the Company's vacation policy.2 The Company may end Mr. Aquilino's employment only for cause, in which case his salary shall terminate. Mr. Aquilino has entered into a covenant not to compete with the Company, which is coterminous with the Employment Agreement. All of Mr. Aquilino's inventions or creations conceived while the Company employs Mr. Aquilino will belong to the Company. See Exhibit 10.13. Employment Agreement with William H. Whitmore The Company's employment agreement with William H. Whitmore requires him to act as its Vice President of Marketing and Communications from January 26, 2001, and continuing for a period of two (2) years, unless automatically renewed or earlier terminated. His initial annual base salary is $78,000, he received 25,000 shares of common stock as a signing bonus, subject to annual upward-only adjustment, complimented by an incentive bonus and stock options. Other benefits include health, medical and life insurance, business-related travel expenses, ordinary and necessary business expenses, a retirement or pension plan, and three (3) weeks paid vacation during each of the first two (2) years of the Term. The Company may end Mr. Whitmore's employment only for cause, in which case his salary shall terminate. Mr. Whitmore has entered into a covenant not to compete with the Company, which is coterminous with the Employment Agreement. All of Mr. Whitmore's inventions or creations conceived while the Company employs Mr. Whitmore shall belong to the Company. See Exhibit 10.14. ITEM 7: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Assignment and Assumption Agreement On June 14, 2000, we entered into an Assignment and Assumption Agreement with Desert Entertainment, Inc. an Arizona corporation ("DEI"), and Michael Paloma pursuant to which we transferred certain assets to DEI and DEI assumed, and Michael Paloma guaranteed, certain liabilities related to those assets. On June 19, 2000, we sold all of the outstanding capital stock of DEI owned by us to Michael Paloma in exchange for 500,000 shares of common stock of the Company. Mr. Paloma is a former officer and director of the Company. The board approved the consideration as fair to the Company.
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18See Exhibit 10.15 for a copy of the Assignment and Assumption Agreement. Consulting Agreement On March 17, 2000, we entered into a Consulting Agreement with S.B. Corporate Consulting, Inc., a Nevada corporation ("SB"), wholly owned by Stephen F. Burg, a director of the Company, pursuant to which SB agreed to provide corporate counseling services in exchange for $2,000 per week for the duration of the consulting relationship. Additionally, SB received a $30,000 bonus for services provided through June 30, 2000. A disinterested majority of the board approved the consideration as fair to the Company. See Exhibit 10.16 for a copy of the Consulting Agreement. Management Consulting Services During 2000, we issued 2,000,000 shares of the Company's common stock to Planet 10 Partners, Inc., a Nevada corporation, for management consulting services valued at $350,000. Mr. Jacobs, Mr. Aquilino and Mr. Burg each own one-third of Planet 10 Partners. The board of directors believed that this transaction was fair to the Company in light of the services rendered, particularly as it involved no payment of cash. Consulting Agreement On August 18, 2000, we entered into a Consulting Agreement with Kenneth W. Fagan, whereby Mr. Fagan agreed to act as Special Advisor to the board of directors and a corporate consultant. The term of the agreement is one (1) year. We paid Mr. Fagan an initial payment of $2,500 upon the execution of the agreement. We also agreed to pay Mr. Fagan $2,000 per month during the term, along with 250,000 restricted shares of the Company's common stock upon the execution of the agreement. Mr. Fagan has a right to earn up to 750,000 options at an exercise price of .22as follows: 34% to be issued upon the signing of three (3) licensing agreements with major software vendors ($25,000000 + in revenues) delivered by Mr. Fagan, and 66% to be issued upon the signing of a licensing agreement with a large independent software vendor (such as Oracle, Microsoft, etc.) delivered by Mr. Fagan. See Exhibit 10.17 for a copy of the Consulting Agreement. ITEM 8: DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 100,000,000 common shares, par value $0.001, 43,235,097 of which were outstanding as of March 31, 2001, and held of record by approximately 2000 shareholders. The following summary of certain provisions of the common shares does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Articles of Incorporation, as amended, and Bylaws, each of which is attached as Exhibit 3.01 and Exhibit 3.02, respectively, as well as by the provisions of applicable law. As disclosed in Part II, Item 4, below, we issued convertible debentures to various investors. The debentures bear interest at five percent (5%) per annum. The conversion feature of the debt is automatic upon the effectiveness of any registration statement to be filed by the Company. See Exhibits 4.01 and 4.02 for more information.
