<PAGE>
As filed with the Securities and Exchange Commission on December 21, 1999
Registration No. 333-84909
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
Amendment No. 3
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
KANAKARIS COMMUNICATIONS, INC.
-----------------------------------------------------
(Name of Small Business Issuer in its charter)
Nevada 3714 86-0888532
- ---------------------------- --------------------------- ------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Code Number)
------------------
3303 HARBOR BOULEVARD, SUITE F-3
COSTA MESA, CA 92626
(714) 444-0560
------------------------------------------------------------------
(Address and telephone number of Registrant's principal executive
offices and principal place of business)
------------------
Alex Kanakaris
President and Chief Executive Officer
Kanakaris Communications, Inc.
3303 Harbor Boulevard, Suite F-3
Costa Mesa, CA 92629
(714) 444-0560
----------------------------------------------------------
(Name, address, and telephone number of agent for service)
Copies to:
Larry A. Cerutti, Esq.
Cristy Lomenzo Parker, Esq.
Rutan & Tucker, LLP
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626
(714) 641-5100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
------------------
<PAGE>
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement becomes effective on
such date as the Commission, acting under Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION, DECEMBER 21, 1999
PROSPECTUS
Kanakaris Communications, Inc.
1,783,334 Shares of Common Stock
The 1,783,334 shares of our company's common stock, $.001 par value,
offered hereby are being offered by certain of our security holders. Our common
stock trades on the NASD's OTC Bulletin Board under the symbol "KKRS".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 2.
The information in this prospectus is not complete and may be changed.
The selling security holders identified in this prospectus may not sell these
securities until the registration statement filed with the Securities and
Exchange Commission, of which this prospectus is a part, is declared effective.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
, 1999
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider the following factors carefully before deciding to purchase any
shares of our common stock.
WE HAVE INCURRED OPERATING LOSSES, EXPECT CONTINUED LOSSES AND MAY NOT ACHIEVE
PROFITABILITY. IF WE CONTINUE TO LOSE MONEY, WE MAY HAVE TO CURTAIL OUR
OPERATIONS.
We have not been profitable and we may continue to lose money for the
foreseeable future. Historically, we have incurred losses and experienced
negative cash flow. As of September 30, 1999, we had an accumulated deficit of
approximately $8.3 million. We may continue to incur losses and may never
achieve or sustain profitability. An extended period of losses and negative cash
flow may prevent us from operating and expanding our business, especially our
Internet-based business.
WE MAY NEED AND BE UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY TERMS,
WHICH COULD DILUTE OUR SHAREHOLDERS OR IMPOSE BURDENSOME FINANCIAL RESTRICTIONS
ON OUR BUSINESS
Historically, we have relied upon cash from financing activities and
revenues generated from operations to fund all of the cash requirements of our
company's activities. We have not been able to generate any cash from our
operating activities in the past and cannot assure you that we will be able to
do so in the future. As a result, we may require additional financing. This may
not be available on a timely basis, in sufficient amounts or on terms acceptable
to us. This financing may also dilute existing shareholders' equity. Any debt
financing or other financing of securities senior to common stock will likely
include financial and other covenants that will restrict our flexibility. At a
minimum, we expect these covenants to include restrictions on our ability to pay
dividends on our common stock. Any failure to comply with these covenants would
have a material adverse effect on our business, prospects, financial condition
and results of operations.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS
Our strategy envisions a period of rapid growth that may put a strain
on our administrative and operational resources. While we believe that we have
established an infrastructure to support growth, our ability to effectively
manage growth will require us to continue to expand the capabilities of our
operational and management systems and to attract, train, manage and retain
qualified engineers, technicians, salespersons and other personnel. There can be
no assurance that we will be able to do so. If we are unable to successfully
manage our growth, our business, prospects, financial condition and results of
operations could be adversely affected.
2
<PAGE>
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT IN
LITIGATION AGAINST US
There is currently an extremely limited trading market for our common
stock. Our common stock trades on the OTC Bulletin Board under the symbol
"KKRS." There can be no assurance that any regular trading market for our common
stock will develop or, if developed, will be sustained. The trading prices of
our common stock could be subject to wide fluctuations in response to:
o quarter-to-quarter variations in our operating results;
o material announcements of technological innovations;
o price reductions;
o significant customer orders or establishment of strategic
partnerships by us or our competitors or providers of alternative
products;
o general conditions in the Internet and e-commerce industries; or
o other events or factors, many of which are beyond our control.
In addition, the stock market as a whole and individual stocks have
experienced extreme price and volume fluctuations, which have often been
unrelated to the performance of the related corporations. Our operating results
in future quarters may be below the expectations of market makers, securities
analysts and investors. In any such event, the price of our common stock will
likely decline, perhaps substantially. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to our
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our business, prospects, financial condition and results of operations. Any
adverse determination in such litigation could also subject us to substantial
liabilities.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market,
and monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, broker-dealers who sell these securities
to persons other than established customers and "accredited investors" must make
a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written agreement to the
transaction. Consequently, these requirements may have the effect of reducing
the level of trading activity, if any, in the secondary market for a security
subject to the penny stock rules, and investors in our common stock may find it
difficult to sell their shares.
3
<PAGE>
OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations. We have performed a review of our internal systems
to identify and resolve the effect of Year 2000 software issues on the integrity
and reliability of our financial and operational systems. Based on this review,
our management believes that our internal systems are substantially compliant
with Year 2000 issues. In addition, we are also communicating with our principal
service providers to ensure Year 2000 issues will not have an adverse impact on
us. If we, and third parties upon which we rely, are unable to address this
issue in a timely manner, it could result in a material financial risk to us. In
order to assure that this does not occur, we plan to devote all resources
required to resolve any significant Year 2000 issues in a timely manner.
WE RELY HEAVILY ON OUR KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Alex Kanakaris, and our Vice Chairman of the Board,
Secretary and Desience Division President, Branch Lotspeich. The loss of either
of Mr. Alex Kanakaris or Mr. Lotspeich could have a material adverse effect on
our company. We have not entered into any employment agreement with Mr.
Kanakaris, Mr. Lotspeich or any other officer of our company. Currently, we do
not maintain key-man life insurance policies on any member of management.
ALTHOUGH INTERNET COMMERCE HAS YET TO ATTRACT SIGNIFICANT REGULATION, GOVERNMENT
REGULATION MAY RESULT IN FINES, PENALTIES, TAXES OR OTHER COSTS THAT MAY REDUCE
OUR FUTURE EARNINGS
Our Internet and e-commerce businesses currently are not directly
regulated by any governmental agency, other than through regulations applicable
to businesses generally. However, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet covering, among other things, the following
issues:
o taxation of consumer transactions;
o advertising;
o user privacy;
o unsolicited marketing;
o pricing;
o quality of products and services;
o intellectual property;
o information security; and
o anti-competitive practices.
The adoption of laws or regulations covering these issues may decrease
the growth of Internet commerce. Such laws could decrease the demand for our
products and services, increase our cost of doing business, or otherwise have an
adverse effect on our business, operating results or financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues including intellectual property ownership, libel and personal privacy is
uncertain. If these existing laws were to be applied to the Internet, our
business may be harmed.
Taxing authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject us to additional state sales, use and income taxes.
The adoption of any of these laws or regulations may decrease the growth of
Internet usage or the acceptance of Internet commerce which could, in turn,
decrease the demand for our products and services, increase costs and otherwise
have a material adverse effect on our business, results of operations and
financial condition. To date, we have not spent significant resources on
lobbying or related government affairs issues, but we may need to do so in the
future.
4
<PAGE>
WE MAY UNINTENTIONALLY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS, WHICH MAY
RESULT IN COSTLY LITIGATION AND LOSS OF THE RIGHT TO USE SUCH PROPRIETARY RIGHTS
We may be subject to claims alleging that we have infringed upon third
party proprietary rights which may result in significant damages. We generally
obtain representations as to the origin and ownership of all licensed technology
and content; however, this may not adequately protect us. Any infringement
actions, with or without merit, could subject us to costly litigation and the
diversion of our technical and management personnel.
WE MAY BE HURT BY SYSTEM INTERRUPTIONS IF OUR PRIMARY SERVERS ARE LOCATED AT A
SINGLE PRINCIPAL LOCATION. IF COMMUNICATIONS TO THAT LOCATION WERE INTERRUPTED,
OUR OPERATIONS COULD BE NEGATIVELY IMPACTED
Our movies and general KKRS.Net web site are hosted on a server owned
and operated by a third party in Rancho Santa Margarita, California. Our
NetBooks.com web site presently is hosted on a server owned and operated by
Earthlink but may in the future be hosted on the third-party server in Rancho
Santa Margarita, California. Although offsite backup servers are maintained by
our hosts, all of our primary servers are vulnerable to interruption by damage
from fire, flood, power loss, telecommunications failure, break-ins and other
events beyond our control. We have, from time to time, experienced periodic
systems interruptions and anticipate that these interruptions will occur in the
future. If we experience significant system disruptions, our business, results
of operations and financial condition would be materially adversely affected. We
do not currently maintain business interruption insurance.
OUR COMPUTER INFRASTRUCTURE MAY SUFFER SECURITY BREACHES. ANY SUCH BREACHES
COULD JEOPARDIZE CONFIDENTIAL INFORMATION TRANSMITTED OVER THE INTERNET, CAUSE
INTERRUPTIONS IN OUR OPERATIONS OR CAUSE US TO HAVE LIABILITY TO THIRD PARTIES
We rely on technology that is designed to facilitate the secure
transmission of confidential information. Our computer infrastructure is
potentially vulnerable to physical or electronic computer break-ins, viruses and
similar disruptive problems. A party who is able to circumvent our security
measures could misappropriate proprietary information, jeopardize the
confidential nature of information transmitted over the Internet or cause
interruptions in our operations. Concerns over the security of Internet
transactions and the privacy of users could also inhibit the growth of the
Internet in general, particularly as a means of conducting commercial
transactions. To the extent that our activities involve the storage and
transmission of proprietary information, including personal financial
information, security breaches could expose us to a risk of financial loss,
litigation and other liabilities. Our insurance does not currently protect us
against these losses. Any security breach would have a material adverse effect
on our business, results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
Some of the information contained in this prospectus contains
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industry, plans, objectives, expectations,
intentions and assumptions and other statements contained in the prospectus that
are not historical facts. When used in this prospectus, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by these
forward-looking statements.
5
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock offered hereby by the selling security holders.
PRICE RANGE OF OUR COMMON STOCK
Our common stock commenced trading on the OTC Bulletin Board under the
symbol "KANA" on November 26, 1997. On August 2, 1999 we changed our symbol to
"KKRS."
The following table shows the high and low closing bid prices of our
common stock for the periods presented. The quotations shown below reflect
interdealer prices, without retail mark-up, mark-down or commissions, and may
not represent actual transactions.
High Low
---- ---
Year Ended September 30, 1998:
First Quarter.........................................$3.625 $3.50
Second Quarter........................................ 4.00 1.375
Third Quarter......................................... 3.25 .40625
Fourth Quarter........................................ .40625 .035
Year Ended September 30, 1999:
First Quarter.........................................$ .25 $ .03
Second Quarter........................................ 2.25 .17
Third Quarter......................................... 2.96875 1.09375
Fourth Quarter........................................ 1.46875 .71875
The closing price of our common stock on December 15, 1999 was $.625.
At December 15, 1999, there were approximately 249 shareholders of
record of our common stock. Within the holders of record of our common stock are
depositories such as Cede & Co. that hold shares of stock for brokerage firms
which, in turn, hold shares of stock for beneficial owners.
DIVIDEND POLICY
We have never paid any dividends on our common stock and do not
anticipate declaring or paying cash dividends in the foreseeable future. We
intend to retain future earnings, if any, to reinvest in our business. We expect
that covenants in our future financing agreements will prohibit or limit our
ability to declare or pay cash dividends.
6
<PAGE>
CAPITALIZATION
The following table sets forth our cash position and capitalization as
of September 30, 1999. The information set forth below should be read in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this prospectus.
<TABLE>
September 30, 1999
-------------
<S> <C>
Cash and cash equivalents......................................... $ 155,063
=============
Long-term debt.................................................... -
=============
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares;
Class A Convertible Preferred Stock; issued and outstanding
1,000,000 shares........................................ 10,000
Common stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 25,490,550 shares(1)........ 25,958
Additional paid-in capital................................... 7,907,746
Treasury stock............................................... (201,920)
Stock subscriptions.......................................... (1,260)
Accumulated deficit.......................................... (8,364,140)
-------------
Total stockholders' deficiency............................. (623,616)
-------------
Total capitalization.............................................. $ (468,553)
=============
</TABLE>
- -------------------
(1) Excludes 2,350,000 shares of common stock issuable pursuant to the exercise
of stock options outstanding as of September 30, 1999, at a weighted
exercise price of $.22 per share, none of which were exercisable on
September 30, 1999. Also excludes 1,033,334 shares of common stock issuable
pursuant to the conversion of our convertible debentures outstanding as of
September 30, 1999, all of which were convertible on September 30, 1999.
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, related notes and other
financial information included elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal years ended September 30, 1999 and
1998 and the period from February 25, 1997 (inception) to September 30, 1997,
and the consolidated balance sheets data as of September 30, 1999, 1998 and
1997, are derived from our consolidated financial statements which have been
audited by Weinberg & Company, P.A. and are included in this prospectus.
Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
FEBRUARY 25, 1997 FISCAL YEAR ENDED
(INCEPTION) TO SEPTEMBER 30,
SEPTEMBER 30, ------------- -------------
1997 1998 1999
------------- ------------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C> <C>
Net sales................................ $ 8,475 $ 919,905 $ 968,758
Cost of sales............................ - 481,349 661,707
------------- ------------- -------------
Gross profit........................ 8,475 438,556 307,051
Operating expenses:
Marketing and advertising........... 14,717 98,110 822,306
Provision for bad debt.............. - 300,000 1,000
General and administrative.......... 764,774 4,105,320 2,849,944
------------- ------------- -------------
Total operating expenses.......... 779,491 4,503,430 3,673,250
------------- ------------- -------------
Operating loss.................... (771,016) (4,064,874) (3,366,199)
Other expense (income) net............... (5,135) 8,475 (175,661)
------------- ------------- -------------
Net loss.......................... $ (765,881) $ (4,056,399) $ (3,541,860)
============= ============= =============
Net loss attributable to
common shares................... $ (765,881) $ (4,056,399) $ (3,541,860)
============= ============= =============
Basic and diluted net loss per
common share............................ $ (.2733) $ (.2813) $ (.15)
============= ============= =============
Weighted average common
shares used in determining
net loss per share...................... 2,802,154 14,419,873 22,945,540
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------
1997 1998 1999
---- ---- ----
CONSOLIDATED BALANCE SHEETS DATA:
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 53,804 $ 5,415 $ 155,063
Working capital (deficiency)............................. 79,326 (411,984) (1,189,834)
Total assets............................................. 309,763 787,970 1,000,303
Long-term debt........................................... - 20,753 -
Total stockholders' equity (deficiency).................. 290,990 160,421 (623,616)
8
<PAGE>
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are an Internet-based provider of online delivery of films and
books. Our Internet web site, www.KKRS.Net, is the portal to all of the
proprietary content and web sites of our company. Our films are accessible by
Internet users at access rates from 56K to broadband. We have over 200 on-demand
movies available with full-screen scalability and television quality. We have
over 250 books online available. The books feature re-sizable type, the ability
to turn pages without scrolling and the ability to search by word or phrase. In
addition, currently we offer other content at www.KKRS.Net, including co-branded
auctions, classified ads and personal ads.
In addition to our Internet and e-commerce businesses, we design,
manufacture and install ergonomic data control console systems for high-end
computer command centers used by governmental agencies and Fortune 500 and other
companies. Our customers include NASA, the Federal Bureau of Investigation, the
United States Navy, Bank of America and Mitsubishi.
To date, all of our revenues have been derived through sales of our
data control console systems. Our current business strategy includes expansion
of our data control console business and a significant emphasis upon developing
and expanding our Internet and e-commerce businesses.
Our company is a Nevada corporation that was incorporated on November
1, 1991 and is the sole shareholder of Kanakaris InternetWorks, Inc. Kanakaris
InternetWorks, Inc. is the sole shareholder of Desience Corporation. Our common
stock is currently traded on the OTC Bulletin Board under the ticker symbol
"KKRS."
We currently derive substantially all of our revenue from the
manufacture and sale of our data control console systems. We are in the process
of further developing and expanding our Internet-related businesses with the
goal of deriving revenues from these businesses in the near future. In that
regard, we anticipate deriving revenue from, among other sources:
o rental and sales of online, downloaded and print books and other
written materials;
o movie subscription and pay-per-view fees;
o classified and personal ad advertising fees;
o fees based on the value of items auctioned through our Internet
Lifestyle Network; and
o sales of downloadable music.
We expect to continue to place significant emphasis upon the further
development and expansion of our Internet and e-commerce businesses. We expect
to increase our sales and marketing expenses in the near term. We intend to
increase our marketing efforts substantially in order to develop awareness and
brand loyalty for our Internet-based products and services and to generate
revenues from those who visit our Internet sites. These marketing efforts will
require a considerable effort on our part.
We also intend to continue to invest in the development of new products
and services, complete the development of our products and services currently
under development and expand our network.
9
<PAGE>
We have incurred significant losses since our inception. As of
September 30, 1999, we had an accumulated deficit of approximately $8.3 million.
We expect to incur substantial operating losses for the foreseeable future. Our
results of operations have been and may continue to be subject to significant
fluctuations. The results for a particular period may vary due to a number of
factors, many of which are beyond our control, including:
o the timing and nature of revenues from our Internet and e-commerce
businesses and data control console product sales that are
recognized during any particular quarter;
o the impact of price competition on our average prices for our
products and services;
o market acceptance of new product or service introductions by us or
our competitors;
o the timing of expenditures in anticipation of future sales;
o product returns;
o the financial health of our customers;
o the overall state of the Internet and e-commerce industries and the
data control console industries; and
o economic conditions generally.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales increased $48,853 or 5.3%, from $919,905 for the year ended
September 30, 1998 to $968,758 for the year ended September 30, 1999. This
slight increase in total sales was primarily due to an increase in sales of our
OPCON Module System. The portion of net sales derived from our e-commerce
businesses decreased $58,621 or 65.3%, from $89,783 for the year ended September
30, 1998 to $31,162 for the year ended September 30, 1999 primarily due to a
shift in our focus from establishing web sites to providing downloadable
content. The portion of net sales derived from the sales of our data control
console systems increased $107,474 or 13.0%, from $830,122 for the year ended
September 30, 1998 to $937,596 for the year ended September 30, 1999.
Gross profit decreased $131,505 or 30.0%, from $438,556 for the year
ended September 30, 1998 to $307,051 for the year ended September 30, 1999. The
decrease in gross profit and corresponding decrease in gross margin from 47.7%
to 31.7% was primarily due to the purchase of intangible movie and book rights
for use on our web sites.
Total operating expenses decreased $830,180, or 18.4%, from $4,503,430
for the year ended September 30, 1998 to $3,673,250 for the year ended September
30, 1999. This decrease in total operating expenses was primarily due to a
significant decrease in our consulting fees from $3,241,466 for the year ended
September 30, 1998 to $1,339,287 for the year ended September 30, 1999. This
decrease in consulting fees was primarily due to the use of stock for payment of
these costs at a lower stock value.
Other expense was $175,661 for the year ended September 30, 1999, as
compared with other income of $8,475 for the year ended September 30, 1998. The
resultant other expense was primarily due to an increase in interest and
financing expense from $0 for the year ended September 30, 1998 to $208,641 for
the year ended September 30, 1999.
Total net loss decreased $514,539 or 12.7%, from $4,056,399 for the
year ended September 30, 1998 to $3,541,860 for the year ended September 30,
1999. For the year ended September 30, 1998, our e-commerce businesses
experienced a net loss of $4,004,486 as compared with a net loss of $3,692,570
for the year ended September 30, 1999. For the year ended September 30, 1998,
our data control console business experienced a net loss of $51,913 as compared
with a net profit of $150,710 for the year ended September 30, 1999.
YEAR ENDED SEPTEMBER 30, 1998 AND PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO
SEPTEMBER 30, 1997
Net sales were $919,905 and $8,475 for the year ended September 30,
1998 and the period from inception to September 30, 1997, respectively. This
significant increase in net sales was due to the acquisition of Desience
Corporation during fiscal 1998 and the inclusion of Desience Corporation's net
sales in fiscal 1998.
Gross profit increased $430,081 from $8,475 for the period from
inception to September 30, 1997 to $438,556 for the year ended September 30,
1998. This increase was due to the acquisition of Desience Corporation during
fiscal 1998 and the inclusion of Desience Corporation's net sales for fiscal
1998.
10
<PAGE>
Total operating expenses increased $3,723,939 from $779,491 to
$4,503,430 partially due to the acquisition of Desience Corporation during
fiscal 1998 and the inclusion of Desience Corporation's operating expenses for
fiscal 1998. During fiscal 1998, our consulting fees were $3,241,466 as compared
with $453,841 for the period from inception to September 30, 1997. This increase
in consulting fees was due to recording the stock issued for consulting services
as an expense using the fair value of the stock as of the date of issue, which
value was significantly higher in 1998 than in 1997.
LIQUIDITY AND CAPITAL RESOURCES
From February 25, 1997 through June 30, 1999, we funded our operations
primarily from equity investments through private placements of our securities,
including our convertible debentures, proceeds from our line of credit and
revenue generated from our operations.
As of September 30, 1999, we had a negative working capital of
$1,189,834 and an accumulated deficit of $8,364,140. As of that date, we had
$155,063 in cash and $154,110 in accounts receivable. We also had obligations
under our debentures in the amount of $600,000.
Cash used in our operating activities totaled $1,231,233 for the year
ended September 30, 1999 as compared to $282,795 for the year ended September
30, 1998. Cash provided by our investing activities totaled $4,870 for the year
ended September 30, 1999 as compared to cash used in investing activities of
$287,873 for the year ended September 30, 1998.
Cash provided by our financing activities was $1,376,011 for the year
ended September 30, 1999. That amount was raised through the issuance of our
common stock which generated $756,061, and through the issuance of our
debentures which generated $620,000. Cash provided by our financing activities
was $522,279 for the year ended September 30, 1998.
On February 25, 1999, we obtained a $5,000,000 revolving line of credit
from Alliance Equities. On April 7, 1999, this line of credit was increased to
$7,000,000. The February 25, 1999 agreement memorializing our arrangement with
Alliance Equities provides that a definitive agreement is to be negotiated
within seven days of that date. Prior to December 10, 1999, the parties had not
finalized a definitive agreement and had operated under the February 25, 1999
agreement as amended by the April 7, 1999 amendment. On December 10, 1999, the
parties executed a definitive agreement relating to the revolving line of
credit. The agreement provides that our company may draw up to $500,000 per
month on the line of credit, up to a maximum aggregate borrowing of $7,000,000.
Interest accrues at the rate of 10% per annum, with unpaid principal and accrued
interest due at maturity on December 10, 2001, unless the line of credit is
terminated earlier by mutual agreement of the parties upon 30 days' prior
written notice, is prepaid by us or is converted into shares of our common stock
by us, by the lender or automatically upon the happening of certain events.
At any time or times prior to maturity, our company may convert any
portion of the unpaid principal balance into shares of our common stock, or the
lender may convert up to 50% of the unpaid principal balance, at a conversion
price equal to the average market price for our common stock for the 30 days
prior to the conversion. The unpaid principal balance of the line of credit is
automatically convertible into shares of our common stock if we fail to pay the
unpaid principal and interest due at maturity, at a conversion price equal to
the average market price for our common stock for the 30 days prior to the
conversion. Alternatively, the unpaid principal balance of the line of credit is
automatically convertible into shares of our common stock if we close a
financing in which the aggregate gross proceeds received by us equal or exceed
$7,000,000, in which case a total of 50% of the entire original line of credit
amount (which is the aggregate of amounts previously converted at that time plus
non-converted amounts equaling a maximum of 50% of the entire original line of
credit amount) will be converted at a conversion price equal to the average
market price of our common stock as exists thirty days prior to such automatic
conversion.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our revolving line of credit with Alliance Equities, will be adequate
to meet our anticipated working capital and capital expenditure requirements for
at least the next 12 months. If, however, our capital requirements or cash flow
vary materially from our current projections or if unforseen circumstances
occur, we may require additional financing sooner than we anticipate. Failure to
raise necessary capital could restrict our growth, limit our development of new
products and services or hinder our ability to compete.
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YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
such computer applications could fail or create erroneous results by or at the
Year 2000. We are currently identifying which of our information technology and
non-information technology systems will be affected by Year 2000 issues.
Our Year 2000 compliance program consists of three phases:
identification and assessment, remediation and testing. For any given system,
the phases occur in sequential order, from identification and assessment of Year
2000 problems, to remediation and, finally, to testing our solutions.
We have completed the identification and assessment of most of our
information technology systems, and those systems address or have been modified
to address Year 2000 problems. We have received assurances from our vendors and
suppliers that their products and businesses are Year 2000 compliant. However,
we have no direct control over these third parties and cannot assure you that
any third-party software and hardware systems will be timely converted. The
failure of certain individual vendors or suppliers, or a combination of vendors
or suppliers, to make their systems Year 2000 compliant could have a material
adverse effect on our financial results.
We have completed all phases of our Year 2000 compliance program. Our
costs to date for our Year 2000 compliance program have not been material.
We rely on third-party network infrastructure providers to gain access
to the Internet. If such providers experience business interruptions as a result
of their failure to achieve Year 2000 compliance, our ability to provide our
services could be impaired, which could harm our business, financial condition
and operating results.
We are currently unable to determine our most reasonably likely worst
case Year 2000 scenario. Because most of our information technology systems
address or have been modified to address Year 2000 problems and because we do
not have significant non-information technology systems, we do not anticipate
that the Year 2000 will have a significant impact on our operations. However, a
failure to address all of our Year 2000 issues successfully could have a
material adverse effect on our business, results of operations and financial
conditions.
BUSINESS
COMPANY HISTORY
Our company is the surviving company in a series of transactions
involving Kanakaris InternetWorks, Inc., a Delaware corporation that was
incorporated on February 25, 1997, Desience Corporation, a California
corporation that was incorporated on April 17, 1984, and Big Tex Enterprises, a
Nevada corporation that was incorporated on November 1, 1991. On October 10,
1997, Kanakaris InternetWorks, Inc. purchased all of the outstanding shares of
common stock of Desience Corporation in exchange for a royalty payable to the
prior sole shareholder of Desience Corporation based upon a percentage of
Desience Corporation's gross sales. On November 25, 1997, Big Tex Enterprises
purchased all of the outstanding shares of common stock of Kanakaris
InternetWorks, Inc. in exchange for 3,000,000 shares of our common stock owned
by Nelson Vasquez, the then president of Big Tex Enterprises, 3,000,000 newly
issued shares of our common stock and 1,000,000 newly issued shares of our
preferred stock. On November 26, 1997, Big Tex Enterprises changed its name from
Big Tex Enterprises to Kanakaris Communications, Inc. Consequently, our company
is a Nevada corporation that was incorporated on November 1, 1991 and is the
sole shareholder of Kanakaris InternetWorks, Inc., and Kanakaris InternetWorks,
Inc. is the sole shareholder of Desience Corporation. Our common stock currently
is traded on the OTC Bulletin Board under the ticker symbol "KKRS."
COMPANY OVERVIEW
We are an Internet-based provider of online delivery of films and
books. Our Internet web site, www.KKRS.Net, is the portal to all of the
proprietary content and web sites of our company. Our films are accessible by
Internet users at access rates from 56K to broadband. We have over 200 on-demand
movies available with full-screen scalability and television quality. We have
over 250 books online available. The books feature re-sizable type, the ability
to turn pages without scrolling and the ability to search by word or phrase. In
addition, currently we offer other content at www.KKRS.Net, including co-branded
auctions, classified ads and personal ads.
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In addition to our Internet and e-commerce businesses, we design,
manufacture and install ergonomic data control console systems for high-end
computer command centers used by governmental agencies and Fortune 500 and other
companies. Our customers include NASA, the Federal Bureau of Investigation, the
United States Navy, Bank of America and Mitsubishi.
To date, all of our revenues have been derived through sales of our
data control console systems. Our current business strategy includes expansion
of our data control console business and a significant emphasis upon developing
and expanding our Internet and e-commerce businesses.
We currently derive all of our revenue from the manufacture and sale of
our data control console systems. We are in the process of further developing
and expanding our Internet-related businesses with the goal of deriving revenues
from these businesses in the near future. In that regard, we anticipate deriving
revenue from, among other sources: rental and sales of online, downloaded and
print books and other written materials; movie subscription and pay-per-view
fees; classified and personal ad advertising fees; fees based on the value of
items auctioned through our Internet Lifestyle Network; and sales of
downloadable music.
We store single digital source files of content on our servers. This
single file - which may be a movie, a book or, in the future, music - is
duplicated on demand as many times as demand warrants. We deliver our content
direct over the Internet, which eliminates traditional remanufacturing, storage
and shipping costs. In addition, we provide Internet services such as the design
and hosting of web sites, proprietary web sites, digital book publishing, themed
content commerce web sites and online advertising. We also design and
manufacture computer command centers used by corporations and governmental
agencies. We are focused on developing proprietary web sites and downloadable
Internet content and anticipate that these components of our business will be a
major portion of our overall and Internet business.
Our currently available and planned Internet services are designed to
provide the following key benefits to individual consumers and end-users:
ONLINE MOVIES
o No Plug-In Required For Delivery
o Works With Any Computer With An Internet Connection
o Compatible With Any Browser Or On Any Platform
o Pay-Per-View for Individual Movies
o Monthly Access to Unlimited Viewing
o Full-Screen Viewing of Movies
ONLINE BOOKS
o Real-time Delivery
o Secured Impressions
o Direct Delivery
o Dynamic Updates
ONLINE MUSIC (in development)
o 24-Hour Access to New Artists
o Direct Online Purchase Of A Wide Variety Of Music
ONLINE SHOPPING/ENTERTAINMENT (in initial implementation)
o Specialized Items for the Internet Lifestyle
Our data control console products are designed to provide the following
key benefits to customers:
o Maximization of operator efficiency and productivity through
ergonomics, focusing on data and immediate accessibility
o Operator productivity is increased by providing an environment
which reduces visual and physical stress, enhancing the operator's
ability to focus attention and facilitating equipment access
o Maximization of the number of displays per operator in a compact
space
o Flexibility to accommodate growth and change in both hardware and
location
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INTERNET INDUSTRY BACKGROUND
The Internet began in the late 1960s as an experiment in the design of
robust computer networks. Basically, the Internet is a collection of computer
networks - a network of networks - that allows anyone to connect with their
computer to the Internet and immediately communicate with other computers and
users across the world. Its use for decades was primarily limited to defense
contractors and academic institutions. With the advent of high-speed modems for
digital communication over common telephone lines, some individuals and
organizations began connecting to and taking advantage of the Internet's
advanced global communications ability.
Although there were several factors responsible for the growth of the
Internet, the factors that are most often attributed to its success are the
advent of HTML, the World Wide Web and Internet browsers. With the expansion in
the number of Internet users and web sites, we believe the following two recent
phenomena have developed: growth in the amount of commerce that is being
transacted over the Internet; and willingness of businesses to spend money to be
a part of the Internet.
Because the Internet has experienced rapid growth, it has developed
into a significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation, or IDC, estimates that there were over 51
million web users in the United States and over 97 million worldwide at the end
of 1998. IDC projects these numbers to increase to over 135 million web users in
the United States and over 319 million worldwide by the end of 2002.
Internet-based businesses have emerged to offer a variety of products and
services over the Internet. Advances in online security and payment mechanisms
have also prompted more businesses and consumers to engage in electronic
commerce. IDC estimates that the value of purchases of goods and services,
excluding fund transfers and stock transfers, on the Internet will grow from
$32.4 billion worldwide in 1998 to $425.7 billion worldwide in 2002.
DATA CONTROL CONSOLE INDUSTRY BACKGROUND
The data control console industry focuses on the design, manufacture,
and implementation of high-tech furniture systems used to fully integrate
computer systems and communications systems in the workplace. Working with IBM,
we developed the first modular system for enclosing and organizing the equipment
and cabling associated with data and network control centers. The first large
installation occurred in 1985. We were the first and only manufacturer using a
standard, modular "system" which could be quickly installed by bolting together
without any site construction and could similarly be added to or reconfigured
easily with additional parts.
OUR STRATEGY
Our objective is to be the leader of downloadable content, information
and entertainment products and a leading supplier of data control console
products. Our goal is to provide the direct delivery of interactive content,
including movies, books and music, directly over the Internet to computer
devices available in schools, offices, homes and cars on a worldwide
around-the-clock basis. To achieve these objectives, we have developed a
strategy with the following key elements:
o EXPAND OUR MOTION PICTURE LIBRARY. Currently we have over 200
movies available for viewing in full-length, full computer
screen format on demand through our "virtual theater", which
utilizes Microsoft Media 4.0 technology. We intend to expand
our motion picture library as funds become available.
o FINALIZE THE DEVELOPMENT AND IMPLEMENTATION OF OUR MOVIE
PARTNER PROGRAM. We intend to finalize the development and
implementation of our Movie Partner Program to allow any
mainstream web site in the world to host a virtual theater. We
plan to attract web sites to participate in our proposed Movie
Partner Program by allowing such web sites to join our program
free of charge and to share in our revenues generated through
their participation in our program.
o BECOME THE LEADING PROVIDER OF DIRECT-OVER-THE-INTERNET
DELIVERY OF BOOKS. We are working toward providing the largest
number of copyrighted books available via secure
direct-over-the-Internet technology. To accomplish this goal,
we are seeking new relationships with publishers and authors.
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o DEVELOP AND CULTIVATE STRATEGIC ALLIANCES. We intend to
cultivate our existing strategic alliances with Microsoft
Corporation, ION Systems, Inc. and others and to develop new
strategic alliances that will aid us in building brand
awareness for our Internet and e-commerce web sites and
enhancing the products and services we provide.
o BUILD THE KKRS.NET NAME. We intend to increase our focus on
building the KKRS.Net name. As funds become available, we
intend to launch a promotional campaign to increase awareness
of the KKRS.Net name through, among other things, our
strategic alliances, co-branding of others' web sites and
traditional media, including print and radio.
o CAPITALIZE ON FREE SERVICES. We believe that our free services
will attract a critical mass of users and educate Internet
users, authors and publishers regarding the benefits of our
products and services.
o EXPAND OUR PRODUCTION AND INSTALLATION OF DATA CONTROL CONSOLE
PRODUCTS. We intend to generate new and exciting sales
materials and aids to enhance our product exposure and to
increase our sales force to penetrate deeper into national and
international markets.
OUR INTERNET PRODUCTS AND SERVICES
ONLINE MOVIES
We operate an online movie site, entitled "NetMovieMania.com," which
enables Internet users to download full-length motion pictures with no download
time and no plug-in required utilizing Microsoft Windows Media Technology 4.0.
NetMovieMania.com is a channel on our KKRS.Net entertainment web portal. We plan
to offer pay-per-view movies as well as promotional movies. We have amassed a
catalog of over 400 film titles, of which more than 200 are currently available
for online distribution. We plan to offer pay-per-view movies as well as sell
advertising to our web site. We plan to charge a monthly access fee for those
customers who desire unlimited viewing access to a larger portion of our web
site. We are in the process of merchant service system that will enable us to
charge and collect access fees to our NetMovieMania.com web site.
We have developed a Movie Partner Program aimed at attracting web sites
to utilize our innovative technology. We intend to allow other web sites to
co-brand our virtual theater and receive a commission for subscription and
pay-per-view fees generated by visitors from their web sites.
We plan to introduce our Movie Partner Program during the first quarter
of calendar year 2000. We anticipate that our Movie Partner Program will include
the following revenue streams:
o Advertising sales to companies interested in selling products
to our viewers
o Monthly subscription fees for unlimited access to a larger
number of online movies
o Pay-per-view fees for individual viewers at broadband access
speeds for selected movies and events
o Co-branding of our content with other web sites to increase
traffic value of ads and the potential numbers of subscribers
and pay-per-view customers
ONLINE BOOKS
We have a web site called "NetBooks.com" which is integrated within our
main web site KKRS.Net and which offers secure online delivery of books using
proprietary technology licensed from ION Systems. Over the past several years,
book publishing in the United States has shown a steady increase. As a result,
the emerging online bookselling industry is expected to grow from $630 million
in 1998 to $3 billion in 2003, according to Forrester Research, Inc., a
Cambridge, Massachusetts, research group.
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Currently, online booksellers account for about three percent of the
market for books and industry experts believe that this market share is growing.
We estimate there are 500 book titles available electronically on the Internet
today. Microsoft, in an advertisement in Publisher's Weekly in November 1999,
stated that by the year 2020, 90% of all book titles will be available
electronically.
Our company's content, which currently is available as movies and
books, is downloadable in real-time which means there is not a significant delay
in the display of text or images. This allows the consumer to obtain immediate
access to the medium of their choice. We believe that our site is secure to the
extent that it preserves the author's rights to ownership. We also believe that
we are the only online Internet publisher that provides real-time secure
fulfillment from one source file.
The primary concern for downloadable content providers is security.
There are currently other sites on the Internet that offer a variety of
downloadable titles. However, the number of titles available is extremely
limited because authors and publishers are reluctant to put their materials
online. This is largely a result of a lack of security systems offered by other
similar sites. When security is lacking, the author and publisher lose control
of their property. The material can be copied, printed, e-mailed, or transferred
to anyone as many times as the user would like with no payment or royalty to the
owner. In addition, other sites make it difficult for people to comfortably read
books. The document is downloaded and the text and spacing cannot be changed.
Often times, this makes for an uncomfortable reading experience.
We have made available a solution for both the security problem as well
as the comfort problem with our software solutions. Books and articles are now
available through high-speed access for use on desktops, laptops, personal data
assistants, compact discs and other innovative end user hardware. Most
importantly, there is no end user software needed. Earlier this year, we entered
into an alliance with ION Systems for use of their secure online download
technologies. Using this new, innovative software, we can rent or sell books
online while allowing authors and publishers to retain control over their
content.
Authors and publishers whose materials are available on our
NetBooks.com web site determine which of the following access options are to be
made available to visitors to our website:
o Free Browsing - Currently, a visitor may browse certain posted
materials free of charge.
o Purchase Hourly Access - We anticipate that a visitor will in the
future be able to rent the online version of the materials on an
hourly basis. The author or publisher may allow visitors to apply
a percentage of the online rental fees toward another method of
purchase or rental described below.
o Purchase of Download Version - Currently, a visitor may purchase
the download version of the materials, thus enabling them to use
the materials for off-line reading in unlimited sessions for an
unlimited amount of time. The copyright notice will state that the
visitor cannot duplicate the book.
o Purchase Extended Access - We anticipate that a visitor will in
the future be able to purchase a password enabling them to read
the online version of the materials for five years in any number
of sessions.
o Purchase of Print Version - We anticipate that a visitor will in
the future be able to purchase a print version of the materials
and that when an order for a print copy is submitted, the
purchasing visitor will be given immediate access to the online
version while the book is shipped.
The text of the online materials cannot be copied, printed, or
extracted using optical character recognition software. Our licensed technology
also prevents temporary Internet files from storing usable text. We believe this
is the first application of a technology through which the author and publisher
can retain complete control of how their creative work is used online. Any book
or document - no matter how long - can be read page by page. The reader also
maintains control over the size of the type with just the click of the mouse.
None of these features requires any special user software other than a
JAVA-enabled browser. By using this technology, a long document, book, textbook
or manual can be read without scrolling and in any type size the reader's eyes
find comfortable.
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A value-added feature of our company's system is real-time secure
fulfillment of orders from customers. When an order for a print copy is
submitted, the purchaser is given immediate access to the online version while
the book is shipped. We believe that the online protection of the author's
intellectual property and the enhanced reading format differentiate our company
from any other Internet distributor.
We are also working with ION Systems to develop and implement an
exclusive Partner Program, which will be a unique method of title acquisition
among Internet publishers. The program will allow qualified publishers to post
books online free of charge and to share in revenues derived from access
charges. The program will be available to publishers, agents, packagers or other
persons or organizations who have the copyright to book titles. Qualified
partners will be able to post books online for free and receive multiple new
revenue streams. The program is available to publishers, agents, packagers or
other persons or entities who have the copyright to multiple book titles.
ONLINE MUSIC
We plan to establish an online music site entitled cyberpop.com. We
anticipate that cyberpop.com will be a downloadable music site offering a
combinations of 24-hour Internet radio exposure to artists, combined with direct
online sales of songs and compact disks in a choice of the leading Internet
delivery technologies.
ONLINE SHOPPING/ENTERTAINMENT
We have established the Internet LifeStyle Network. To maximize
exposure and accessibility, the site is fully integrated with our downloadable
movie and book web sites. The site presently offers co-branded auctions,
classified ads and personal ads.
OUR DATA CONTROL CONSOLE PRODUCTS
Our primary data control console product is our OPCON Module System, a
proprietary modular system for high-end computer command centers. Our OPCON
Module Systems have been purchased and installed by major governmental agencies
such as NASA, the Federal Bureau of Investigation and the United States Navy and
by large corporations including Bank of America, Mitsubishi and Pacific Bell.
Our control center consoles are ergonomically designed to maximize
comfort, function, adaptability and efficiency for the corporate network system.
We assist clients in the planning process by making site visits, taking lists of
requirements, then providing customers with blueprint floor plans of OPCON
Module System layouts, elevated views of suggested equipment layouts and
perspective presentation drawings. In order to assure complete customer
satisfaction, we oversee the manufacturing of products as well as the
installation.
Our company through its wholly-owned subsidiary, Desience Corporation,
has been marketing and selling the OPCON Module System to corporate and
government mainframe computer users since the early 1980's. Historically,
approximately 90% of our sales have been in the United States. During the 1990's
we have seen increased business from South America, including multiple orders
from Venezuela, and have also seen increased business from Mexico. We have also
sold and installed the OPCON Module System in Canada, Barbados, Bermuda, St.
Lucia, Kuwait and Guam.
In 1999, we announced plans to develop a "personal" module system,
tentatively titled Opcon 2000, to provide a single computer work station for the
home or office. This product will represent the first consumer product offering
in our history. We plan to market this product over the Internet with the
intention of consumer retail distribution throughout the world.
Currently, there are five companies competing in the marketplace for
modular system solutions, including Desience Corporation, Wrightline, Evans
Consoles, and Stacking Systems, which provide metal products, and
Infrastructures, which provides wood-type products. All of our competitors have
more resources than us, and most competitors offer similar services such as
installation, warranties and customer service. Deciding factors such as price,
service and features vary according to the requirements of the customer.
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Wood is a low cost short-range solution with no ability to endure the
rigors of years of use and frequent reconfigurations so often required in our
environment. Therefore, only the other metal products are true competition for
us. We are a leader in the design and production of quality metal products. Our
system is made of heavy steel, has a proprietary lens to provide better task
lighting, provides extremely open architecture for cable routing and is easy to
reconfigure. To this end, we are proud that our existing clients return often
for new and/or expanded systems.
STRATEGIC RELATIONSHIPS
In order to expand our Internet and e-commerce businesses, we have
developed strategic relationships with various Internet, technology and software
companies. The following is a brief description of some of our more important
strategic relationships.
MICROSOFT CORPORATION
In August 1999, we entered into an Internet content partner agreement
with Microsoft Corporation. Under the terms of the agreement, Microsoft promotes
certain portions of our web content and provides assistance in the use of
Microsoft's Windows Media technology. Microsoft has agreed to promote four of
our web sites through December 30, 2001. Microsoft is providing clickable
headline links to our NetMovieMania.com web site consisting of brief summaries
of the content available via the site link on their WindowsMedia.com web site.
This site link enables Internet users to read about and click on the
descriptions of content available from our company and then be directly
connected to our web site. In addition, in November 1999 our company was
selected by Microsoft to participate in the Microsoft Windows Media Technologies
Broadband Jumpstart Initiative. On December 7, 1999, we launched 45 movie titles
at 100 kbps and 300 kbps broadband speeds on our NetMovieMania.com web site, and
Microsoft has begun providing links to this content from its WindowsMedia.com
web site. As part of the Broadband Jumpstart Initiative, William Gates, the
Chairman and CEO of Microsoft Corporation, introduced a new Microsoft Broadband
web site at the StreamingMedia West conference in San Jose, California on
December 7, 1999. Our company is represented on this web site through a
clickable link. On that same day, InterVu began providing server space and
bandwidth for 45 movies. Microsoft Corporation will cover the cost of this
service for a period of six months.