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19In addition, some of the debenture holders received "A" and "B" warrants which confer upon them the right to buy a share of common stock at the opening bid price and $2 above the opening bid price, respectively, of our first underwritten public offering following the warrant issue date, and may be exercised at any time after the first day of the seventh month and nineteenth month, respectively, following the issue date. We have the right to redeem the warrants for $15 and $20 each, respectively, at any time. See Exhibits 4.03 and 4.04 for more information. Our Articles of Incorporation, as amended, authorize the issuance of up to one hundred million common shares. Holders of common shares are entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Company, after payment of all debts and other liabilities of the Company, the holders of common shares are thereafter entitled to receive ratably the remaining net assets of the Company. Holders of common shares have no preemptive subscription, redemption or conversion rights. The common shares are, when issued, fully paid and non-assessable. The Transfer Agent for the shares is First American Stock Transfer, 1717 East Bell Road, Suite 2, Phoenix, Arizona 85022, 602-485-1346, facsimile 602-788-0423. PART II ITEM 1: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock is currently traded on the OTC Pink Sheets(r) under the symbol SUNX, and, as of March 31, 2001, had approximately 2000 shareholders. The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for OTC securities in real time. The quotations listed below reflect inter-dealer prices without mark-up, markdown or commission and may not represent actual transactions. As of March 30,2001, the closing price of the common stock was $0.47 per share. We have not declared cash dividends on any class of common equity for the last two fiscal years or in any subsequent period for which financial information is required. Because we are developing the capacity to generate income and do not currently expect to generate income within the near future, there is no assurance that we will pay dividends in the future. Due to limited trading, the following prices may not reflect actual trades (selling price) during the applicable periods. Quarter Ended High Low ------------- ---- --- March 99 1.125 0.375 June 99 0.875 0.563 Sept. 99 N/A N/A December 99 N/A N/A March 00 1.875 0.500 June 00 0.440 0.150 Sept. 00 0.500 0.170
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20 December 00 0.535 0.175 March 01 0.740 0.220 ITEM 2: LEGAL PROCEEDINGS We are currently a party to two lawsuits. Matthew Bardasian et al v. Desert Winds Entertainment et al, CV-N-00-0199-DWH (VPC), in the United States District Court for the District of Nevada, was filed on April 14, 2000 (the "Bardasian suit"). American Equities Group v. Desert Winds et al, case no. 00-CV-952, in the United States District Court for the Eastern District of California, was filed on May 2, 2000 (the "AEG suit"). The Bardasian suit alleges that the Company has failed to repay loans in the aggregate amount of $1.8 million and that the previous management of the Company violated Federal securities laws by misrepresenting the economic status of the Company, use of proceeds, and by refusing to authorize the issuance of shares that plaintiffs claim they were owed by the Company. Plaintiffs requested that the Company be placed in receivership, and requested compensatory and punitive damages in an unknown amount. Should the Plaintiffs prevail, the damages a court may order us to pay could far exceed the capital previously raised by the Company and most likely curtail future capital raises. The court could place the Company into receivership. We have filed a counterclaim alleging that Bardasian personally, and through a corporation or corporations he owned and controlled, caused shares of the Company stock to be issued that were not authorized or approved by the Company. The Counterclaim seeks (i) actual, compensatory and punitive damages in an amount to be proven at trial (with damages trebled pursuant to the Nevada RICO statutes); (ii) requesting the court to order Bardasian to indemnify and hold the Company harmless from any claims brought by reputed shareholders of the Company to whom Bardasian sold unauthorized share certificates; and for (iii) attorneys' fees and costs. We are committed to vigorously defending the Company. The AEG suit alleges that the Company, as the successor of Ti-Mail, is responsible for Ti-Mail's alleged failure to perform under an accounts receivable sales agreement, requesting compensatory damages of $275,099.95. On October 27, 2000, Ti-Mail filed an amended counter-claim, alleging breach of contract and violations of the California usury laws. We believe that, in the event that the plaintiff is successful in making its claim, we will be able to collect a significant portion or all of the judgment through indemnification from other parties for breaches of certain representations regarding the subject of the suit. However, if the parties from which we would seek indemnification became judgment proof or the amount we must pay in damages prior to obtaining a successful judgment against potential third party payors exceeds amounts raised by the Company, then we would be forced raise additional funds, which may have a material adverse effect on the Company. No trial date has been scheduled. Additionally, there is a pending SEC formal investigation, HO-7499, styled "In the Matter of Desert Winds Entertainment, Inc." [sic]. The SEC has made no findings nor has it established a timeline for resolving issues. We understand that the SEC investigation is focused on the actions of prior management in connection with events that occurred between January 1, 1999, and March 20,
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212000. If it is ultimately determined that the Company violated federal securities laws, we may incur substantial fines or penalties or become subject to lawsuits by shareholders. There is no assurance that the SEC will not levy substantial fines against the Company and certain former officers and directors. There is no assurance that the investigation will be limited to actions taken by the Company and its prior officers and directors between January 1, 1999, and March 20, 2000. Should the Company incur substantial fines or penalties or face litigation from shareholders, then it may be forced into insolvency. In the future, we may be subject to lawsuits occurring in the regular course of business. Most of these lawsuits would likely involve claims for money damages. We carry insurance to protect ourselves against such claims, subject to any applicable deductibles, but the insurance may not cover any action brought by the SEC. We can give no assurances that future lawsuits will not have a material adverse effect on the Company's financial condition or results of operations. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS There have been no disagreements with accountants reportable hereunder. ITEM 4: RECENT SALES OF UNREGISTERED SECURITIES For the period beginning April 1, 1998 and ending October 5, 1998, we issued 1,771,970 shares of our common stock to four (4) persons. For the period beginning December 31, 1998 and ending February 7, 2000, we issued 15,085,129 shares to sixty-seven (67) persons. Of the shares issued between December 31, 1998 and February 7, 2000, 3,787,500 shares were issued to the then serving Chief Executive Officer as a bonus. Management believes that shares issued between April 1998 and February 2000, were either issued pursuant to Section 4(2) of the Securities Act or Rule 504 of Regulation D. From October 2000 through March 2001, we issued approximately 1,351,455 shares of our common stock for consulting, technology development, compensation, investor and public relations services for an approximate value of $650,000. In addition, we issued 500,000 shares of our common stock in conversion of a debt from discontinued operations of $112,500. Management believes these shares were issued pursuant to Section 4(2) of the Securities Act. From March 12, 2000 through March 31, 2001, we issued approximately $1,117,492 of convertible debentures to one hundred sixty-nine (169) investors. The debentures bear interest at five percent (5%) per annum. The debentures will automatically convert into approximately 7,844,650 shares of our common stock upon the effectiveness of a registration statement. The conversion feature of the debt is automatic upon the effectiveness of any registration statement to be filed by the Company. See Exhibits 4.01 and 4.02 for more information. If the registration statement does not become effective, the debentures will mature one year from the date of issuance. In addition, some of the debenture