ION SYSTEMS
Our license agreement with ION Systems allows us to use their secure
online download technologies. The agreement continues through December 31, 2004,
and thereafter will be renewable automatically for additional renewal terms of
five years each. Under this agreement, ION Systems has granted us a license to
use their E*Web and the X*Maker computer software which allows for the secure
downloading and viewing of our web sites. ION System's software may be used by
us solely for the publishing, displaying, promoting, marketing, offering and
selling for a fee of certain specified book categories as well as of products or
services listed in the books published. The fee for each book conversion
performed by ION Systems is $100.00, and the royalties for each book sale and
product sale are 20% and 5% respectively, of gross revenue. In April 1999, we
amended our agreement with ION Systems to provide that ION Systems would manage
all e-commerce transactions through our web sites for Netbooks.com and would
also manage the maintenance of all our web sites for Netbooks.com, including
site maintenance and coordination with site hosting facilities.
SALES AND MARKETING
Sales and marketing activities with respect to our data control console
business are currently handled by a limited number of manufacturer's
representatives and the four employees of our company that are engaged primarily
in this portion of our business, who locate potential customers and assist them
in the planning process by making site visits, taking lists of requirements,
then providing customers with proposed blueprints and drawings suited to the
customers' individual needs. We intend to increase the number of manufacturer's
representatives and employees devoted to these functions as funds and
opportunities become available so that we can continue to enhance Desience
Corporation's name as the pioneer and a modern leader in the data control
console business.
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Sales and marketing activities with respect to our Internet and
e-commerce businesses are currently limited primarily to headline links provided
by Microsoft Corporation from its web site to our NetMovieMania.com web site,
co-branding of others' web sites, and hosting web events such as the live
webcast of a charitable fashion show for the Los Angeles organization known as
L.A. Shanti, on December 14, 1999. An important piece of our current marketing
strategy is to offer free services. For example, movies on our web site
presently can be viewed free of charge and will remain viewable free of charge
for a limited time. This is intended to allow us to expand our customer base and
get customers in the habit of using our services while building brand awareness
and increasing the number of hits to our web site, resulting in increased sales
of our products and services. Also, we anticipate that our exclusive Partner
Program will allow authors and publishers to post books to our web site free of
charge and take advantage of the opportunity to share in revenues generated from
such posts.
As discussed more fully below, to capitalize on our business model, we
intend to initiate a more traditional marketing campaign as funds allow. Such a
campaign is likely to initially include targeted print and radio advertising and
may also include hiring marketing staff that would be primarily responsible for
communications, advertising and public relations for our data control console
business and our Internet and e-commerce businesses.
ADVERTISING AND PROMOTION
There are numerous Internet sites that are frequently visited by
Internet users. These sites range from television network companies such as ABC,
CBS and NBC to lesser known companies that publish information on their web
sites on various special interest topics. Because of the popularity of these
sites, these sites provide excellent mediums in which to advertise products and
services. Several different business models are currently being used by the
Internet community regarding advertising on web sites. One model allows the
owner of the web site to charge a fee to display an advertisement on its web
site with a link to the advertiser's site. Another uses cooperative arrangements
in which companies exchange advertisements on each other's sites. Our company is
pursuing both types of relationships. Currently, we are not involved in any
significant advertising or promotion. However, as funds become available, our
company plans to advertise its site in traditional advertising mediums that will
be directed to the first time Internet user as well as sophisticated Internet
users. This will include print, radio and possibly television advertisements
targeted to specific markets.
We intend to place advertisements for the KKRS.Net web site in
influential trade publications catering to the entertainment industry, such as
the advertisement we placed in the September 14-20, 1999 issue of The Hollywood
Reporter. Since 1997, we have created Internet web events in order to drive
traffic to our web site. We intend to continue to create high profile Internet
events as a means to further promote our business.
Alex Kanakaris, our Chairman of the Board, President and Chief
Executive Officer, is the author of a new book that highlights the impact of the
Internet on our society. The book was released November 8, 1999. We believe that
the promotion of this book will bring further attention to our web site.
COMPETITION
The Internet and e-commerce businesses are extremely competitive and
can be significantly affected by many factors, including changes in local,
regional or national economic conditions, changes in consumer preferences, brand
name recognition and marketing and the development of new and competing
technologies. We expect that existing businesses that compete with us and which
have greater resources than us will be able to undertake more extensive
marketing campaigns and adopt more aggressive advertising sales policies than
us, thereby generating more traffic to their web sites.
We believe that KKRS.Net is the only web site that currently offers
both online movies and books. Also, we are not aware of any web site that
intends to offer online movies, books and music. We believe that our unique
combination of products on our web site will assist us in becoming and remaining
competitive with other movie, book and music web sites by allowing us to share
traffic, and therefore share revenue potential, between our various web sites.
19
<PAGE>
Although there are numerous movie web sites on the Internet, we believe
that we have a competitive edge in the online movie industry because, among
other things:
o We believe that NetMovieMania.com currently offers the largest
number of full-length, mainstream Hollywood movies with
Internet access at multiple access speeds.
o Most of our full-length movies can be downloaded in
approximately one minute rather than in a few hours, as on
many other web sites.
o We currently have over 220 full-length films online, which are
viewable in streams from 28.8 to broadband. Because of the
significant time involved in translating film into streaming
media technology, we believe that our film library gives us a
significant lead over others in the online movie industry.
The emerging online book industry is expected to grow from $630 million
in 1998 to $3 billion in 2003, according to Forrester Research, Inc., a
Cambridge Massachusetts research group. Currently, online booksellers account
for about three percent of the market for books. We estimate there are 500 book
titles available electronically on the Internet today. Microsoft Corporation, in
an advertisement in Publisher's Weekly in November 1999, projected that by the
year 2020, 90% of all book titles will be available electronically.
Although there are numerous book sites on the Internet, we believe that
our NetBooks.com web site is the only web site that provides real-time secure
fulfillment from one source file. In addition, we believe that NetBooks.com is
the only web site that currently uses proprietary technology which enables
consumers to read posted books and other materials without scrolling and in any
type size the consumer's eyes find comfortable while allowing authors and
publishers to maintain ownership and control over their proprietary content.
With respect to competition with our data control console business,
currently there are five companies competing in the marketplace for modular
system solutions, including Desience Corporation, Wrightline, Evans Consoles,
and Stacking Systems, which provide metal products, and Infrastructures, which
provides wood-type products. Most of our competitors offer similar services,
such as installation, warranties and customer service. Deciding factors such as
price, service, features and materials vary according to the requirements of the
customer.
Although we were the pioneers in this industry and are a leader in the
design and production of quality metal data control console products, we believe
that all of our competitors currently have more financial and other resources
than us. Nevertheless, we have remained competitive in the data control console
industry based upon our delivery of quality products and services with
relatively minimal overhead. We intend to maintain and enhance our competitive
position in this industry by committing additional staffing and other resources
to our data control console business as funds become available.
PATENTS AND PROPRIETARY RIGHTS
We rely on a combination of trademark, trade secret and copyright law
and contractual agreements to protect our proprietary technology and
intellectual property rights. We hold the Internet domain names "KKRS.Net,"
"NetBooks.com," "NetMovieMania.com," "cyberpop.com" and many others. Under
current domain name registration practices, no one else can obtain an identical
domain name, but someone might obtain a similar name, or the identical name with
a different suffix, such as ".org", or with a country designation. The
relationship between regulations governing domain names and the laws protecting
trademarks and similar proprietary rights is enforceable under local national
law. In addition, the regulation of domain names in the United States and in
foreign countries is subject to change, and we could be unable to prevent
third-parties from acquiring domain names that infringe or otherwise decrease
the value of our domain names.
20
<PAGE>
GOVERNMENT REGULATION
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being considered by federal, state and foreign
legislatures with respect to these issues. The nature of any new laws and
regulations and the manner in which existing and new laws and regulations may be
interpreted and enforced cannot be fully determined.
In addition, there is substantial uncertainty as to the applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. The vast majority of these laws were adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
and environment of the Internet. Future developments in the law might decrease
the growth of the Internet, impose taxes or other costly technical requirements,
create uncertainty in the market or in some other manner have an adverse effect
on the Internet. These developments could, in turn, have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We provide our services through data transmissions over public
telephone lines and other facilities provided by telecommunications companies.
These transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. However, we are not subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses generally. Nevertheless, as Internet
services and telecommunications services converge or the services we offer
expand, there may be increased regulation of our business, including regulation
by agencies having jurisdiction over telecommunications services. Additionally,
existing telecommunications regulations affect our business through regulation
of the prices we pay for transmission services, and through regulation of
competition in the telecommunications industry.
The Federal Communications Commission has ruled that calls to Internet
service providers are jurisdictionally interstate and that Internet service
providers should not pay access charges applicable to telecommunications
carriers. Several telecommunications carriers are advocating that the Federal
Communications Commission regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. The Federal Communications Commission is examining inter-carrier
compensation for calls to Internet service providers, which could affect
Internet service providers' costs and consequently substantially increase the
costs of communicating via the Internet. This increase in costs could slow the
growth of Internet use and thereby decrease the demand for our services.
FACILITIES
We currently occupy approximately 1,780 square feet of office space at
our headquarters in Costa Mesa, California. We sublease this space for $1,579
per month. The sublease expires August 20, 2000.
EMPLOYEES
As of December 15, 1999, we employed or contracted a total of 7
employees and 4 consultants on a full or part-time basis. We have 8 full-time
and 3 hourly workers. Seven of our workers are devoted primarily to our Internet
and e-commerce businesses, and 4 of our workers are devoted primarily to our
data control console business.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. Our employees are not represented by any collective
bargaining unit. We have never experienced a work stoppage. We believe our
relationship with our employees is good.
21
<PAGE>
LEGAL PROCEEDINGS
On September 15, 1999, Robert Adams filed a complaint against our
company and our Chairman of the Board, President and Chief Executive Officer,
Alex Kanakaris, individually, in Los Angeles Superior Court (Case No. LC050023)
alleging breach of contract and fraud. Mr. Adams based his fraud claim primarily
on alleged misrepresentations and concealment involving a consulting agreement
between our company and Mr. Adams. Mr. Adams alleged that he is entitled to
certain stock options, of which 75% of the option price allegedly is already
deemed paid in exchange for services allegedly rendered by Mr. Adams to our
company. Mr. Adams is attempting to exercise the options for the purchase of a
certain number of shares to which he claims to be entitled pursuant to the
agreement. We have engaged counsel to analyze the complaint and vigorously
defend us against all of Mr. Adams' claims.
On October 14, 1999, Institutional Management, Inc., an Illinois
corporation, filed suit against our company and Alpha Tech Stock Transfer &
Trust Company, our stock transfer agent and registrar, in the Circuit Court of
Cook County, Illinois (Case No. 99L 011509). The case was removed to the United
States District Court for the Northern District of Illinois, Eastern Division
(Case No. 99C 7100). In the complaint, Institutional Management sought damages
in excess of $50,000 under breach of contract and various other state law
theories in connection with our unwillingness to permit them to transfer shares
of our company's common stock held by Institutional Management. We believe that
the shares were wrongfully converted by a predecessor to Institutional
Management. We have engaged counsel to analyze the complaint, vigorously defend
us against all of Institutional Management's claims and pursue any appropriate
counterclaims we may have.
On August 2, 1999, the Securities and Exchange Commission filed suit in
the United States District Court in the District of Nevada against our company,
Mr. Kanakaris, David Valenti, who is a major stockholder of our company, and
another individual seeking permanent injunctions and civil penalties based on
alleged violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities Act
of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in connection with the sale of approximately 6,000,000 shares of our
company's common stock in 1996 and 1997 to the former shareholders of Kanakaris
InternetWorks, Inc., a subsidiary of our company. On August 9, 1999, a final
judgment of permanent injunction and other relief was entered in connection with
the execution by each defendant of a consent to entry of injunction and the
payment by each of Mr. Kanakaris and Mr. Valenti of a $25,000 civil penalty.
Without admitting or denying any guilt involving the violations cited in the
decrees, Mr. Kanakaris, Mr. Valenti and our company each have agreed pursuant to
the consents to entry of injunction not to take actions that would violate
federal securities laws in connection with the offer, purchase or sale of
securities.
22
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of our company and their ages are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Alex Kanakaris.................................... 43 Chairman of the Board, President,
Chief Executive Officer and Director
Branch Lotspeich.................................. 52 Vice Chairman of the Board, Secretary and
Director
John Robert McKay................................. 38 Webmaster and Director
David T. Shomaker................................. 43 Acting Chief Financial Officer
</TABLE>
Alex F. Kanakaris has served as a director and as our Chairman of the
Board, President and Chief Executive Officer since November 1997. Mr. Kanakaris
served as the President of Kanakaris InternetWorks, Inc. from 1994 until it was
acquired by our company in November 1997. During the past 15 years, Mr.
Kanakaris created innovative web sites, including www.cyberpop.com and
www.NetBooks.com, and he served as editor-in-chief of various publications such
as Video Swapper, Video Entertainment, New Talent Streetscene and L.A.>POP. Mr.
Kanakaris is author of the book "Signs of Intelligent Life on the Internet"
published by Darce/Brentwood Media Group, November 1999.
On August 2, 1999, the Securities and Exchange Commission filed suit in
the United States District Court in the District of Nevada against our company,
Mr. Kanakaris, David Valenti, who is a major stockholder of our company, and
another individual seeking permanent injunctions and civil penalties based on
alleged violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities Act
of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in connection with the sale of approximately 6,000,000 shares of our
company's common stock in 1996 and 1997 to the former shareholders of Kanakaris
InternetWorks, Inc., a subsidiary of our company. On August 9, 1999, a final
judgment of permanent injunction and other relief was entered in connection with
the execution by each defendant of a consent to entry of injunction and the
payment by each of Mr. Kanakaris and Mr. Valenti of a $25,000 civil penalty.
Without admitting or denying any guilt involving the violations cited in the
decrees, Mr. Kanakaris, Mr. Valenti and our company each have agreed pursuant to
the consents to entry of injunction not to take actions that would violate
federal securities laws in connection with the offer, purchase or sale of
securities.
Branch Lotspeich has served as our Vice Chairman of the Board and as
President of Desience Corporation since June 1997. He has served as our
Secretary and as a director since November 1997. Prior to that, he also served
as Vice President of Desience Corporation from March 1992 through June 1997.
Prior to that Mr. Lotspeich worked as an independent consultant in
telecommunications, acquiring accounts including Proctor & Gamble and Cincinnati
Bell Telephone. Mr. Lotspeich is a Summa Cum Laude graduate of the University of
Cincinnati with a Bachelor of Fine Arts degree in Television Broadcasting.
John Robert McKay has served as a director and as our Webmaster since
August 1999. Mr. McKay served as our Vice President-Internet Division from
November 1997 through July 1998. Mr. McKay has been a Webmaster since 1995 and
has worked both full-time and as a consultant to our company's Chairman of the
Board, Chief Executive Officer, Alex Kanakaris, since 1994. Mr. McKay was a web
site administrator for NNA Services, a non-profit educational organization, from
1993 to 1994. Prior to that, he served as Sales Promotion Manager for ORA
Electronics/Alliance Corporation, an international consumer electronics company,
from 1991 to 1992. From 1987 to 1991, Mr. McKay served as the advertising
manager for Kelly-Moore Paint Co. Mr. McKay is a graduate of San Francisco State
University with a Bachelor of Science degree in Marketing.
23
<PAGE>
David T. Shomaker has served as our acting Chief Financial Officer
since May 1999. He has been a partner of Haynie & Company, Certified Public
Accountants, based in Orange County, California and Salt Lake City, Utah since
1990. Mr. Shomaker holds a Bachelor of Science degree in Accounting from Brigham
Young University, Provo, Utah.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation earned for all services rendered to our company in all capacities
during the fiscal year ended September 30, 1999, for our Chief Executive Officer
and our only other executive officer whose total compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------- SECURITIES
NAME AND UNDERLYING
PRINCIPAL POSITION SALARY BONUS STOCK OPTIONS
------------------ ------ ----- -------------
Alex Kanakaris........... $105,000 $73,378 1,400,000
Chairman of the Board,
President and Chief
Executive Officer
Branch Lotspeich........ $105,000 $18,838 900,000
Vice Chairman of the
Board and President of
Desience Corporation
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------------------------------
Number of Percent of
Securities Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year (%) ($/Sh) Date
- ------------------- ----------- -------------- ------------ -----------
Alex F. Kanakaris 500,000 21.3% .18 01/06/04
900,000 38.3% .25 01/06/09
Branch Lotspeich 500,000 21.3% .18 01/06/09
400,000 17.0% .25 01/06/09
STOCK INCENTIVE PLAN
Our company's 1999 Stock Incentive Plan was adopted by our Board of
Directors in January 1999 and is subject to shareholder approval. The purpose of
the Incentive Plan is to attract and retain qualified personnel, provide
additional incentives to employees, officers and non-employee directors of our
company and the subsidiaries it may have from time to time, and promote the
success of our company's business. Under the Incentive Plan, our company may
grant incentive and non-qualified stock options to key employees, officers and
non-employee directors of our company. A total of 2,750,000 shares of common
stock have been reserved for issuance under the Incentive Plan. As of December
15, 1999, a total of 1,050,000 incentive stock options and 1,300,000
non-qualified stock options had been granted subject to shareholder approval of
the Incentive Plan.
Our Board of Directors selects the key employees and officers of our
company to whom stock options are granted (provided that incentive stock options
only be granted to employees of our company), interprets and adopts rules for
the operation of the Incentive Plan and specifies other terms of stock options.
Subject to the limitations set forth in the Incentive Plan, our Board of
Directors has the authority to designate the number of shares to be covered by
each option, determine whether an option is to be an incentive stock option or a
non-qualified stock option, establish vesting schedules, specify the type of
consideration to be paid to our company upon exercise and, subject to certain
restrictions, specify other terms of the options.
24
<PAGE>
The maximum term of options granted under the Incentive Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per optionee. Options granted under the Incentive Plan are
nontransferable (except by will or the laws of descent and distribution) and
generally expire three months after the termination of an optionee's service to
our company. However, generally if an optionee is permanently disabled or dies
during his or her service to our company, the optionee's options, to the extent
then presently exercisable, shall remain in full force and effect and may be
exercised through the expiration date of such options.
The exercise price of incentive stock options must equal at least the
fair market value of a share of our common stock on the date of grant. The
exercise price of incentive stock options granted to any person who at the time
of grant owns stock possessing more than 10% of the total combined voting power
of all classes of stock must be at least 110% of the fair market value of such
stock on the date of grant, and the term of those options cannot exceed five
years.
The Incentive Plan provides that each non-employee member of our Board
of Directors shall automatically be granted a non-qualified stock option to
purchase 5,000 shares of common stock on each anniversary of the non-employee
director's continuous service on our Board of Directors. These options have a
term of ten years and are exercisable six months and one day from the later of
the date of grant, or the date of shareholder approval of the Incentive Plan
through the expiration of the option term, regardless of whether the
non-employee director is a member of our Board of Directors at the time of
exercise or later enters the employ of our company.
DIRECTOR COMPENSATION
Our directors do not receive any compensation for attendance at Board
of Directors meetings.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors has not established any committees. No executive
officer of our company has served as a director or member of the compensation
committee of any other entity whose executive officers served as a director of
our company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation, as amended, do not expressly limit the
liability of our company's directors for monetary damages. However, our Bylaws
provide that every person who was or is a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or a
person of whom he is the legal representative is or was a director or officer of
our company or is or was serving at the request of our company or for its
benefit as a director or officer of another corporation, or as our company's
representative in a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless to the fullest extent legally permissible under
the General Corporation Law of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys' fees, judgments, fines and
amounts paid or to be paid in settlement) reasonably incurred or suffered by him
in connection therewith.
Our Bylaws provide that the expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding must be paid by our
company as they are incurred and in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by our
company. Such right of indemnification is a contract right that is not exclusive
of any other right such directors, officers or representatives may have,
including rights under any bylaw, agreement, vote of shareholders, provision of
law and any other rights.
Our Bylaws provide further that our Board of Directors may cause our
company to purchase and maintain insurance on behalf of any person who is or was
a director or officer of our company, or is or was serving at the request of our
company as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred in any such
capacity or arising out of such status, whether or not our company would have
the power to indemnify such person.
25
<PAGE>
The selling security holders and our company each have agreed to
indemnify the other and their respective officers, directors and other
controlling persons against certain liabilities in connection with this
registration, including liabilities under the Securities Act of 1933, and to
contribute to payments such persons may be required to make in respect thereof.
RESALES OF SHARES COVERED BY THIS PROSPECTUS
This prospectus covers the resale by the selling security holders of an
aggregate of up to 1,783,334 shares of common stock that may be issued upon
conversion of our 10% Convertible Subordinated Debentures that were issued in
two private placement transactions not involving a public offering. This
prospectus does not cover the sale or other transfer of the debentures or the
issuance of shares of common stock to holders of debentures upon conversion or
pursuant to the escrow arrangement whereby holders of the debentures may receive
from time to time shares of our common stock if the fair market value of a share
of our common stock falls below a certain price. If a selling security holder
transfers its debentures prior to conversion, the transferee of the debentures
may not sell the shares of common stock issuable upon conversion of the
debentures under the terms of this prospectus unless this prospectus is
appropriately amended or supplemented by us.
All of the debentures contain anti-dilution and adjustment provisions
providing for the adjustment of the underlying shares and/or the conversion
price upon the occurrence of certain events, including recapitalizations,
reclassifications, share dividends, share splits or combinations, mergers or
acquisitions or similar transactions. In the event of the liquidation,
dissolution or winding up of our company, holders of the debentures will not be
entitled to receive any of our assets available for distribution to the holders
of common stock.
In the event of any reclassification, capital reorganization or other
similar change in our outstanding common stock, any consolidation or merger
involving our company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization or other similar change
in our outstanding common stock) or a sale or conveyance to another corporation
of all or substantially all of the property of our company, each of the
debentures will become convertible for the kind and number of shares of stock or
other securities, assets or cash to which a holder of the number of shares of
common stock issuable (at the time of such reclassification, reorganization,
consolidation, merger or sale) upon conversion of the debentures would have been
entitled upon such reclassification, reorganization, consolidation, merger or
sale. However, this prospectus covers only our common stock, and any other
securities received upon conversion of the debentures are not offered hereby.
For the period a holder holds our debentures, the holder has the
opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon the conversion of the debentures. The holders of debentures may be expected
to voluntarily convert their debentures for common stock when the conversion
price is less than the market price for our common stock. Further, the terms on
which we could obtain additional capital during the period in which the
debentures remain outstanding may be adversely affected.
PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of December 15, 1999 with
respect to the beneficial ownership of our common stock both before and
immediately following the offering by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our
common stock,
o the selling security holders in this offering,
o each of our directors and our named executive officers in the
summary compensation table above, and
o all executive officers and directors as group.
26
<PAGE>
The following calculations of the percentages of outstanding shares are
based on 27,520,050 shares of our common stock outstanding as of December 15,
1999. We determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission, which generally require inclusion of shares
over which a person has voting or investment power. Share ownership in each case
includes shares issuable upon exercise of outstanding options and warrants or
conversion of outstanding shares of Class A Convertible Preferred Stock or
debentures that are exercisable or convertible within sixty days of December 15,
1999, as described in the footnotes below. Percentage of ownership is calculated
pursuant to Securities and Exchange Commission Rule 13d-3(d)(i).
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
<TABLE>
<CAPTION>
Shares of Common Shares of Common
Stock Beneficially Stock Being Shares of Common
Name and Address of Owned Prior Offered Pursuant Stock Beneficially Owned
Beneficial Owner(1) to this Offering to this Prospectus After this Offering(2)
----------------- ------------------- ------------------ ------------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Alliance Equities
1915 Merion Lane
Coral Springs, FL 33071(3)............ 866,667 3.05% 866,667 -- --
AJW Partners, LLC
1670 Old Country Road, Suite 112
Plainview, New York 11803(3).......... 416,667 1.49% 416,667 -- --
New Millenium Capital Partners II, LLC
1670 Old Country Road, Suite 112
Plainview, New York 11803(3).......... 250,000 * 250,000 -- --
Bank Insinger de Beaufort
Herengtecht 551
1017 BW Amsterdam
Netherlands(3)........................ 250,000 * 250,000 -- --
Alex F. Kanakaris(4).................. 2,915,147 10.22% -- 2,915,147 10.22%
Branch Lotspeich...................... 1,277,976 4.64% -- 1,277,976 4.64%
John Robert McKay..................... 685,000 2.49% -- 685,000 2.49%
David Valenti
519 Idaho Avenue,
Santa Monica, California 90403........ 2,197,280 7.98% -- 2,197,280 7.98%
David T. Shomaker(5).................. 175,000 * -- 175,000 *
All directors and executive
officers as a group
(4 persons)(6)......................... 5,053,123 17.72% -- 5,053,123 17.72%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each person in this table is
c/o Kanakaris Communications, Inc., 3303 Harbor Boulevard, Suite F-3,
Costa Mesa, California 92626. Messrs. Kanakaris, Lotspeich and McKay
are directors and executive officers of our company. Mr. Shomaker is
Acting Chief Financial Officer of our company.
(2) Assumes that all of the Shares are sold pursuant to this prospectus.
(3) Represents shares of common stock issuable upon conversion of 10%
Convertible Subordinated Debentures.
(4) Consists of 1,915,147 shares of common stock issued and outstanding and
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock.
(5) Mr. Shomaker is a partner of Haynie & Co., which owns 175,000 shares of
our company's common stock.
(6) Consists of 4,053,123 shares of common stock issued and outstanding and
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock.
27
<PAGE>
We will prepare and file all amendments and supplements to the
registration statement as may be necessary in accordance with the rules and
regulations of the Securities Act of 1933, as amended (the "Securities Act") to
keep it effective until the earlier to occur of the following: the date as of
which all shares of common stock offered hereby may be resold in a public
transaction without volume limitations or other material restrictions without
registration under the Securities Act, including without limitation, pursuant to
Rule 144 under the Securities Act; or the date as of which all shares of common
stock offered hereby have been resold. We have agreed to pay the expenses, other
than broker discounts and commissions, if any, in connection with this
prospectus.
PLAN OF DISTRIBUTION
We have no specific information concerning whether or when any offers
or sales of shares of our common stock covered by this prospectus will be made,
or if made, what the price, terms or conditions of any such offers or sales will
be. Based on information available to us, it is our understanding that the
selling security holders may offer and sell the shares of common stock in one or
more transactions either:
o by one or more broker-dealers as agents for the selling security
holders at a price or prices related to the then current market
price of the common stock on the OTC Bulletin Board, with such
commission to be paid by the selling security holders to the
broker-dealers as shall be agreed upon by them;
o by the selling security holders to the broker-dealers (for resale
by the broker-dealers as principals) at a price or prices related
to the then current market price of our common stock, less such
discount, if any, as shall be agreed upon by the selling security
holders and the broker-dealers;
o directly, at prices and on terms to be determined at the time of
sale; or
o by a combination of the methods described above. In effecting
sales, broker-dealers engaged by the selling security holders may
arrange for other broker-dealers to participate in resales. The
shares of common stock offered hereby may also be offered or sold
as described above by pledgees, donees, transferees, or other
successors in interest to the selling security holders, subject to
any appropriate amendment or supplement to this prospectus.
In connection with distributions of the shares of common stock or
otherwise, the selling security holders may sell shares of common stock short
and redeliver the shares of common stock to close out such short positions. The
selling security holders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares of
common stock registered hereunder, which the broker-dealer may resell or
otherwise transfer pursuant to this prospectus. The selling security holders may
also loan or pledge the shares of common stock registered hereunder to a
broker-dealer, and the broker-dealer may sell the shares of common stock so
loaned or upon a default the broker-dealer may effect sales of the pledged
shares pursuant to this prospectus.
We have agreed to indemnify certain selling security holders and each
of such selling security holder's officers, directors and partners and any
person who controls such selling security holder against liabilities under the
Securities Act, and to contribute to payments such selling security holder and
such persons may be required to make in respect thereof. The selling security
holders may agree to indemnify any broker-dealer or agent that participates in
transactions involving sales of the shares against certain liabilities under the
Securities Act.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts, or concessions from selling security holders in amounts
to be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any securities covered by
this prospectus which qualify for sale pursuant to Section 4(1) of the
Securities Act or Rule 144 promulgated thereunder may be sold pursuant to such
provisions rather than pursuant to this prospectus. The selling security holders
also may be considered "underwriters" within the meaning of the Securities Act.
We will bear the expense of preparation and filing of the registration
statement (of which this prospectus is a part) and certain other expenses.
Commissions and discounts, if any, attributable to the sale of the shares of
common stock offered hereby will be borne by the selling security holders.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition by Kanakaris InternetWorks, Inc. of
Desience Corporation in October 1997, Mr. Lotspeich, our Vice Chairman of the
Board and Secretary, is entitled to receive 2.5% of the gross sales of Desience
Corporation. As of June 30, 1999, $38,762 was due and payable to Mr. Lotspeich
pursuant to this arrangement.
Effective as of February 26, 1997, Alex Kanakaris, who is our Chairman
of the Board, President and Chief Executive Officer and who was then a director
and the President of Kanakaris InternetWorks, Inc., executed an unsecured
promissory note in favor of Kanakaris InternetWorks, Inc. in the principal
amount of the smaller of $50,000 or the sum of the drawn amounts between
February 26, 1997 and September 30, 1997, with interest at an annual rate of
6.625%. Interest payments under the note are due annually commencing June 30,
1998, with a final interest payment at maturity of the note on February 26,
2002. Principal payments are due in five equal installments annually commencing
December 31, 1998, with a final principal payment at maturity of the note. As of
September 30, 1999, the outstanding principal balance of this note was $39,680.
Effective as of February 27, 1997, David Valenti, who is currently one
of our principal shareholders and who was then a director and the national sales
manager of Kanakaris InternetWorks, Inc. executed an unsecured promissory note
in favor of Kanakaris InternetWorks, Inc. in the principal amount of the smaller
of $50,000 or the sum of the drawn amounts between February 26, 1997 and
September 30, 1997, with interest at an annual rate of 6.625%. Interest payments
under the note are due annually commencing June 30, 1998, with a final interest
payment at maturity of the note on February 26, 2002. Principal payments are due
in five equal installments annually commencing December 31, 1998, with a final
principal payment at maturity of the note. As of September 30, 1999, the
outstanding principal balance of this note was $39,680.
Effective as of April 7, 1997, John McKay, who is a director and the
webmaster of our company and who was then a director and the webmaster of
Kanakaris InternetWorks, Inc., executed an unsecured promissory note in favor of
Kanakaris InternetWorks, Inc. in the principal amount of the smaller of $18,000
or the sum of the drawn amounts between April 7, 1997 and September 30, 1997,
with interest at an annual rate of 6.625%. Interest payments under the note are
due annually commencing June 30, 1998, with a final interest payment at maturity
of the note on April 7, 2002. Principal payments are due in five equal
installments annually commencing December 31, 1998, with a final principal
payment at maturity of the note. As of September 30, 1999, the outstanding
principal balance of this note was $13,599.
Effective as of May 19, 1997, Branch Lotspeich, who is a director and
executive officer of our company and who was then a director of Kanakaris
InternetWorks, Inc. and the President of Desience Corporation, executed an
unsecured promissory note in favor of Kanakaris InternetWorks, Inc. in the
principal amount of the smaller of $10,000 or the sum of the drawn amounts
between May 19, 1997 and September 30, 1997, with interest at an annual rate of
6.625%. Interest payments under the note are due annually commencing June 30,
1998, with a final interest payment at maturity of the note on May 19, 2002.
Principal payments are due in five equal installments annually commencing
December 31, 1998, with a final principal payment at maturity of the note. As of
September 30, 1999, the outstanding principal balance of this note was $7,680.
Effective as of September 30, 1997, Alex Kanakaris executed an
unsecured promissory note in favor of Kanakaris InternetWorks, Inc. in the
principal amount of $101,915.49, with interest at an annual rate of 8.0%.
Principal and interest payments under the note are due in annual installments of
$38,250.03 commencing September 30, 1998 and continuing until September 30,
2002, at which time the remaining unpaid principal and interest shall be due in
full. As of September 30, 1999, the outstanding principal balance of this note
was $103,295, and the note was prepaid through a portion of the year 2000.
On January 8, 1998, John McKay executed an unsecured promissory note in
favor of Kanakaris InternetWorks, Inc. in the principal amount of the smaller of
$50,000 or the sum of the drawn amounts between January 1, 1998 and December 31,
1998, with interest at an annual rate of 6.625%. Interest payments under the
note are due annually commencing June 30, 1999, with a final interest payment at
maturity of the note on January 1, 2003. Principal payments are due in five
equal installments annually commencing December 31, 1999, with a final principal
payment at maturity of the note. As of September 30, 1999, the outstanding
principal balance of this note was $9,599.
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On January 8, 1998, Alex Kanakaris executed an unsecured promissory
note in favor of Kanakaris InternetWorks, Inc. in the principal amount of the
smaller of $85,000 or the sum of the drawn amounts between January 1, 1998 and
December 31, 1998, with interest at an annual rate of 6.625%. Interest payments
under the note are due annually commencing June 30, 1999, with a final interest
payment at maturity of the note on January 1, 2003. Principal payments are due
in five equal installments annually commencing December 31, 1998, with a final
principal payment at maturity of the note. As of September 30, 1999, the
outstanding principal balance of this note was $16,640.
On January 8, 1998, Branch Lotspeich executed an unsecured promissory
note in favor of Kanakaris InternetWorks, Inc. in the principal amount of the
smaller of $30,000 or the sum of the drawn amounts between January 1, 1998 and
December 31, 1998, with interest at an annual rate of 6.625%. Interest payments
under the note are due annually commencing June 30, 1999, with a final interest
payment at maturity of the note on January 1, 2003. Principal payments are due
in five equal installments annually commencing December 31, 1998, with a final
principal payment at maturity of the note. As of September 30, 1999, the
outstanding principal balance of this note was $8,000.
On January 8, 1998, David Valenti executed an unsecured promissory note
in favor of Kanakaris InternetWorks, Inc. in the principal amount of the smaller
of $85,000 or the sum of the drawn amounts between January 1, 1998 and December
31, 1998, with interest at an annual rate of 6.625%. Interest payments under the
note are due annually commencing June 30, 1999, with a final interest payment at
maturity of the note on January 1, 2003. Principal payments are due in five
equal installments annually commencing December 31, 1998, with a final principal
payment at maturity of the note. As of September 30, 1999, the outstanding
principal balance of this note was $10,240.
David Shomaker, our acting Chief Financial Officer, is a partner of
Haynie & Co., a certified public accounting firm. Our company engaged Haynie &
Co. to provide us with accounting assistance, tax preparation services and
acting Chief Financial Officer services for the twelve months commencing in May
1999. To date, we have issued 175,000 shares to Haynie & Co. in connection with
this arrangement. Also in connection with this arrangement, our company paid to
Haynie & Co. a fee of $1,000 per month during each month from May 1999 through
October 1999, and has agreed to pay to Haynie & Co. a fee of $2,000 per month
commencing in November 1999.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.01
par value per share. Of the 5,000,000 shares of preferred stock, 1,000,000
shares have been designated as Class A Convertible Preferred Stock and the
remaining 4,000,000 shares of preferred stock are undesignated. As of December
15, 1999, there were 27,520,050 shares of common stock outstanding held by 249
holders of record and 1,000,000 shares of Class A Convertible Preferred Stock
outstanding held by Alex Kanakaris, a director and the President and Chief
Executive Officer of our company. The following is a description of the capital
stock of our company.
COMMON STOCK
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available therefor at times and in
amounts as the board of directors may from time to time determine, subordinate
to any preferences that may be granted to the holders of preferred stock.
Holders of common stock are entitled to one vote per share on all matters on
which the holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon liquidation, dissolution or winding-up of the
company, the assets legally available for distribution to stockholders are
divided among the holders of the common stock in proportion to the number of
shares of common stock held by each of them, after payment of all of our debts
and liabilities and the rights of any outstanding class or series of preferred
stock to have priority to distributed assets.
All outstanding shares of common stock are, and the shares of common
stock to be issued in this offering will be, when issued and delivered, validly
issued, fully paid and nonassessable. The rights, preferences and privileges of
holders of common stock are subordinate to any series of preferred stock that we
may issue in the future.
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PREFERRED STOCK
Preferred stock may be issued from time to time in one or more series,
and our board of directors, without action by the holders of common stock, may
fix or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. No shares
of preferred stock presently are outstanding other than the shares of our Class
A Convertible Preferred Stock and we have no present plans to issue any
additional preferred shares. The issuance of shares of preferred stock could
adversely affect the voting power of the holders of common stock and could have
the effect of making it more difficult for a third party to acquire or could
discourage or delay a third party from acquiring, a majority of our outstanding
stock.
CLASS A CONVERTIBLE PREFERRED STOCK
Shares of our Class A Convertible Preferred Stock rank senior to our
common stock as to dividends and distributions. The holders of outstanding
shares of Class A Preferred are entitled to receive dividends out of assets
legally available therefor at times and in amounts as the board of directors may
from time to time determine, before any dividend is paid on common stock.
Holders of Class A Preferred are entitled to three non-cumulative votes
per share on all matters presented to our shareholders for action, and the
affirmative vote of the holders of a majority of the Class A Preferred then
outstanding, voting as a separate class, is required for our company to do any
of the following: amend, alter or repeal any of the preferences or rights of the
Class A Preferred; authorize any reclassification of the Class A Preferred;
increase the authorized number of shares of the Class A Preferred; or create any
class or series of shares ranking prior to the Class A Preferred as to dividends
or upon liquidation. The Class A Preferred is not entitled to preemptive rights.
Shares of Class A Preferred have a liquidation preference of $.10 per
share plus accumulated and unpaid dividends. After payment of the full amount of
the liquidating distribution to which they are entitled, holders of Class A
Preferred will not be entitled to any further participation in any distribution
of assets by our company.
The Class A Preferred may be redeemed by our company at any time upon
30 days' prior written notice at a redemption price of $.50 per share. Holders
of Class A Preferred have the right to convert their shares of Class A Preferred
into our common stock until the third business day prior to the end of the
30-day notice period. The redemption price for Class A Preferred is payable
together with accumulated and unpaid dividends to the date fixed for redemption.
If full cumulative dividends on the Class A Preferred through the most recent
dividend payment date have not been paid, the Class A Preferred may not be
redeemed in part unless approved by the holders of a majority of the outstanding
shares of Class A Preferred, and our company may not purchase or acquire any
share of Class A Preferred other than pursuant to a purchase or exchange offer
made on the same terms to all holders of Class A Preferred. If less than all
outstanding shares of Class A Preferred are to be redeemed, our company will
select those to be redeemed by lot or a substantially equivalent method.
The shares of Class A Preferred are not subject to any sinking fund or
other similar provision. The redemption by our company of all or part of the
Class A Preferred is subject to the availability of cash. Moreover, under Nevada
law, shares of capital stock shall not be redeemed when the capital of a company
is impaired or when the redemption would cause any impairment of capital.
Holders of Class A Preferred have the right to convert their shares of
Class A Preferred into shares of common stock at any time before the third
business day prior to the end of any 30-day redemption notice period, at an
initial conversion rate of one share of common stock per share of Class A
Preferred. The conversion rate is subject to certain anti-dilution adjustments.
If our company disappears in a merger or consolidation or we sell substantially
all of our assets, each share of Class A Preferred will entitle the holder to
convert such shares into the kind and amount of consideration that the holder
would have been entitled to receive immediately after such transaction.
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10% CONVERTIBLE SUBORDINATED DEBENTURES
Our company's 10% Convertible Subordinated Debentures were issued
pursuant to debenture purchase agreements. The outstanding principal balance of
the debentures bears interest at the rate of 10% per year. Interest will be
computed based on a 365-day year. Interest through the last day of each calendar
quarter is due and payable in arrears on the first business day of the month
immediately following the end of such calendar quarter.
The debentures mature and the outstanding principal balance and all
accrued and unpaid interest is due and payable on the first anniversary of the
debenture purchase agreements. The debentures are transferable by their holders
upon delivery to us of a duly executed written instrument of transfer and an
opinion of legal counsel reasonably satisfactory to us that the proposed
transfer is lawful.
The debentures rank pari passu with one another in right of payment of
principal and interest and are subordinated or junior in right of payment of
principal and interest to all present and future indebtedness that we owe or
have guaranteed to any bank, savings and loan, investment company, insurance
company, other licensed financial or lending institution, or accounts receivable
or factoring lender. Consequently, upon any distribution to our creditors in a
liquidation or dissolution of our company or in a bankruptcy, reorganization,
receivership or similar proceeding relating to our company or its property, the
holders of all senior debt will be entitled to receive payment in full of the
outstanding principal balance and all accrued but unpaid interest on such senior
debt before the debenture holders will be entitled to receive any payment of
principal or interest on the debentures.
At our option, we may prepay all or any part of the outstanding
principal balance of the debentures. Certain of the debentures require us to
provide 30 days' prior written notice to the holders of the debentures and pay
100% of the principal amount being prepaid plus all accrued and unpaid interest
on such amount. The other debentures require that if we prepay all or any
portion of the outstanding principal balance of such debentures, we must also
pay a prepayment penalty equal to 120% of the value of the outstanding principal
balance of and accrued interest on such debentures. All of the debentures
provide that if we elect to prepay less than all of the outstanding principal
balance of the debentures, then we must prepay the same percentage of the
outstanding principal balance of the debentures held by each holder. Until
prepayment is made, the holder retains full conversion rights described below
with respect to any amount of debentures called for prepayment.
The debentures are convertible at any time at the option of the holder,
or automatically on the earlier of:
o the effective date of the registration statement for a public
offering of at least $5,000,000 of our company's common stock;
o the date our company's common stock is listed for sale on a
national stock exchange or has its sales or bid price quoted on
NASDAQ with a sales/bid price of at least $5.00 per share, as
adjusted for stock splits, subdivisions and combinations; or
o the securities into which the debentures would be convertible as a
result of a merger or consolidation of our company into another
company where we are not the surviving entity or as a result of a
sale of substantially all of our assets to another person meet the
criteria set forth in the first or second items set forth above. In
addition, certain of the debentures are convertible automatically
on March 1, 2000, if any registration statement filed or amended
subsequent to the relevant debenture purchase agreement has not
become effective and to which any portion of such debenture is
converted to shares and registered for resale.
The conversion price of the debentures initially is $.60 per share and
is subject to adjustment for capital reorganizations or a sale of our company,
stock splits, subdivisions or combinations of shares of our common stock and the
like. The conversion price is also subject to anti-dilution adjustments if we
issue shares of common stock, whether directly or on the exercise of an option,
warrant or other right to purchase shares of common stock or on the conversion
of any convertible security, for a sales price that is less than both the
conversion price and the market price:
o pursuant to any stock split, stock dividend or subdivision;
o on the exercise or conversion of any option, warrant or convertible
security outstanding on the date hereof; or
o pursuant to any employee stock or stock option plan approved by our
shareholders.
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As security for our obligation to issue shares upon conversion of
certain of the debentures, we were required to deposit into an escrow account
916,667 shares of our common stock underlying those debentures, with such number
being subject to adjustment for stock splits, stock dividends and similar
events. If we fail to issue the appropriate number of shares of common stock
upon conversion of those debentures, the escrow agent will transfer the
appropriate number of escrow shares to the holder. The escrow arrangement
terminates upon the earlier of: the receipt by the debenture holder of the
appropriate number of shares of common stock upon conversion of the entire
outstanding principal balance of the debentures to which the escrow arrangement
applies; and our payment of the entire outstanding principal balance of the
debentures to which the escrow arrangement applies. Upon termination of the
escrow arrangement, the shares of our common stock, if any, remaining in the
escrow account will be returned to us.
As used in the debentures, the market price of a share of our common
stock is the average for the 20 trading days immediately preceding the date in
question of the closing prices of our common stock as reported on Nasdaq or, if
not listed on Nasdaq, on the principal national security exchange or quotation
system on which our common stock is quoted or listed or admitted to trading, or
if not quoted or listed or admitted to trading on any national securities
exchange or quotation system, the closing bid price of such security on the
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or a similar generally accepted reporting service, or if not so
available, in such manner as furnished by any Nasdaq member firm of the NASD
selected from time to time by our Board of Directors for that purpose.
A debenture holder may declare the entire unpaid principal balance and
all accrued but unpaid interest immediately due and payable by giving written
notice to us if: we fail to make any principal payment to such holder within 30
days of its due date; we breach any provision of the debenture and do not cure
such breach within 30 days after receiving written notice of the breach from the
holder or, if such breach cannot be cured within 30 days, we commence to cure
the breach within 30 days but are not successful within 180 days; we are in
default under any senior debt, the senior lender accelerates the maturity of the
senior debt and the acceleration would cause a material adverse effect on our
company; we are in default under any other debenture and the holder thereof
accelerates the maturity of such debenture; or we elect to dissolve, dissolve or
are the subject of any order, judgment or decree of any court or governmental
authority dissolving or ending our existence.
The entire unpaid principal balance and all accrued but unpaid interest
will automatically become due and payable immediately, without notice from the
holder, if we file or consent to any voluntary or involuntary petition for
bankruptcy, insolvency, reorganization, liquidation or other similar form of
debtor relief, or petition for or consent to the appointment of a receiver,
trustee or liquidator appointed on our behalf for all or a substantial portion
of our assets, unless such petition or appointment is set aside, withdrawn or
ceases to be in effect within 90 ninety days.
The debentures have certain demand and incidental registration rights
that expire on the earliest to occur of:
o the sale of all of the shares issued upon conversion of the
debentures;
o receipt by the holders of a written opinion by our counsel stating
that such shares may be sold publicly without registration; or
o the tenth anniversary of the date of the applicable registration
rights agreement. The incidental registration rights apply whenever
we propose to file a registration statement under the Securities
Act of 1933 in connection with a public offering of shares of our
common stock for cash, other than in connection with any merger,
acquisition or other transaction under Rule 145 of the Securities
Act of 1933, exchange offer, dividend reinvestment plan, employee
benefit plan or stock option plan. Such incidental registration
rights are subject to underwriters' cutbacks and other customary
provisions. The demand registration rights involve up to four
demands that may be made by the holders of at least a majority of
the outstanding shares issued or issuable upon conversion of the
debentures. Each such demand must relate to at least 20% of the
total shares of common stock issued or issuable upon conversion of
the debentures.
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Certain of the debentures entitle their holder to receive shares of our
common stock from time to time under certain conditions until the sooner of one
year after the effective date of the registration statement relating to the
shares of common stock underlying their debentures or the date that the holder
realizes proceeds from sales of such shares equal to 150% of the purchase price
of the holder's debentures. The number of shares of common stock, if any, to be
issued to a holder shall, at a holder's written election, be determined as of
the first trading day of each calendar month commencing October 1, 1999
("Issuance Date") based on 25% of the total purchase price of the holder's
debentures ("Designated Principal Portion"). If, on an Issuance Date, the market
price of a share our common stock is less than 150% of the conversion price, as
adjusted, then we must issue and deliver to the holder within ten days of the
holder's written election a number of shares of common stock equal to the
difference between 150% of the Designated Principal Portion divided by the
market price of a share of our common stock and the Designated Principal Portion
divided by the conversion price of a share of our common stock.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is Alpha
Tech Stock Transfer & Trust Company.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Shares
offered pursuant to this prospectus will be passed upon for us by Rutan &
Tucker, LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements of Kanakaris Communications, Inc.
and subsidiaries for the years ended September 30, 1999 and 1998 and for the
period from February 25, 1997 (inception) to September 30, 1997, have been
included in this prospectus and in the registration statement in reliance upon
the report of Weinberg & Company, P.A., independent certified public
accountants, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of Kanakaris Communications, Inc.
(formerly Desience Corporation) for the years ended September 30, 1995, 1996 and
1997 have been included in this prospectus and in the registration statement in
reliance upon the report of Tanner & Co., independent certified public
accountants, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
In May 1998, our company engaged Weinberg & Company, P.A. as the
independent certified public accountants for our company and its subsidiaries.
Prior thereto, Tanner & Co. served as the independent certified public
accountant for our company's subsidiaries. The change in accountants from Tanner
& Co. to Weinberg & Company, P.A. was effective for the audit of the financial
statements for the year ended September 30, 1997, was unanimously approved by
our Board of Directors and was not due to any disagreements between our company
or its subsidiaries and Tanner & Co. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form SB-2 under the Securities Act of
1933, and the rules and regulations enacted under its authority, with respect to
the common stock offered in this prospectus. This prospectus, which constitutes
a part of the registration statement, does not contain all of the information
set forth in the registration statement and its exhibits and schedules.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the full text of the contract or other document which is
filed as an exhibit to the registration statement. Each statement concerning a
contract or document which is filed as an exhibit should be read along with the
entire contract or document. For further information regarding us and the common
stock offered in this prospectus, reference is made to this registration
statement and its exhibits and schedules. The registration statement, including
its exhibits and schedules, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
documents may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the charges prescribed by the Commission.
The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
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INDEX TO FINANCIAL STATEMENTS
KANAKARIS COMMUNICATIONS, INC.
AND SUBSIDIARIES
Page
----
Report of Independent Public Accountants....................................F-2
Consolidated Balance Sheets at September 30, 1999 and 1998..................F-3
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
for the Years Ended September 30, 1999 and 1998....................F-5
Consolidated Statements of Operations for the Years Ended September 30,
1999 and 1998......................................................F-7
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999 and 1998......................................................F-8
Notes to Consolidated Financial Statements as of September 30, 1999
and 1998...........................................................F-10
Report of Independent Public Accountants....................................F-30
Consolidated Balance Sheets at September 30, 1998 and 1997..................F-31
Consolidated Statements of Operations for the Year Ended
September 30, 1998 and for the period from February
25, 1997 (inception) to September 30, 1997.........................F-33
Consolidated Statements of Changes in Stockholders' Equity for
the Year Ended September 30, 1998 and for the period from
February 25, 1997 (inception) to September 30, 1997................F-34
Consolidated Statements of Cash Flows for the Year Ended
September 30, 1998 and for the period from February
25, 1997 (inception) to September 30, 1997.........................F-36
Notes to Consolidated Financial Statements as of September 30, 1998
and 1997...........................................................F-38
KANAKARIS COMMUNICATIONS, INC.
(FORMERLY DESIENCE CORPORATION)
Page
----
Report of Independent Public Accountants....................................F-49
Consolidated Balance Sheets at September 30, 1997, 1996 and 1995............F-50
Consolidated Statements of Operations and Accumulated Deficit for
the Years Ended September 30, 1997, 1996 and 1995..................F-51
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995..................................F-52
Notes to Financial Statements for the Years Ended September 30,
1997, 1996 and 1995................................................F-53
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of:
Kanakaris Communications, Inc.
We have audited the accompanying consolidated balance sheets of Kanakaris
Communications, Inc. and Subsidiaries as of September 30, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kanakaris
Communications, Inc. and Subsidiaries as of September 30, 1999 and 1998 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
December 2, 1999
F-2
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
---------------------------
ASSETS
------
1999 1998
----------- -----------
CURRENT ASSETS
Cash $ 155,063 $ 5,415
Accounts receivable 154,110 118,473
Inventory - 10,122
Advances to suppliers - 7,839
Current maturities of notes
receivable-shareholders and
related parties 61,695 36,280
Interest receivable 2,404 16,683
Prepaid expenses 60,813 -
----------- -----------
Total Current Assets 434,085 194,812
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 50,051 22,631
Less: Accumulated depreciation (12,718) (6,184)
----------- -----------
Total Property and Equipment 37,333 16,447
----------- -----------
OTHER ASSETS
Notes receivable - shareholders and
related parties - non-current 185,338 247,033
Organization costs - net 1,450 2,050
Security deposits 1,400 700
Goodwill - net of amortization 340,697 326,928
----------- -----------
Total Other Assets 528,885 576,711
----------- -----------
TOTAL ASSETS $1,000,303 $ 787,970
- ------------ =========== ===========
See accompanying notes to financial statements.
F-3
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
1999 1998
----------- -----------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 933,210 $ 521,432
Convertible debentures 620,000 -
Notes payable - 25,000
Due to former shareholder of subsidiary 70,709 30,937
Customer deposits - 29,427
----------- -----------
Total Current Liabilities 1,623,919 606,796
LONG-TERM LIABILITIES
Royalties payable - 20,753
----------- -----------
Total Liabilities 1,623,919 627,549
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $0.01 par value;
5,000,000 shares authorized;
1,000,000 Class A Convertible
issued and outstanding in 1999 and 1998 10,000 10,000
Common stock, $0.001 par value;
100,000,000 shares authorized;
25,958,050 issued and 25,859,026
outstanding in 1999; 19,179,636
issued and 19,080,612 outstanding in 1998 25,958 19,179
Common shares to be issued, 1,340,140 - 1,340
Additional paid-in capital 7,907,746 5,155,362
Accumulated deficit (8,364,140) (4,822,280)
Less subscriptions receivable
(1,260,000 shares, common) (1,260) (1,260)
----------- -----------
Total paid-in capital and
retained earnings (deficit) (421,696) 362,341
Less cost of treasury stock
(99,024 shares, common) (201,920) (201,920)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (623,616) 160,421
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
- -----------------------------------
EQUITY (DEFICIENCY) $1,000,303 $ 787,970
------------------- =========== ===========
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------
<CAPTION>
COMMON STOCK ADDITIONAL
COMMON STOCK TO BE ISSUED PREFERRED STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- --------- ------ ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 2,802,154 28,022 - $ - 1,697,280 16,973 1,011,876
Stock Issued For:
Cash 22,680 227 - - - - 43,073
Consulting fees 1,500,843 15,008 - - - - 2,850,401
Advertising services 5,000 50 - - - - 9,496
Recapitalization Transactions:
- ------------------------------
Cancellation of KIW, Inc.
stock resulting from
recapitalization (4,330,677)(43,307) - - (1,697,280) (16,973) 60,280
Pre exchange Big Tex
Common stock outstanding 6,000,000 6,000 (6,000)
Surrender of Common Stock by
50% Shareholder of Big Tex (3,000,000) (3,000) - - - - 3,000
Issuance of Common Stock
to Shareholders of Kanakaris
InternetWorks, Inc. 6,000,000 6,000 - - - - (6,000)
Issuance of Preferred Stock
to Shareholders of Kanakaris
InternetWorks, Inc. - - - - 1,000,000 10,000 (10,000)
---------- ------- --------- ------ ----------- ------- -----------
Balance after recapitalization 9,000,000 9,000 - - 1,000,000 10,000 3,956,126
Stock Issued For:
Cash 155,250 155 96,000 96 - - 184,624
Consulting fees 1,703,200 1,703 100,000 100 - - 306,793
Executive compensation 3,000,000 3,000 - - - - 180,750
Advertising services 20,000 20 - - - - 61,230
504 offering 3,981,800 3,982 537,500 537 - - 466,505
Subscriptions 1,260,000 1,260 - - - - -
Stock exchange program 59,386 59 606,640 607 - - (666)
Treasury stock redemption
Net loss 1998 - - - - - - -
---------- ------- --------- ------ ----------- ------- -----------
BALANCE, SEPTEMBER 30, 1998 19,179,636 $19,179 1,340,140 $1,340 1,000,000 $10,000 $5,155,362
- ---------------------------
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - continued
<CAPTION>
TREASURY STOCK
ACCUMULATED STOCK SUBSCRIPTIONS
DEFICIT AMOUNT RECEIVABLE TOTAL
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 (765,881) $ - $ - 290,990
Stock Issued For:
Cash - - - 43,300
Consulting fees - - - 2,865,409
Advertising services - - - 9,546
Recapitalization Transactions:
Cancellation of KIW, Inc.
stock resulting from
recapitalization - - - -
Pre exchange Big Tex
Common stock outstanding -
Surrender of Common Stock by
50% Shareholder of Big Tex - - - -
Issuance of Common Stock
to Shareholders of Kanakaris
InternetWorks, Inc. - - - -
Issuance of Preferred Stock
to Shareholders of Kanakaris
InternetWorks, Inc. - - - -
------------ ----------- ------------- -----------
Balance after recapitalization (765,881) - - 3,209,245
Stock Issued For:
Cash - - - 184,875
Consulting fees - - - 308,596
Executive compensation - - - 183,750
Advertising services - - - 61,250
504 offering - - - 471,024
Subscriptions - - (1,260) -
Stock exchange program - - - -
Treasury stock redemption - (201,920) - (201,920)
Net loss 1998 (4,056,399) - - (4,056,399)
------------ ----------- ------------- -----------
BALANCE, SEPTEMBER 30, 1998 $(4,822,280) $ (201,920) $ (1,260) $ 160,421
- ---------------------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------
<CAPTION>
COMMON STOCK ADDITIONAL
COMMON STOCK TO BE ISSUED PREFERRED STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- --------- ------ ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Issued For:
Cash 50,000 50 - - - - 12,450
Consulting fees 941,000 941 - - - - 1,221,814
Professional Services 485,000 485 - - - - 413,410
Advertising services 157,600 158 - - - - 173,004
504 & 506 offering 3,976,674 3,980 - - - - 739,531
Common stock to be
issued 1,340,140 1,340(1,340,140) (1,340) - - -
Convertible debt
- financing costs - - - - - - 195,000
Cancelled shares (175,000) (175) - - - - (2,825)
Net loss 1999 - - - - - - -
---------- -------- -------- ------- --------- ------- ----------
BALANCE, SEPTEMBER 30, 1999 25,958,050 $25,958 - - 1,000,000 $10,000 $7,907,746
- --------------------------- ========== ======== ======== ======= ========= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
ACCUMULATED STOCK SUBSCRIPTIONS
DEFICIT AMOUNT RECEIVABLE TOTAL
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Stock Issued For: - - - 12,500
Cash - - - 1,222,755
Consulting fees - - - 413,895
Professional Services - - - 173,162
Advertising services - - - 743,511
504 & 506 offering
- - - -
Common stock to be
issued
- - - 195,000
Convertible debt
- financing costs - - - (3,000)
Cancelled shares (3,541,860) - - (3,541,860)
------------ ----------- ------------- ------------
Net loss 1999
$(8,364,140) $ (201,920) $ (1,260) $ (623,616)
============ =========== ============= ============
BALANCE, SEPTEMBER 30, 1999
- ---------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------
1999 1998
------------ ------------
NET SALES $ 968,758 $ 919,905
COST OF SALES 661,707 481,349
------------ ------------
GROSS PROFIT (LOSS) 307,051 438,556
------------ ------------
OPERATING EXPENSES
Executive compensation 390,988 235,802
Salaries 111,671 279,462
Employee benefits 6,158 6,479
Payroll taxes 20,852 20,184
Consulting fees 1,339,287 3,241,466
Royalties 23,440 20,753
Travel and entertainment 105,649 40,872
Telephone and utilities 43,846 46,172
Marketing & advertising 822,306 98,110
Professional fees 616,282 75,494
Rent 25,459 52,302
Office and other expenses 89,143 24,415
Equipment rental and expense 11,558 7,953
Insurance 20,706 10,979
Auto expense 676 1,500
Depreciation and amortization 33,135 30,214
Bad debts 1,000 300,000
Taxes - other 2,728 1,370
Repairs and maintenance 5,138 2,238
Moving expense - 6,055
Bank charges 3,228 1,610
------------ ------------
TOTAL OPERATING EXPENSES 3,673,250 4,503,430
------------ ------------
LOSS BEFORE INTEREST AND OTHER INCOME (3,366,199) (4,064,874)
------------ ------------
INTEREST & OTHER INCOME (EXPENSE)
Interest income 10,215 8,475
Interest and financing expense (208,641) -
Other income - debt forgiveness 25,607 -
Settlement agreement - attorney,
net of allowance - -
Loss on abandonment of assets (2,842) -
------------ ------------
TOTAL INTEREST & OTHER INCOME
(EXPENSE) (175,661) 8,475
------------ ------------
NET LOSS $(3,541,860) $(4,056,399)
- -------- ============ ============
NET LOSS PER COMMON SHARE-
BASIC AND DILUTED $ (.15) $ (.28)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 22,945,540 14,419,873
============ ============
See accompanying notes to financial statements.
F-7
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,541,860) $(4,056,399)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Amortization of goodwill 26,003 23,352
Depreciation and amortization 7,132 6,862
Other income - debt forgiveness (25,607) -
Write-off of fixed assets 2,842 793
Provision for bad debts 1,000 300,000
Consulting, advertising and compensation
incurred in exchange for common stock 1,756,812 3,428,550
Convertible debt - financing costs 195,000 -
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (35,637) (61,699)
Inventory 10,122 (1,434)
Prepaid expenses (10,813) 11,846
Advances to suppliers 7,839 (7,839)
Interest receivable 14,279 (11,548)
Increase (decrease) in:
Accounts payable and accrued expenses 411,835 103,139
Royalties payable (20,753) 20,753
Deferred revenue - (68,598)
Customer deposits (29,427) 29,427
------------ ------------
Net cash used in operating activities (1,231,233) (282,795)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (30,710) (7,204)
(Increase) decrease in notes
receivable - shareholders and
related parties 36,280 (41,599)
Increase in security deposits (700) -
(Increase)in notes receivable - (300,000)
Cash provided by subsidiary
acquisition - 60,930
------------ ------------
Net cash provided by (used in)
investing activities 4,870 (287,873)
------------ ------------
See accompanying notes to financial statements.
F-8
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 25,000
Proceeds from convertible debt 620,000 -
Proceeds from sale of common stock 4,030 4,498
Proceeds from additional paid in capital 751,981 694,701
Purchase of treasury stock - (201,920)
------------ ------------
Net cash provided by financing
activities 1,376,011 522,279
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 149,648 (48,389)
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 5,415 53,804
------------ ------------
CASH AND CASH EQUIVALENTS -
- ---------------------------
END OF YEAR $ 155,063 $ 5,415
------------ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
- -----------------------------------------------------------------------
The Company has incurred a liability in the total amount of $70,709 in 1999 and
$30,937 in 1998 which is due to the former sole shareholder of the Company's
subsidiary pursuant to the acquisition agreement.
During the year ended September 30, 1999 the Company issued 1,583,600 shares of
common stock for consulting, professional and advertising services having a fair
value of $1,806,812, of which $50,000 was for professional services that were
prepaid at September 30, 1999.
During the year ended September 30, 1998 the Company issued 1,260,000 shares of
common stock in exchange for unpaid subscriptions of $ 1,260, and 4,723,200
shares of common stock for executive compensation, consulting and other services
valued at $3,428,550.
See accompanying notes to financial statements.
F-9
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
(A) Business Organization and Activity
--------------------------------------
Kanakaris Communications, Inc.(formerly Big Tex Enterprises, Inc.)
(the "Company") was incorporated in the State of Nevada on November 1,
1991 The Company develops and supplies internet products, for
electronic commerce, and operates a subsidiary which designs and
installs modular consoles.
(B) Business Combinations
-------------------------
On October 10, 1997 (the "Acquisition Date"), Kanakaris InternetWorks,
Inc. ("KIW") consummated a Stock Purchase Agreement with the
shareholder (the "Seller") of Desience Corporation ("Desience") to
purchase 10,000 common shares representing 100% of its issued and
outstanding common stock in exchange for a 4% royalty on the gross
sales (after collection) of Desience subsequent to the Acquisition
Date, to be paid monthly for as long as Desience remains in business or
its products are sold. Pursuant to APB 16, since the seller has no
continuing affiliation with the Company, the 4% royalty is accounted
for as an increase to goodwill at the date the amount is determinable.
In addition, the Seller shall receive five percent of funds which are
to be allocated to Desience arising from KIW's next securities offering
as a non-refundable advance on the royalty. As of September 30, 1999,
no advances have been given. KIW will hold harmless the Seller from any
claims, causes of action, costs, expenses, liabilities and prior
shareholder advances. Immediately following the exchange, Desience
became a wholly owned subsidiary of KIW. The fair value of the assets
and liabilities acquired pursuant to the acquisition of Desience was
$148,776 and $468,120, respectively, which resulted in goodwill of
$319,344 at the date of acquisition since no trademarks, copyrights,
existing or identified long-term requirement contracts or other
intangibles existed at that date. Additions to goodwill resulting from
the royalty for the years ended September 30, 1999 and 1998 were
$39,772 and $30,937, respectively (See Note 1(I)).
Desience is not a high technology company, but designs and installs
specialized business furniture for a variety of industries utilizing
base designs developed in 1985. No changes have been made or are
contemplated to be made to the basic furniture design, with the
exception of minor additions or accoutrements. Because of the relative
stability of the design of the furniture, management considered the
goodwill attributable to the acquisition to be greater than 10 years.
However, because of the potential for changes to the basic design in
the future, management decided that a life of 20 years was not
appropriate. Consequently, a 15 year life was adopted.
On November 25, 1997, KIW and its stockholders (the ("Stockholders")
consummated an acquisition agreement with Big Tex Enterprises, Inc.
("Big Tex"), an inactive public shell with no recent operations at
that time, whereby the shareholders sold all of their preferred and
common stock, which represented 100% of KIW's issued and outstanding
capital stock, to Big Tex in exchange for 7,000,000 shares (6,000,000
common, 1,000,000 preferred) of Big Tex's restricted stock,
representing 66.67% of the issued and outstanding common stock and
100% of the issued and outstanding preferred stock of Big Tex,
aggregating 75% of the total voting rights (the "Exchange"). Big Tex
was founded in 1991 for the purpose of lawful business or enterprise,
but had been inactive since 1991. Immediately following the exchange,
the Company changed its name to Kanakaris Communications, Inc.
F-10
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
- --------------------------------------------------------------
(B) Business Combinations - (CONT'D)
------------------------------------
Generally accepted accounting principles require that the company
whose stockholders retain the majority interest in a combined business
be treated as the acquirer for accounting purposes. Accordingly, the
Big Tex acquisition was accounted for as an acquisition of Big Tex by
the Company and a recapitalization of the Company. The financial
statements immediately following the acquisition are as follows: (1)
the balance sheet includes the Company's net assets at historical
costs and Big Tex's net assets at historical costs and (2) the
statement of operations includes the Company's operations for the
period presented and Big Tex's operations from November 25, 1997.
(C) Principles of Consolidation
-------------------------------
The accompanying consolidated financial statements include the
accounts of the Company, and its wholly owned subsidiaries Kanakaris
InternetWorks Inc., and Desience. All significant intercompany
balances and transactions have been eliminated in consolidation.
(D) Use of Estimates
--------------------
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(E) Cash and Cash Equivalents
-----------------------------
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
F-11
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
- --------------------------------------------------------------
(F) Property and Equipment
--------------------------
Property and equipment are stated at cost and depreciated using the
declining balance method over the estimated economic useful life of 5
to 7 years. Maintenance and repairs are charged to expense as incurred.
Major improvements are capitalized. Depreciation expense for the years
ended September 30, 1999 and 1998 was $7,132 and $6,812, respectively.
(G) Inventories
---------------
Inventories at September 30, 1998 consisted of parts, finished goods,
and collectibles and were recorded at the lower of cost or market, cost
being determined using the first-in, first-out method.
(H) Organization Costs
----------------------
Organization costs, which are included in other assets, are being
amortized over 60 months on a straight line basis. Amortization expense
for the years ended September 30, 1999 and 1998 was $600 respectively.
(I) Goodwill
------------
Goodwill arising from the acquisition of Desience, as discussed in Note
1 (B) - Business Combinations, is being amortized on a straight-line
basis over 15 years. Amortization expense for the years ended September
30, 1999 and 1998 was $26,003 and $23,352, respectively.
(J) Earnings Per Share
----------------------
Earnings per share are computed using the weighted average of common
shares outstanding as defined by Financial Accounting Standards No.
128, "Earnings per Share". There were no common stock equivalents
outstanding at September 30, 1998. The assumed exercise of common share
equivalents was not utilized since the effect was anti-dilutive.
(K) Income Taxes
----------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events
other than enactments of changes in the tax law or rates. Any available
deferred tax assets arising from net operating loss carryforwards has
been offset by a deferred tax valuation allowance on the entire amount.
(See Note 12).
F-12
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
- --------------------------------------------------------------
(L) Concentration of Credit Risk
--------------------------------
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk or cash and cash equivalents.
(M) New Accounting Pronouncements
---------------------------------
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components, and is effective for fiscal
years beginning after December 15, 1997. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers, and is effective for financial statements for periods
beginning after December 15, 1997. Statement No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits" revises
employers' disclosure requirements about pension and other
postretirement benefit plans and is effective for fiscal years
beginning after December 15, 1997. Statement No 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by Statement
No. 137, establishes accounting and reporting standards for derivative
instruments and related contracts and hedging activities. This
statement is effective for all fiscal quarters and fiscal years
beginning after June 15, 2000. The Company believes that its adoption
of these pronouncements will not have a material effect on the
Company's financial position or results of operations.
(N) Stock Options
-----------------
In accordance with Statement of Financial Accounting Standards No. 123
(FAS No. 123), the Company has elected to account for stock options
issued to employees under Accounting Principles Board Opinion No. 25
("APB Opinion No. 25") and related interpretations (See Note 9).
F-13
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 2 - NOTES RECEIVABLE - SHAREHOLDERS AND RELATED PARTIES
- ------------------------------------------------------------
<TABLE>
The following is a summary of notes receivable at September 30, 1999 and 1998:
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes receivable - Shareholder, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually on
each subsequent June 30. Principal payments are due beginning December 31, 1998
when one-fifth of the outstanding amount is due. Subsequent payments are due
one-fifth each December 31 until February 26, 2002 when all
outstanding principal and interest is due. $ 56,320 $ 70,400
Notes receivable - Shareholder, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually on
each subsequent June 30. Principal payments are due beginning December 31, 1998
when one-fifth of the outstanding amount is due. Subsequent payments are due
one-fifth each December 31 until February 26, 2002 when all
outstanding principal and interest is due. 49,920 62,400
Notes receivable - Related Party, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually on
each subsequent June 30. Principal payments are due beginning December 31, 1998
when one-fifth of the outstanding amount is due. Subsequent payments are due
one-fifth each December 31 until February 26, 2002 when all
outstanding principal and interest is due. 23,198 28,998
Notes receivable - Related Party, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually on
each subsequent June 30. Principal payments are due beginning December 31, 1998
when one-fifth of the outstanding amount is due. Subsequent payments are due
one-fifth each December 31 until February 26, 2002 when all
outstanding principal and interest is due. 15,680 19,600
F-14
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 2 - NOTES RECEIVABLE - SHAREHOLDERS AND RELATED PARTIES - (CONT'D)
- -----------------------------------------------------------------------
1999 1998
---------- ----------
Note receivable - Shareholder, unsecured. Interest at 8%, principal and interest
is payable in five annual installments of $38,250 beginning September 30, 1998.
The note was prepaid through a portion of the year 2000 101,915 101,915
---------- ----------
Total Notes Receivable 247,033 283,313
Less: Current maturities 61,695 36,280
---------- ----------
TOTAL NOTES RECEIVABLE - LESS CURRENT
- -------------------------------------
MATURITIES $ 185,338 $ 247,033
---------- ========== ==========
</TABLE>
The aggregate amount of notes receivable maturing in each of the three years
subsequent to September 30, 1999 is as follows:
For the year ending September 30, 2000 $ 61,695
2001 74,529
2002 110,809
----------
$ 247,033
==========
NOTE 3 - NOTE RECEIVABLE
- ------------------------
As a result of certain actions by its former securities attorney, which
led, among other things, to the Company's recognition of a bad debt in
the year ended September 30, 1998 of $300,000, the Company entered into
a settlement agreement with the former attorney and received a $250,000
non-interest bearing promissory note dated February 3, 1999. The note
is payable in monthly installments of $20,833 commencing February 15,
1999. The note is currently in default and the Company has recorded a
bad debt allowance on the entire amount of the note as of September 30,
1999.
The Company was negotiating with its former attorney relating to a
further financial settlement concerning the actions of the attorney.
The Company's efforts to informally resolve this matter proved to be
unsuccessful and the Company intends to vigorously pursue its claims.
(See Note 7(B)).
F-15
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 4 - NOTE PAYABLE
- ---------------------
At September 30, 1998, the Company had a note payable, in the original
amount of $25,000 dated June 25, 1998. Interest accrued at 5% per month
that was due and payable on the retirement of the note. The note and
accrued interest was satisfied on May 26, 1999 under a settlement
agreement which resulted in a forgiveness of debt in the amount of
$25,607.
NOTE 5 - PREFERRED STOCK
- ------------------------
The Company has authorized the issuance of 5,000,000 shares of
preferred stock. The 1,000,000 shares of preferred stock issued in
connection with the Big Tex business combination discussed in Note 1
(B) are convertible to common stock at an initial conversion rate of
one share of common stock per share of Class A Preferred. The preferred
stock also has 3 to 1 voting rights over all common stock.
In July 1999, the board of directors approved a resolution to change
the voting rights from 3 to 1 to a 20 to 1 voting preference. This
change will need to be approved by a majority of the common
stockholders.
NOTE 6 - PRIVATE PLACEMENT
- --------------------------
June 15, 1998, the Company prepared an Offering Memorandum under
Securities and Exchange Commission Regulation D, Rule 504 promulgated
thereunder to raise $625,000 by offering shares of the Company's common
stock. The offering was terminated on September 28, 1998 and the
Company raised $471,024 from such offering.
On December 3, 1998 and February 18, 1999 the Company completed two
offerings under the Securities and Exchange Commission Regulation D,
Rule 504. In the first offering, 2,892,326 shares were sold to two
investors at $.06 per share for a total of $173,540. In the second
offering 475,000 shares were sold to one investor at $.50 per share for
a total of $237,500. On June 17, 1999 the Company initiated a
Regulation D, Rule 504 offering, but on July 23, 1999, the Company's
Board of Directors voted to cancel the June 17 offering.
The Company has also issued securities under Regulation D, Rule 506, to
various investors at prices ranging from $.32 to $.50 during the year
ended September 30, 1999.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
(A) Leases
----------
On October 8, 1998 the Company, as subtenant, entered into a
F-16
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- -------------------------------------------------
(A) Leases - (Cont'd)
---------------------
sublease agreement with the existing tenant commencing on October 15,
1998. The term of the sublease is through and including the end of the
original term of the tenant's lease of the premises, which is August
20, 2000. The monthly rent on this sublease is $1,512 through August
20, 1999 at which time it increased to $1,579 a month until August 20,
2000. Future annual minimum rentals under this sublease agreement for
the year ended September 30, 1999 is $ 17,369.
(B) Legal Actions
-----------------
On September 15, 1999, an individual filed a complaint against the
Company and the executive who is the Chairman of the Board, President
and Chief Executive Officer in Los Angeles Superior Court alleging
breach of contract and fraud. The fraud claim was based primarily on
alleged misrepresentation and concealment involving a consulting
agreement between the Company and the individual. The individual
alleged that he is entitled to certain stock options, of which 75% of
the option price allegedly is already deemed paid in exchange for
services allegedly rendered to the Company. The individual is
attempting to exercise the options for the purchase of a certain number
of shares to which he claims to be entitled pursuant to the agreement.
The Company has engaged counsel to analyze the complaint and vigorously
defend the Company against all of the claims. Company's counsel has
filed an action with the court to dismiss the Plaintiff's complaint
because it is without merit.
On October 14, 1999, an Illinois Corporation filed suit against the
Company and the Company's stock transfer agent and registrar, in the
Circuit Court of Cook County, Illinois. The case was removed to the
United States District Court for the Northern District of Illinois,
Eastern Division. In the complaint, the Illinois Corporation sought
damages in excess of $50,000 under breach of contract and various other
state law theories in connection with the Company's unwillingness to
permit them to transfer shares of the Company's common stock held by
the Illinois Corporation. The Company believes that the shares were
wrongfully converted by a predecessor to the Illinois Corporation. The
Company engaged counsel to analyze the complaint, vigorously defend the
Company against all of the Illinois Corporation's claims and pursue any
appropriate counterclaims the Company may have.
On August 5, 1999, the Company filed a Complaint in the Los Angeles
Superior Court against its former securities attorney along with 20
unnamed Defendants claiming damages for breach of contract, conversion
fraud and deceit and negligence. This Complaint arises out of the
alleged transfer of certain funds without the Company's authorization
F-17
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- -------------------------------------------------
(B) Legal Actions - (Cont'd)
----------------------------
to an unknown entity by named and possible unnamed Defendants. The
Company intends to vigorously pursue this action until its resolution
either through a jury trial or by fashioning an appropriate settlement
agreement.
In the normal course of business, there may be various other legal
actions and proceedings pending which seek damages against the Company.
Management believes that the amounts if any, that may result from these
claims, will not have a material adverse effect on the financial
statements.
(C) Securities and Exchange Commission Informal Inquiry
-------------------------------------------------------
In August 1998, the Securities and Exchange Commission ("SEC") began an
informal inquiry relating to the sales of shares of the Company in 1996
and 1997 to the former shareholders of Kanakaris InternetWorks, Inc.
("KIW") (See Note 1(B)). Approximately 6,000,000 shares were sold to
investors of KIW. Named in the inquiry as defendants were the Company
and its President and former Vice President.
On August 9, 1999, a final judgement of permanent injunction and other
relief was entered into in connection with the execution by each
defendant of a consent to entry of injunction and the payment by each
of the President and former Vice President of a $25,000 civil penalty.
Without admitting or denying any guilt involving the violations cited
in the decrees, the President, former Vice President and the Company
each have agreed pursuant to the consents to entry of injunction not to
take any actions that would violate federal securities laws in
connection with the offer, purchase or sales of securities.
(D) Year 2000 Issues
--------------------
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches.
The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the
two-digit year value to 00. The issue is whether computer systems will
properly recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail.
The Company uses a standard off the shelf accounting software package
for all of its accounting requirements. Management has contacted the
software vendor and determined that the accounting software is Year
2000 compliant. All internal management software is Microsoft based and
F-18
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- -------------------------------------------------
(D) Year 2000 Issues - (Cont'd)
management continually monitors the Year 2000 status of such software.
Management has verified Year 2000 status with its primary vendors and
has not identified any Year 2000 issues with those vendors. Costs of
investigating internal and external Year 2000 compliance issues have
not been material to date. As a result, management believes that the
effect of investigating and resolving Year 2000 compliance issues on
the Company will not have a material effect on the Company's future
financial position or results of operations.
In addition to the effect of Year 2000 issues on the Company's
accounting and management systems, Year 2000 issues may effect the
Company's products as the products are primarily computer related. The
Company's products have been developed and tested with regard to Year
2000 compliance. All products were deemed to be Year 2000 compliant.
The costs of such development and testing and validating were minimal
and absorbed as part of the Company's normal quality control
procedures.
(E) Letter of Intent
--------------------
On January 26, 1999, the Company entered into a Letter of Intent with
Timothy L. Waller to develop, design, and maintain two Real Estate Web
Sites: (1) www.brea.com (Bank Real Estate Auctions) is intended to be
used to sell bank owned real estate via the internet in an auction like
atmosphere and (2) www.fsbomls.com (For Sale By Owner Multiple Listing
Service) is intended to enable real estate owners to market and sell
their property without the services of a professional real estate
broker. The two parties intended to sign a formal agreement and are
still in negotiations as of the date of this report.
(F) License Agreement
---------------------
On February 18, 1999, the Company entered into a License Agreement
("Agreement") with ION Systems, Inc. ("ION"), a Missouri corporation.
The Agreement is through December 31, 2004, and thereafter will be
renewed automatically for additional renewal terms of five years each,
ending on December 31 of each fifth year. Under the terms of the
Agreement, ION grants to the Company a license to use its products, the
E*Web and the X*Maker computer software enabling the secure downloading
and viewing of web sites, for or in connection with the Company's web
sites. The two parties agreed that the software may be used solely for
the publishing, displaying, promoting, marketing, offering and selling
for a fee of certain specified book categories as well as of products
or services listed in the books published. The aforementioned
activities are meant to be offered directly to customers and end users
using the facilities of a web site. No geographic or territorial
F-19
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- ------------------------------------------------
(F) License Agreement - (Cont'd)
--------------------------------
restrictions apply to the use of the software. At the option of the
Company to be exercised until August 30, 1999, the license with regard
to E*Web shall be exclusive to the Company for a license fee of
$1,000,000 (See Below). The agreed fee for each book conversion
performed by ION will be $100, and the royalties for each book sale and
product sale shall be 12% and 5%, respectively, of the gross revenue.
Furthermore, ION shall have the right to buy 100,000 shares of the
Company's common stock at a price of $0.30 per share one time at any
time between June 1, 1999 and December 31, 2005.
The Company did not exercise the exclusive $1,000,000 license option
contained in the agreement it has with ION, but the Company continues
to use Ion Systems, Inc. products and computer software, under the
terms contained in the Agreement dated February 18, 1999.
(G) Service Agreements
----------------------
On April 15, 1999, the Company entered into a six month agreement with
Wall Street Advancement, Inc. (WSA), whereby WSA would locate and
introduce the Company to fund managers, analysts, selected retail and
institutional brokers and introduce the Company to investment writers.
The Company will provide WSA with a three year option to purchase
300,000 shares of Rule 144 stock with "piggy back" registration rights
at three dollars and fifty cents per share. The first 100,000 shares
are due upon signing, the next 100,000 shares are due in the third
month, and the final 100,000 shares are due in the fifth month. The
Company also agreed to allocate thirty thousand dollars of cash as well
as sixty thousand shares of Rule 144 stock with "piggy back"
registration rights to Wall Street Advancement, Inc. As of June 30,
1999, no services had been provided. In July of 1999, there was a
verbal conversation with representatives of the Wall Street Advancement
group wherein, the Company verbally requested to have the service
agreement placed on hold. As of September 30, 1999 no stock or stock
options have been issued under this agreement and therefore no
compensation expense has been recognized under SFAS No. 123.
On April 20, 1999, the Company entered into a one year service
agreement (effective June 15, 1999) with GEO Publishing, Inc. ("GEO"),
whereby GEO will provide their "emblazed" technology for their web
page, as well as weekly assistance in live broadcasting over the
internet. In consideration for GEO's services, the Company will provide
five hours of audio content weekly and pay a monthly fee of $7,500. GEO
will pay the Company 50% of any net revenues actually received by GEO
in connection with sales placed at the Company's broadcast page. The
Company is in the process of re-negotiating the terms of the service
F-20
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- ------------------------------------------------
(G) Service Agreements - (Cont'd)
---------------------------------
contract with GEO and no consideration as yet been exchanged between
the parties.
(H) Internet Data Center Services Agreements
--------------------------------------------
Effective June 27, 1999, the Company entered into an agreement with
Exodus Communications, Inc. to provide the Company with internet data
services. Under the agreement, Exodus Communications, Inc. will perform
these services under a discounted pricing arrangement, a schedule of
which is incorporated into the agreement. In consideration for this
pricing arrangement, Exodus Communications, Inc. will receive some
equity in the form of common stock on a par basis with the discounts
extended, to be determined.
On August 23, 1999, the Company entered into a one-year agreement with
ScreamingMedia, Inc. to receive daily customized content update for the
Company's web site. Under the terms of this agreement, the Company will
pay ScreamingMedia $12,000, of which $3,000 was paid in August 1999.
The balance of $9,000 is payable in twelve monthly installments of
$750.
Effective August 9, 1999, the Company entered into an agreement with
Microsoft Corporation whereby Microsoft will promote certain of the
Company's web sites in consideration for the Company's promotion of
specified Microsoft Windows Media Technology on the Company's web sites
through December 30, 2001. No expense or income has been recorded by
the Company for the year ended September 30, 1999 relating to this
agreement because under APB No. 29, Accounting For Non-monetary
Transactions, the fair values of such web site promotions are not
determinable within reasonable limits.
(I) Internet Content Provider Agreement
---------------------------------------
Effective August 1, 1999, the Company entered into an agreement with
InXsys Corporation (InXsys) granting the Company the right to
incorporate InXsys's Aggregated ClassiFIND On-Line Classifieds, Buy
Sell Bid On-Line Personals Co-Branded Services as Revenue-Generating
and Traffic-Building Content within the Company's Website by placement
of one or more hotlinks and/or banners to the InXsys sites. Under the
terms of this agreement, the Company shall receive a Referral
Commission equal to a percentage, as defined in the agreement, of the
net user fees collected.
F-21
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- ------------------------------------------------
(J) Letter of Intent - Financial Services
-----------------------------------------
On September 29, 1999, the Company entered into a Letter of Intent with
National Investment Resources, LLC ("NIR") whereby NIR intends to
structure investment and funding vehicles amounting to $10,000,000 for
the Company in accordance with the rules and regulations of the
Securities and Exchange Commission. Under the terms of this Letter of
Intent, NIR will use its best efforts to cause these investments to be
funded. In exchange for these services, the Company agrees to
compensate NIR from the proceeds of the investments in the amount of
10% of the gross amount funded to the Company and 3% in non-accountable
expenses. As a method of funding the Company, in connection with this
agreement, NIR acted as nominee for various investors who purchased
Convertible Debentures from the Company (See Note 11B).
NOTE 8 - REVOLVING LINE OF CREDIT
- ---------------------------------
On February 25, 1999, the Company entered into a Revolving Line of
Credit Agreement ("the Agreement") with Alliance Equities Inc.
("Alliance"), a Florida-based venture capital firm which expires
December 10, 2001. Under the terms of the Agreement, Alliance will make
available a $7 million revolving line of credit with interest on the
unpaid principal at 10% per annum. The funds from the line of credit
will enable the Company to pursue current Internet opportunities and
commerce development. Under the terms of the Agreement the Company may
draw up to $500,000 per month on the total line of credit upon written
request by the Company to the Lender. Additionally the parties have
agreed that any portion of the indebtedness may be paid back by the
Company either with cash or by the issuance of common stock.
Furthermore, in a separate Memorandum of Agreement the two parties
agreed that Alliance will provide ongoing consulting services to the
Company including, but not limited to, strategic growth advice and
introductions, marketing advice, and business ideas. Alliance will be
compensated for these services at the option of the Company either in
cash, or through the issuance of stock or credit towards the purchase
of stock. See Note 11(A) for issuance of convertible debt to Alliance.
NOTE 9 - STOCK INCENTIVE PLAN
- -----------------------------
On January 6, 1999, the Company's Board of Directors created a stock
option plan, entitled the 1999 Stock Incentive Plan (the "Plan") which
was adopted by the Board of Directors on July 9, 1999. The incentive
portion of the plan requires shareholder approval. The plan was
developed to provide a means whereby designated officers, employees and
certain non-employee directors of the Company and its Subsidiaries may
be granted incentive or non-qualified stock options to purchase common
stock of the Company.
F-22
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 9 - STOCK INCENTIVE PLAN - (CONT'D)
- ----------------------------------------
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for options issued under the plan as of September 30, 1999.
Had compensation cost for the Company's stock-based compensation plan
been determined on the fair value basis at the grant dates for awards
under that plan, consistent with Statement of Accounting Standards No
123, "Accounting for Stock Based Compensation" (Statement No. 123), the
Company's net loss for the year ended September 30, 1999 would have
been increased to the pro-forma amounts indicated below.
Net loss As reported $ (3,541,860)
Pro forma $ (3,844,673)
Net loss per share
(basic and diluted) As reported $ (0.15)
Pro forma $ (0.17)
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net loss for future years due
to, among other things, the effects of vesting.
The Plan authorizes options up to an aggregate of 2,750,000 shares of
the Company's common stock, all of which have been reserved as of
January 6, 1999. Under the terms of the Plan, the Company may grant
incentive and nonqualified stock options to officers, employees and
non-employee directors. Non-employee directors may only be granted
nonqualified stock options. The exercise price of the stock options
must equal at least 100% of the fair market value of the common stock
at the date of grant and must equal at least 110% of the fair market
value of the common stock at the date of grant in the case of incentive
stock options granted to employees owning more than ten percent of the
total combined voting power of all classes of stock of the Company. The
term of the stock options shall be ten years or such shorter period as
determined by the Compensation Committee (the "Committee") from the
date of grant. In the case of incentive stock options which are granted
to employees owning more than ten percent of the total voting power of
all classes of stock of the Company, the term may not exceed five
years. Incentive stock options are exercisable over their term in such
periodic installments as determined by the Committee. Nonqualified
stock options granted to employees of the Company are exercisable
immediately from the date of grant. Nonqualified stock options that are
granted to non-employee directors have a term of ten years from the
date of grant and are first exercisable six months and one day from the
later of the date of grant or the date of shareholder approval of the
Plan.
F-23
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 9 - STOCK INCENTIVE PLAN - (CONT'D)
- ----------------------------------------
For financial statement disclosure purposes the fair market value of
each stock option granted during 1999 was estimated on the date of
grant using the Black-Scholes Model in accordance with Statement No.
123 using the following weighted-average assumptions: expected dividend
yield 0%, risk-free interest rate of 4.56%, volatility of 248% and
expected term of three years.
A summary of the Company's Stock Option Plan as of September 30, 1999
and changes during the year is presented below:
Weighted
Number of Average
Options Exercise Price
------- --------------
Stock Options
Balance at beginning of period - -
Granted 2,350,000 $ 0.22
Exercised - -
Forfeited - -
--------- ------
Balance at end of period 2,350,000 $ 0.22
========= ======
Options exercisable at end
of period 1,300,000 $ 0.25
========= ======
Weighted average fair value
of options granted during
the period $ 0.17
======
The following table summarizes information about stock options
outstanding at September 30, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise At Sept. 30 Contractual Exercise At Sept. 30 Exercise
Price 1999 Life Price 1999 Price
- -------- ----------- ---------- -------- ------------ ---------
$0.18 1,050,000 6.87 Years $ 0.18 - $ -
$0.25 1,300,000 9.25 $ 0.25 1,300,000 $ 0.25
--------- ---------
$0.18-0.25 2,350,000 8.19 $ 0.22 1,300,000 $ 0.25
========= =========
NOTE 10 - COMMON STOCK OFFERING
- -------------------------------
On August 10, 1999, the Company submitted an initial registration
statement under Form SB-2 whereby the Company was offering 5,000,000
shares of common stock and common stock options.
On November 19, 1999, the Company submitted an amended registration
statement Form SB-2 whereby the Company is registering 1,783,334
F-24
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 10 - COMMON STOCK OFFERING - (CONT'D)
- ------------------------------------------
shares of common stock that may be issued upon conversion of their 10%
Convertible Subordinated Debentures that were issued in two private
placement transactions not involving a public offering (See Note 11).
On June 28, 1999, the Company had entered into a Financial Consulting
Agreement with RH Investment Corporation, as an advisor, to structure
and formalize an offering of the Company's securities pursuant to the
SB-2 registration statement filed with the Securities and Exchange
Commission as previously discussed above. Under the Agreement, the
Company and Advisor agreed to, (i) a strategic alliance wherein the
advisor would assist the Company in funding its ongoing capital
requirements, (ii) provide the Company with investment banking services
relating to financial planning and capital sourcing and (iii) seek to
form a non-exclusive underwriting syndicate for the Company's SB-2
offering. On September 30, 1999, the Company exercised its right to
terminate this contract with a written 30-day notice as provided for
under the terms of this agreement.
NOTE 11 - CONVERTIBLE DEBT
- --------------------------
(A) Alliance Equities
---------------------
In order to provide working capital and financing for the Company's
expansion, on August 5, 1999 the Company entered into an agreement with
Alliance Equities ("the Purchaser") whereby the Purchaser will acquire
up to $1.2 million of the Company's 10% Convertible Subordinated
Debentures, due August 4, 2000. Under the agreement the Purchaser will
make the funds available to the Company and the Company will draw funds
and issue Debentures to the Purchaser as the Company requires funding.
The Debentures and the Company's common stock on conversion of the
Debentures have not been registered, therefore the Debentures or the
shares of stock must be registered before they can be subsequently
resold. (See Note 10)
The Purchaser may convert the debenture and accrued interest to common
stock at a conversion price of $0.60 per shares ("fixed conversion
price") at any time after the issuance date or automatically at the
earlier of (i) an effective date of an IPO where the Company raises at
least $5,000,000 from the sale of common stock or (ii) a quote or list
date on a natural exchange or NASDAQ with a bid price of at least
$5.00.
The debenture contains a contingency provision whereby, if the Company
issues common stock at a price less than both the fixed conversion
price and the then market price on the date of issuance, the fixed
conversion price shall be adjusted as stipulated in the agreement.
F-25
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 11 - CONVERTIBLE DEBT - (CONT'D)
- -------------------------------------
(A) Alliance Equities - (Cont'd)
--------------------------------
Pursuant to the Rules and Regulations of the Securities and Exchange
Commission regarding beneficial conversion features, the Company has
expensed as financing costs any excess of the fair market value of the
common stock at the debenture issuance date over the fixed conversion
price, which amounted to $130,000. There is no amortization period for
these financing costs since the debentures are convertible immediately
upon issuance.
As of September 30, 1999, the Company has issued $520,000 of these
convertible debentures to Alliance Equities.
(B) NIR Group - Nominee
-----------------------
In order to provide working capital and financing for the Company's
expansion, on September 27, 1999 the Company entered into an agreement
with NIR Group as nominee for various investors ("the Purchaser")
whereby the Purchaser will acquire up to $680,000 of the Company's 10%
Convertible Subordinated Debentures, due September 29, 2000.
The Debentures and the Company's common stock on conversion of the
Debentures have not been registered, therefore the Debentures or the
shares of stock must be registered before they can be subsequently
resold. (See Note 10)
The Purchaser may convert the debenture and accrued interest to common
stock at a conversion price of $0.60 per shares ("fixed conversion
price") at any time after the issuance date or automatically at the
earlier of (i) an effective date of an IPO where the Company raises at
least $5,000,000 from the sale of common stock or (ii) a quote or list
date on a natural exchange or NASDAQ with a bid price of at least
$5.00.
The debenture contains a contingency provision whereby, if the Company
issues common stock at a price less than both the fixed conversion
price and the then market price on the date of issuance, the fixed
conversion price shall be adjusted as stipulated in the agreement.
Pursuant to the Rules and Regulations of the Securities and Exchange
Commission regarding beneficial conversion features, the Company has
expensed as financing costs any excess of the fair market value of the
common stock at the debenture issuance date over the fixed conversion
price, which amounted to $65,000. There is no amortization period for
these financing costs since the debentures are convertible immediately
upon issuance.
F-26
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 11 - CONVERTIBLE DEBT - (CONT'D)
- -------------------------------------
(B) NIR Group - Nominee - (Cont'd)
----------------------------------
As of September 30, 1999, the Company issued $100,000 of these
convertible debentures to a member of the NIR Group (See Note 13 for
subsequent proceeds from the sale of convertible debentures).
NOTE 12 - INCOME TAXES
- ----------------------
The Company's tax expense differs from the "expected" tax expense
(benefit) for the year ended September 30, 1999 (computed by applying
the Federal corporate tax rate of 34 percent to loss before taxes as
follows:
Computed "expected" tax (benefit) $(589,000)
Change in valuation allowance 589,000
---------
$ -
=========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at September 30, 1999
are as follows:
Deferred tax assets:
Net operating loss carry-forward $ 875,500
---------
Total gross deferred tax assets 875,500
Less valuation allowance 875,500
---------
$ -
=========
At October 1, 1998, the valuation allowance was $286,500. The net
change in the valuation allowance during the year ended September 30,
1999 was an increase of $589,000. As of September 30, 1999, the Company
has net operating loss carryforwards in the aggregate of $2,415,000
which expire in various years through 2019.
NOTE 13 - SUBSEQUENT EVENTS
- ---------------------------
On October 21, 1999, the Company entered into an agreement with
eConnect to enter into a joint venture and strategic alliance to be
called Internet Cash Programming (ICP). ICP will enable the consumer
the ability to purchase programming by Same-as-Cash, or by Enhanced
Credit Card payments. ICP shall be formed as a Nevada Corporation and
shall authorize 1,000,000 shares of stock of which the Company will
receive 400,000 shares, eConnect will receive 400,000 shares and
200,000 shares will remain in ICP Treasury. The Company shall retain
managing control of ICP. All profits of ICP will be equally split
between eConnect and the Company. The stated purpose of eConnect and
the Company is to bring ICP public by September 2000.
F-27
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 13 - SUBSEQUENT EVENTS - (CONT'D)
- --------------------------------------
On November 1, 1999 the Company signed a Memorandum of Understanding
with SyCoNet.Com, Inc. ("SyCoNet"). SyCoNetwill make available all
properties which it has internet online distribution rights to, both
now and in the future, for direct over-the internet delivery by the
Company. The Company will incur encoding and bandwidth charges for
those properties which it exercises its option to deliver over the
Internet, and will pay SyCoNet 70% of the online access gross fees and
25% of the product specific gross advertising fees pertaining to this
product.
On November 9, 1999, the Company signed a Memorandum of Understanding
with Lain International ("Lain"). Lain will make available all Spanish
language, Spanish dubbed and Spanish sub-titled films for which it has
internet distribution rights to the Company. The Company will create a
KKRS web channel devoted exclusively to these titles. The Company will
maintain web visit status, accounting, and will pay Lain its royalties
on at least a quarterly basis, an amount of 50% of the gross share of
advertising, subscription and pay-per-view fees for the channel devoted
to Lain films, minus 50% of encoding, bandwidth and advertising
charges.
On November 17, 1999, and effective December 7, 1999, the Company
entered into an agreement with Microsoft Corporation ("Microsoft").
Microsoft will assist the Company with the development of an
audio/video enhanced Website which delivers timely and relevant
audiovisual content using Windows Media Technologies in a broadband
network intrastructure.
In October and November 1999, the Company received an additional
$378,500 in proceeds, net of commissions, from the sale of Convertible
Debentures by the NIR Group.
NOTE 14 - SEGMENT INFORMATION
- -----------------------------
As discussed in Note 1(A) the Company's operations are classified into
two reportable business segments: Kanakaris Communications, Inc. which
supplies internet products for Electronic Commerce and Desience
Corporation which designs and installs modular consoles primarily for
various US Government Agencies. Both of the Company's business segments
have their headquarters and major operating facilities located in the
United States. The principal markets for the Company's products are in
the United States. There were no inter-segment sales or purchases.
Financial information by business segment is summarized as follows:
F-28
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
---------------------------------
NOTE 14 - SEGMENT INFORMATION - (CONT'D)
- ----------------------------------------
INTERNET MODULAR
COMMERCE CONSOLES TOTAL
-------- -------- -----
1999
----
REVENUES $ 31,162 $ 937,596 $ 968,758
SEGMENT PROFIT (LOSS) (3,692,570) 150,710 (3,548,860)
TOTAL ASSETS 738,435 261,868 1,000,303
ADDITIONS TO LONG-
LIVED ASSETS 30,710 - 30,710
DEPRECIATION AND
AMORTIZATION 32,165 970 33,135
INTERNET MODULAR
COMMERCE CONSOLES TOTAL
-------- -------- -----
1998
----
REVENUES $ 89,783 $ 830,122 $ 919,905
SEGMENT PROFIT (LOSS) (4,004,486) (51,913) (4,056,399)
TOTAL ASSETS 635,291 152,679 787,970
ADDITIONS TO LONG-
LIVED ASSETS 7,204 - 7,204
DEPRECIATION AND
AMORTIZATION 27,906 2,308 30,214
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Kanakaris Communications, Inc.
We have audited the accompanying consolidated balance sheets of Kanakaris
Communications, Inc. and Subsidiaries (formerly Kanakaris InternetWorks, Inc.
and Subsidiary) as of September 30, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for the year ended September 30, 1998 and for the period from
February 25, 1997 (inception) to September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kanakaris
Communications, Inc. and Subsidiaries (formerly Kanakaris InternetWorks, Inc.
and Subsidiary) as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for the year ended September 30, 1998 and for
the period from February 25, 1997 (inception) to September 30, 1997 in
conformity with generally accepted accounting principles.
/s/ WEINBERG & COMPANY, P.A.
Boca Raton, Florida
March 10, 1999 (Except for
Notes 1(B) and 6(B) as to
which the date is September 21, 1999)
F-30
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
---------------------------
ASSETS
------
1998 1997
---------- ----------
CURRENT ASSETS
Cash $ 5,415 $ 53,804
Accounts receivable 118,473 -
Inventory 10,122 -
Advances to suppliers 7,839 -
Current maturities of notes
receivable-shareholders and
related parties 36,280 39,160
Interest receivable 16,683 5,135
---------- ----------
Total Current Assets 194,812 98,099
---------- ----------
PROPERTY AND EQUIPMENT
Furniture and equipment 22,631 8,044
Less: Accumulated depreciation (6,184) (1,584)
---------- ----------
Total Property and Equipment 16,447 6,460
---------- ----------
OTHER ASSETS
Notes receivable - shareholders and
related parties - non-current 247,033 202,554
Organization costs - net 2,050 2,650
Security deposits 700 -
Goodwill - net of amortization 326,928 -
---------- ----------
Total Other Assets 576,711 205,204
---------- ----------
TOTAL ASSETS $ 787,970 $ 309,763
- ------------ ========== ==========
See accompanying notes to financial statements.
F-31
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1998 1997
---------- ----------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 521,432 $ 18,773
Notes payable 25,000 -
Due to former shareholder of subsidiary 30,937 -
Customer deposits 29,427 -
---------- ----------
Total Current Liabilities 606,796 18,773
---------- ----------
LONG-TERM LIABILITIES
Royalties payable 20,753 -
---------- ----------
Total Liabilities 627,549 18,773
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
in 1998 and 1997; 5,000,000 and
1,697,280 shares authorized in
1998 and 1997; 1,000,000 Class A Convertible
Preferred and 1,697,280 Preferred Stock
issued and outstanding in 1998 and 1997 10,000 16,973
Common stock, $0.001 and $0.01 par
value in 1998 and 1997; 100,000,000
and 3,302,720 shares authorized in
1998 and 1997; 19,179,636 issued and
19,080,612 outstanding in 1998; 2,802,154,
shares issued and outstanding in 1997 19,179 28,022
Common shares to be issued,
1,340,140 1,340 -
Additional paid-in capital 5,155,362 1,011,876
Accumulated deficit (4,822,280) (765,881)
Less subscriptions receivable
(1,260,000 shares, common) (1,260) -
---------- ----------
Total paid-in capital and
retained earnings 362,341 290,990
Less cost of treasury stock
(99,024 shares, common) (201,920) -
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 160,421 290,990
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 787,970 $ 309,763
========== ==========
See accompanying notes to financial statements.
F-32
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND FOR THE
PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO SEPTEMBER 30, 1997
---------------------------------------------------------------
1998 1997
------------ ------------
NET SALES $ 919,905 $ 8,475
COST OF SALES 481,349 -
------------ ------------
GROSS PROFIT 438,556 8,475
------------ ------------
OPERATING EXPENSES
Executive compensation 235,802 -
Salaries 279,462 -
Employee benefits 6,479 -
Payroll taxes 20,184 -
Consulting fees 3,241,466 453,841
Royalties 20,753 -
Development costs - 85,253
Travel and entertainment 40,872 20,333
Telephone and utilities 46,172 18,656
Marketing 27,384 14,717
Professional fees 75,494 12,027
Rent 52,302 11,450
Office supplies and expense 10,703 9,185
Equipment rental and expense 7,953 4,279
Insurance 10,979 4,251
Auto expense 1,500 2,000
Depreciation and amortization 30,214 1,934
Provision for bad debt 300,000 -
Taxes - other 1,370 -
Repairs and maintenance 2,238 1,093
Other expenses 13,712 -
Moving expense 6,055 -
Advertising 70,726 140,472
Bank charges 1,610 -
------------ ------------
TOTAL OPERATING EXPENSES 4,503,430 779,491
------------ ------------
LOSS BEFORE INTEREST INCOME (4,064,874) (771,016)
Interest income - net 8,475 5,135
------------ ------------
NET LOSS $(4,056,399) $ (765,881)
- -------- ============ ============
NET LOSS PER COMMON SHARE $ (.2813) $ (.2733)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 14,419,873 2,802,154
============ ============
See accompanying notes to financial statements.
F-33
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO SEPTEMBER 30, 1998
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK TO BE ISSUED PREFERRED STOCK ADDITIONAL
----------------------- ------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- --------- ------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Issued For:
Cash 427,174 $ 4,272 - - 1,697,280 $ 16,973 $ 515,203
Consulting fees 2,294,980 22,950 - - - - 357,473
Advertising services 80,000 800 - - - - 139,200
Net loss 1997 - - - - - - -
---------- ---------- --------- ------- ---------- --------- ------------
Balance, September 30, 1997 2,802,154 28,022 - - 1,697,280 16,973 1,011,876
Stock Issued For:
Cash 22,680 227 - - - - 43,073
Consulting fees 1,500,843 15,008 - - - - 2,850,401
Advertising services 5,000 50 - - - - 9,496
RECAPITALIZATION TRANSACTIONS:
- ------------------------------
Cancellation of KIW, Inc.
stock resulting from
recapitalization (4,330,677) (43,307) - - (1,697,280) (16,973) 60,280
Pre exchange Big Tex
Common stock outstanding 6,000,000 6,000 - - - - (6,000)
Surrender of Common Stock by
50% Shareholder of Big Tex (3,000,000) (3,000) - - - - 3,000
Issuance of Common Stock
to Shareholders of Kanakaris
InternetWorks, Inc. 6,000,000 6,000 - - - - (6,000)
Issuance of Preferred Stock
to Shareholders of Kanakaris
InternetWorks, Inc. - - - 1,000,000 10,000 (10,000)
---------- ---------- --------- ------- ---------- --------- ------------
Balance after recapitalization 9,000,000 9,000 - - 1,000,000 10,000 3,956,126
Stock Issued For:
Cash 155,250 155 96,000 96 - - 184,624
Consulting fees 1,703,200 1,703 100,000 100 - - 306,793
Executive compensation 3,000,000 3,000 - - - - 180,750
Advertising services 20,000 20 - - - - 61,230
504 offering 3,981,800 3,982 537,500 537 - - 466,505
Subscriptions 1,260,000 1,260 - - - - -
Stock exchange program 59,386 59 606,640 607 - - (666)
Treasury stock redemption
Net loss 1998 - - - - - - -
---------- ---------- --------- ------- ---------- --------- ------------
BALANCE, SEPTEMBER 30, 1998 19,179,636 $ 19,179 1,340,140 $ 1,340 1,000,000 $ 10,000 $ 5,155,362
========== ========== ========= ======= ========== ========= ============
</TABLE>
F-34
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - continued
<TABLE>
<CAPTION>
TREASURY STOCK
ACCUMULATED STOCK SUBSCRIPTIONS
DEFICIT AMOUNT RECEIVABLE TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Stock Issued For:
Cash - - - $ 536,448
Consulting fees - - - 380,423
Advertising services - - - 140,000
Net loss 1997 (765,881) - - (765,881)
-------------- -------------- -------------- --------------
Balance, September 30, 1997 (765,881) - - 290,990
Stock Issued For:
Cash - - - 43,300
Consulting fees - - - 2,865,409
Advertising services - - - 9,546
RECAPITALIZATION TRANSACTIONS:
- -----------------------------
Cancellation of KIW, Inc.
stock resulting from
recapitalization - - - -
Pre exchange Big Tex
Common stock outstanding
Surrender of Common Stock by
50% Shareholder of Big Tex - - - -
Issuance of Common Stock
to Shareholders of Kanakaris
InternetWorks, Inc. - - - -
Issuance of Preferred Stock
to Shareholders of Kanakaris
InternetWorks, Inc. - - - -
-------------- -------------- -------------- --------------
Balance after recapitalization (765,881) - - 3,209,245
Stock Issued For:
Cash - - - 184,875
Consulting fees - - - 308,596
Executive compensation - - - 183,750
Advertising services - - - 61,250
504 offering - - - 471,024
Subscriptions - - (1,260) -
Stock exchange program - - - -
Treasury stock redemption - (201,920) - (201,920)
Net loss 1998 (4,056,399) - - (4,056,399)
-------------- -------------- -------------- --------------
BALANCE, SEPTEMBER 30, 1998 $ (4,822,280) $ (201,920) $ (1,260) $ 160,421
============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND FOR THE
PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO SEPTEMBER 30, 1997
---------------------------------------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,056,399) $ (765,881)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Amortization of goodwill 23,352 -
Depreciation and amortization 6,862 1,934
Write-off of fixed assets 793 -
Provision for bad debts 300,000
Consulting and advertising fees
incurred in exchange for common stock 3,428,550 520,423
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (61,699) -
Inventory (1,434) -
Prepaid expenses 11,846 -
Advances to suppliers (7,839) -
Interest receivable (11,548) (5,135)
Increase (decrease) in:
Accounts payable and accrued expenses 103,139 18,773
Royalties payable 20,753 -
Deferred revenue (68,598) -
Customer deposits 29,427 -
------------ ------------
Net cash used in operating activities (282,795) (229,886)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,204) (8,044)
(Increase) decrease in notes
receivable - shareholders and
related parties (41,599) (241,714)
(Increase)in notes receivable (300,000) -
Payment of organization costs - (3,000)
Cash provided by subsidiary
acquisition 60,930 -
------------ ------------
Net cash used in investing
activities (287,873) (252,758)
------------ ------------
See accompanying notes to financial statements.
F-36
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND FOR THE
PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO SEPTEMBER 30, 1997
---------------------------------------------------------------
1998 1997
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 25,000 -
Proceeds from sale of common stock 4,498 4,272
Proceeds from sale of preferred stock - 16,973
Proceeds from additional paid in capital 694,701 515,203
Purchase of treasury stock (201,920) -
---------- ----------
Net cash provided by financing
activities 522,279 536,448
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (48,389) 53,804
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 53,804 -
---------- ----------
CASH AND CASH EQUIVALENTS -
END OF YEAR $ 5,415 $ 53,804
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
- -----------------------------------------------------------------------
During the year ended September 30, 1998 the Company issued 1,260,000 shares of
common stock in exchange for unpaid subscriptions of $1,260, and 4,723,200
shares of common stock for executive compensation, consulting and other services
valued at $3,428,550
The Company has incurred a liability in the amount of $30,937 which is due to
the former sole shareholder of the Company's subsidiary, Desience, pursuant to
the acquisition agreement.
During the year ended September 30, 1997 the Company issued 2,374,980 shares of
common stock for consulting fees and other services valued at $520,423.
See accompanying notes to financial statements.
F-37
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
(A) BUSINESS ORGANIZATION AND ACTIVITY
Kanakaris InternetWorks, Inc. (the "Company") was
incorporated in the State of Delaware on February 25, 1997.
The Company develops and supplies internet products, on line
products and online commerce.
(B) BUSINESS COMBINATIONS
On October 10, 1997 (the "Acquisition Date"), the Company
consummated a Stock Purchase Agreement (the "Purchase Agreement")
with the shareholder (the "Seller") of Desience Corporation
("Desience") to purchase 10,000 common shares representing 100%
of its issued and outstanding common stock in exchange for a 4%
royalty on the gross sales (after collection) of Desience
subsequent to the Acquisition Date, to be paid monthly for as
long as Desience remains in business or its products are sold.
Pursuant to APB16, since the seller has no continuing affiliation
with the Company, the 4% royalty is accounted for as an increase
to goodwill at the date the amount is determinable. In addition,
the Seller shall receive five percent of funds which are to be
allocated to Desience arising from the Company's next securities
offering as a non-refundable advance on the royalty. The Company
will hold harmless the Seller from any claims, causes of action,
costs, expenses, liabilities and prior shareholder advances.
Immediately following the exchange, Desience became an indirect
wholly owned subsidiary of the Company. The fair value of the
assets and liabilities acquired pursuant to the acquisition of
Desience was $148,776 and $468,120, respectively, which resulted
in goodwill of $319,344 at the date of acquisition, since no
trademarks, copyrights, existing or identified long term
requirement contracts or other intangibles existed of that date.
Additions to goodwill resulting from the royalty for the year
ended September 30, 1998 were $30,937 (See Note 1(I)).
Desience is not a high technology company but designs and
installs specialized business furniture for a variety of
industries utilizing base designs developed in 1985. No changes
have been made or are contemplated to be made to the basic
furniture design, with the exception of minor additions or
accoutrements. Because of the relative stability of the design of
the furniture, management considered the goodwill attributable to
the acquisition to be greater than 10 years. However, because of
the potential for changes to the basic design in the future,
management decided that a life of 20 years was not appropriate.
Consequently, a 15 year life was adopted. (See Note 7 for
unaudited proforma financial information.)
On November 25, 1997, the Company and its shareholders (the
("Shareholders") consummated an acquisition agreement with Big
Tex Enterprises, Inc. ("Big Tex"), a public shell, whereby the
shareholders sold all of their preferred and common stock,
which represented 100% of the Company's issued and outstanding
capital stock, to Big Tex in exchange for 7,000,000 shares
(6,000,000 common, 1,000,000 preferred) of Big Tex's
restricted stock, representing 66.67% of the issued and
outstanding common stock and 100% of the issued and
outstanding preferred stock of Big Tex, aggregating 75% of the
total voting rights (the "Exchange"). Big Tex was founded in
1991 for the purpose of lawful business or enterprise, but had
been inactive since 1991.
Generally accepted accounting principles require that the
company whose stockholders retain the majority interest in a
combined business be treated as the acquirer for accounting
purposes. Accordingly, the Big Tex acquisition will be
accounted for as an acquisition of Big Tex by the Company and
a recapitalization of the Company. The financial statements
F-38
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
immediately following the acquisition are as follows: (1) the
balance sheet includes the Company's net assets at historical
costs and Big Tex's net assets at historical costs and (2) the
statement of operations includes the Company's operations for
the period presented and Big Tex's operations from November
25, 1997. As part of the agreement, Big Tex changed its name
to Kanakaris Communications, Inc.
The dollar, share and par value amounts that appear in the
1997 balance sheet's stockholders' equity section represent
the balances and denominations for such accounts prior to the
acquisition and recapitalization agreements. The dollar, share
and par value amounts that appear in the 1998 balance sheet's
stockholders' equity section represent the balances and
denominations for such accounts subsequent to the acquisition
and recapitalization agreements.
(C) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company, Kanakaris InternetWorks, Inc. and
Desience, the Company's wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(D) USE OF ESTIMATES
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles. The
preparation of financial statements in accordance with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
(E) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents.
F-39
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated
using the declining balance method over the estimated economic
useful life of 5 to 7 years. Maintenance and repairs are
charged to expense as incurred. Major improvements are
capitalized. Depreciation expense for the years ended
September 30, 1998 and 1997 was $6,262 and $1,584,
respectively.
(G) INVENTORIES
Inventories consisting of parts, finished goods, and
collectibles are recorded at the lower of cost or market, cost
being determined using the first-in, first-out method.
(H) ORGANIZATION COSTS
Organization costs, which are included in other assets, are
being amortized over 60 months on a straight line basis.
Amortization expense for the years ended September 30, 1998
and 1997 was $600 and $350, respectively.
(I) GOODWILL
Goodwill arising from the acquisition of Desience, as
discussed in Note 1 (B) - Business Combinations, is being
amortized on a straight-line basis over 15 years.
Amortization expense for the year ended September 30, 1998
was $23,352.
(J) EARNINGS PER SHARE
Earnings per share are computed using the weighted average of
common shares outstanding as defined by Financial Accounting
Standards No. 128, "Earnings per Share".
(K) INCOME TAXES
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 is an asset and liability approach
that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial
statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future
events other than enactments of changes in the tax law or
rates. Any available deferred tax assets arising from net
F-40
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
operating loss carryforwards has been offset by a deferred tax
valuation allowance on the entire amount.
(L) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk or cash and cash
equivalents.
(M) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued
several new accounting pronouncements. Statement No. 130,
"Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its
components, and is effective for fiscal years beginning after
December 15, 1997. Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes
standards for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
reports issued to shareholders. It also establishes standards
for related disclosures about products and services,
geographic areas, and major customers, and is effective for
financial statements for periods beginning after December 15,
1997. Statement No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits" revises employers'
disclosure requirements about pension and other postretirement
benefit plans and is effective for fiscal years beginning
after December 15, 1997. Statement No 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes
accounting and reporting standards for derivative instruments
and related contracts and hedging activities. This statement
is effective for all fiscal quarters and fiscal years
beginning after June 15, 1999. The Company believes that its
future adoption of these pronouncements will not have a
material effect on the Company's financial position or results
of operations.
F-41
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 2 - NOTES RECEIVABLE - SHAREHOLDERS AND RELATED PARTIES
- ------------------------------------------------------------
The following is a summary of notes receivable at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Note receivable - Shareholder, unsecured.
Interest at 6%. Principal is due
December 31, 1997 $ - $ 7,000
Note receivable - Shareholder, unsecured.
Interest at 6%. Principal is due
December 31, 1997 - 7,000
Notes receivable - Shareholder, unsecured.
Interest at 6.625% is payable beginning
June 30, 1998 when all accrued interest
will be due, then annually on each
subsequent June 30. Principal payments
are due beginning December 31, 1998
when one-fifth of the outstanding
amount is due. Subsequent payments are
due one-fifth each December 31 until
February 26, 2002 when all outstanding
principal and interest is due. 70,400 49,600
Notes receivable - Shareholder, unsecured.
Interest at 6.625% is payable beginning
June 30, 1998 when all accrued interest
will be due, then annually on each
subsequent June 30. Principal payments
are due beginning December 31, 1998 when
one-fifth of the outstanding amount is due.
Subsequent payments are due one-fifth each
December 31 until February 26, 2002 when all
outstanding principal and interest is due. 62,400 49,600
Notes receivable - Related Party, unsecured.
Interest at 6.625% is payable beginning
June 30, 1998 when all accrued interest will
be due, then annually on each subsequent
June 30. Principal payments are due beginning
December 31, 1998 when one-fifth of the
outstanding amount is due. Subsequent payments
are due one-fifth each December 31 until
February 26, 2002 when all outstanding
principal and interest is due. 28,998 16,999
</TABLE>
F-42
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 2 - NOTES RECEIVABLE - SHAREHOLDERS AND RELATED PARTIES - CONTINUED
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Notes receivable - Related Party,
unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued
interest will be due, then annually on
each subsequent June 30. Principal payments
are due beginning December 31, 1998
when one-fifth of the outstanding amount
is due. Subsequent payments are due one-fifth
each December 31 until February 26, 2002 when
all outstanding principal and interest is due. 19,600 9,600
Note receivable - Shareholder, unsecured.
Interest at 8%, principal and interest
is payable in five annual installments of
$38,250 beginning September 30, 1998. The
note was prepaid through a portion of
the year 2000 101,915 101,915
--------- ---------
Total Notes Receivable 283,313 241,714
Less: Current maturities 36,280 39,160
--------- ---------
TOTAL NOTES RECEIVABLE - LESS CURRENT
- -------------------------------------
MATURITIES $ 247,033 $ 202,554
---------- ========= =========
</TABLE>
The aggregate amount of notes receivable maturing in each of the five years
subsequent to September 30, 1998 is as follows:
For the year ending September 30, 1999 $ 36,280
2000 61,695
2001 74,529
2002 110,809
---------
$ 283,313
=========
NOTE 3 - PREFERRED STOCK
- ------------------------
The Company has authorized the issuance of 5,000,000 shares of
preferred stock. The 1,000,000 shares of preferred stock
issued in connection with the Big Tex business combination
discussed in Note 1 (B) are convertible to common stock. The
preferred stock also has 3 to 1 voting rights over all common
stock.
F-43
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
(A) LEASES
On October 8, 1998 the Company, as subtenant, entered into a
sublease agreement with the existing tenant commencing on
October 15, 1998. The term of the sublease is through and
including the end of the original term of the tenant's lease
of the premises, which is August 20, 2000. The monthly rent on
this sublease is $1,512 through August 20, 1999 at which time
it will increase to $1,579 a month until August 20, 2000.
Future annual minimum rentals under this sublease agreement
are as follows:
YEARS ENDING
SEPTEMBER 30 AMOUNT
------------ --------
1999 $ 16,632
2000 17,369
(B) LEGAL ACTIONS
In the normal course of business, there may be various legal
actions and proceedings pending which seek damages against the
Company. Management believes that the amount, if any, that may
result from these claims, will not have a material adverse
effect on the financial statements.
(C) SECURITIES AND EXCHANGE COMMISSION INFORMAL INQUIRY
In August 1998, the Securities and Exchange Commission ("SEC")
began an informal inquiry relating to the sales of shares of the
Company in 1996 and 1997 to the former shareholders of Kanakaris
InternetWorks, Inc. ("KIW") (See Note 1(A), (B) and (C)).
Approximately 6,000,000 shares were sold to investors of KIW.
Named in the inquiry as defendants are the Company and its
President and Vice President. Settlement negotiations have been
conducted with the SEC during 1999 and it is the opinion of
counsel that the Company, its executives and the SEC will accept
the following settlement: Without admitting or denying any wrong
doing, the Company and its executives will consent to a permanent
injunction enjoining them from engaging in acts which constitute,
among other things violations of Section 17(a)(1) 2 OR 3 of the
Securities Act of 1933. In addition Company counsel advises that
the proposed settlement would not carry any civil penalties.
F-44
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
- -------------------------------------------------
(D) YEAR 2000 ISSUES
The Company is aware of the issues associated with the
programming code in existing computer systems as the
millennium (Year 2000) approaches. The "Year 2000" problem is
pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit
year value to 00. The issue is whether computer systems will
properly recognize date-sensitive information when the year
changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to
fail.
The Company uses a standard off the shelf accounting software
package for all of its accounting requirements. Management has
contacted the software vendor and determined that the
accounting software is Year 2000 compliant. All internal
management software is Microsoft based and management
continually monitors the Year 2000 status of such software.
Management has verified Year 2000 status with its primary
vendors and has not identified any Year 2000 issues with those
vendors. Costs of investigating internal and external Year
2000 compliance issues have not been material to date. As a
result, management believes that the effect of investigating
and resolving Year 2000 compliance issues on the Company will
not have a material effect on the Company's future financial
position or results of operations.
In addition to the effect of Year 2000 issues on the Company's
accounting and management systems, Year 2000 issues may effect
the Company's products as the products are primarily computer
related. The Company's products have been developed and tested
with regard to Year 2000 compliance. All products were deemed
to be Year 2000 compliant. The costs of such development and
testing and validating were minimal and absorbed as part of
the Company's normal quality control procedures.
NOTE 5 - PRIVATE PLACEMENT
- --------------------------
June 15, 1998, the Company prepared an Offering Memorandum
under Securities and Exchange Commission exemptions from
Registration provided by Section 3 (b) Regulation D and Rule
504 promulgated thereunder to raise $625,000 by offering
shares of the Company's common stock. The offering was
terminated on September 28, 1998 and the Company raised
$471,024 from such offering. (Also See Note 6 (D)).
F-45
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 6 - SUBSEQUENT EVENTS
- --------------------------
(A) LETTER OF INTENT
On January 26, 1999, the Company entered into a Letter of
Intent with Timothy L. Waller to develop, design, and maintain
two Real Estate Web Sites: (1) www.brea.com (Bank Real Estate
Auctions) is intended to be used to sell bank owned real
estate via the internet in an auction like atmosphere and (2)
www.fsbomls.com (For Sale By Owner Multiple Listing Service)
is intended to enable real estate owners to market and sell
their property without the services of a professional real
estate broker. The two parties agreed to sign a formal
agreement within 120 days from the date of the Letter of
Intent.
(B) LICENSE AGREEMENT
On February 18, 1999, the Company entered into a License
Agreement ("Agreement") with ION Systems, Inc. ("ION"), a
Missouri corporation. The Agreement is through December 31,
2004, and thereafter will be renewed automatically for
additional renewal terms of five years each, ending on
December 31 of each fifth year. Under the terms of the
Agreement, ION grants to the Company a license to use its
products, the E*Web and the X*Maker computer software enabling
the secure downloading and viewing of web sites, for or in
connection with the Company's web sites. The two parties
agreed that the software may be used solely for the
publishing, displaying, promoting, marketing, offering and
selling for a fee of certain specified book categories as well
as of products or services listed in the books published. The
aforementioned activities are meant to be offered directly to
customers and end users using the facilities of a web site. No
geographic or territorial restrictions apply to the use of the
software. At the option of the Company to be exercised until
August 30, 1999, the license with regard to E*Web shall be
exclusive to the Company for a license fee of $1,000,000. The
agreed fee for each book conversion performed by ION will be
$100, and the royalties for each book sale and product sale
shall be 12% and 5%, respectively, of the gross revenue.
Furthermore, ION shall have the right to buy 100,000 shares of
the Company's common stock at a price of $0.30 per share one
time at any time between June 1, 1999 and December 31, 2005.
The Company did not exercise the exclusive $1,000,000 license
option it had with ION under the terms of this agreement.
(C) REVOLVING LINE OF CREDIT
On February 25, 1999, the Company signed a Memorandum of
Understanding ("Memorandum") with Alliance Equities Inc.
("Alliance"), a Florida-based venture capital firm. The
F-46
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 6 - SUBSEQUENT EVENTS - (CONT'D)
- -------------------------------------
two parties agreed to sign a final agreement within 14 days
from the date of the Memorandum. Under the terms of the
Memorandum, Alliance will make available a $5 million
revolving line of credit in order to enable the Company to
pursue current Internet opportunities, commerce development,
and a possible stock buy back program. The two parties agreed
that the indebtedness may be paid back by the Company either
with cash or the issuance of stock. Any money advanced to the
Company by Alliance in the interim of signing the final
agreement will be returned if no final agreement can be
reached. Furthermore, the two parties agreed that Alliance
will continue its ongoing consulting services to the Company
including, but not limited to, strategic growth advice and
introductions, marketing advice, and business ideas. Alliance
will be compensated for these services at the option of the
Company either in cash, or through the issuance of stock or
credit towards the purchase of stock.
(D) OFFERING MEMORANDUMS
On December 3, 1998 and February 18, 1999 the Company
completed two offerings under the Securities and Exchange
Commission Regulation D, Rule 504. In the first offering,
3,333,333 shares were sold to two investors at $.06 per share
for a total of $200,000. In the second offering 470,000 shares
were sold to one investor at $.50 per share for a total of
$235,000.
(E) AGREEMENT AND SETTLEMENT
As a result of certain actions by its former securities
attorney, which led, among other things, to the Company's
recognition of a bad debt in the amount of $300,000, the
Company entered into a settlement agreement with the former
attorney and received a $250,000 non-interest bearing
promissory note dated February 3, 1999. The note is payable in
monthly installments of $20,833 commencing February 15, 1999.
The Company is negotiating with its former attorney relating
to a further financial settlement concerning the actions of
the attorney and others.
Should the Company's efforts to informally resolve these
matters prove to be unsuccessful, the Company intends to
vigorously pursue its claims, and has had preliminary
discussions with new legal counsel relating to the matter.
F-47
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KANAKARIS INTERNETWORKS, INC.
AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
NOTE 7 - BUSINESS COMBINATION - UNAUDITED PRO FORMA FINANCIAL INFORMATION
- --------------------------------------------------------------------------
The following unaudited pro forma financial information for the
Company gives effect to the Desience acquisition as if it
occurred on October 1, 1996. (See Note 1(B)) These pro forma
results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the
date indicated, or which may result in the future.
The accompanying financial statements for the year ended
September 30, 1998, include the operations of Desience for the
entire year from October 1, 1997 to September 30, 1998.
<TABLE>
PROFORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Desience Kanakaris
Corporation Communications,
Year ended 2/25/97 (Inception) Proforma
9/30/97 to 9/30/97 adjustment Consolidated
------------ ------------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenue $ 1,409,408 $ 8,475 $ 1,417,883
------------ ------------ ------------
Cost of Revenues 879,821 0 879,821
General &
Administrative 358,209 774,356 21,290 1,153,855
------------ ------------ ------------
1,238,030 774,356 21,290 2,033,676
------------ ------------ ------------
Net Income (loss) $ 171,378 ($765,881) ($615,793)
============ ============ ============
Net Loss per common share ($0.220)
Weighted Average shares outstanding 2,802,154
Proforma Adjustment:
Amortization Goodwill $319,344
15 year amortization-
per yr 21,290
</TABLE>
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF KANAKARIS COMMUNICATIONS, INC.
(FORMERLY DESIENCE CORPORATION)
We have audited the accompanying balance sheet of KANAKARIS COMMUNICATIONS, INC.
(FORMERLY DESIENCE CORPORATION), as of September 30, 1997, 1996, and 1995 and
the related statements of operations and accumulated deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KANAKARIS COMMUNICATIONS, INC.
(FORMERLY DESIENCE CORPORATION) as of September 30, 1997, 1996, and 1995, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Tanner & Co.
Salt Lake City, Utah
January 14, 1998
F-49
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC.
BALANCE SHEET
SEPTEMBER 30,
- --------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1997 1996 1995
------ ---------------------------------------
<S> <C> <C> <C>
Current assets:
Cash $ 60,930 $ 8,489 $ 3,597
Accounts receivable 56,774 81,110 29,053
Inventories 8,688 17,430 14,348
Prepaid expenses 11,846 6,539 1,374
---------------------------------------
Total current assets 138,238 113,568 48,372
Property and equipment, net 9,838 12,585 17,655
Related party advances - 387,000 380,000
Other assets 700 3,000 3,000
---------------------------------------
Total assets $ 148,776 $ 516,153 $ 449,027
=======================================
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 389,792 $ 416,525 $ 437,708
Current portion of long-term debt - 70,629 72,427
Accrued payroll - 331,846 82
Accrued expenses 9,729 348 276,635
Deferred revenue 68,598 187,526 118,761
---------------------------------------
Total current liabilities 468,119 1,006,874 905,613
---------------------------------------
Commitments and contingencies - - -
Stockholder's deficit:
Common stock, $.01 par value, 5,000,000
shares authorized; 10,000 shares
issued and outstanding 100 100 100
Accumulated deficit (319,443) (490,821) (456,686)
---------------------------------------
Total stockholder's deficit (319,343) (490,721) (456,586)
---------------------------------------
Total liabilities and
stockholder's deficit $ 148,776 $ 516,153 $ 449,027
=======================================
- --------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
F-50
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Revenue:
Net sales $ 1,260,979 $ 1,193,084 $ 1,688,832
Installation 79,936 76,678 135,042
Freight 68,493 54,976 104,966
--------------------------------------------
Total revenue 1,409,408 1,324,738 1,928,840
--------------------------------------------
Cost and expenses:
Cost of sales 879,821 807,837 1,157,810
General and administrative 421,093 535,097 658,374
--------------------------------------------
1,300,914 1,342,934 1,816,184
--------------------------------------------
Income (loss) from operations 108,494 (18,196) 112,656
Other income (expense):
Interest expense (6,316) (15,139) (38,699)
Forgiveness of payables 70,000 - -
--------------------------------------------
Income (loss) before income taxes 172,178 (33,335) 73,957
Provision for income taxes - current (800) (800) (800)
--------------------------------------------
Net income (loss) 171,378 (34,135) 73,157
Accumulated deficit beginning of year (490,821) (456,686) (529,843)
--------------------------------------------
Accumulated deficit end of year $ (319,443) $ (490,821) $ (456,686)
============================================
Earnings (loss) per common and common
equivalent share $ 17.14 $ (3.41) $ 7.32
============================================
Weighted average number of common and
common equivalent shares 10,000 10,000 10,000
============================================
- -------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
F-51
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 171,378 $ (34,135) $ 73,157
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 3,405 5,070 7,600
Loss on disposal of property and
equipment 92 - -
Decrease (increase) in:
Accounts receivable 24,336 (52,057) 121,386
Inventories 8,742 (3,082) 8,683
Prepaid expenses (5,307) (5,165) 1,119
Other assets 2,300 - -
Increase (decrease) in:
Accounts payable 143,205 (21,183) (101,212)
Deferred revenue (118,928) 68,765 32,648
Accrued payroll (122,877) 55,211 64,136
Accrued liabilities 9,383 266 (24,138)
----------------------------------------------
Net cash provided by
operating activities 115,729 13,690 183,379
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES-
purchase of property and equipment (750) - -
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party advances 8,091 (7,000) (64,000)
Payment of notes payable (70,629) (1,798) (123,376)
----------------------------------------------
Net cash used in
financing activities (62,538) (8,798) (187,376)
----------------------------------------------
Net increase (decrease) in cash 52,441 4,892 (3,997)
Cash, beginning of year 8,489 3,597 7,594
----------------------------------------------
Cash, end of year $ 60,930 $ 8,489 $ 3,597
==============================================
- -----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
F-52
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF ORGANIZATION AND NATURE OF BUSINESS
SIGNIFICANT Kanakaris Communications, Inc. (formerly known as Desience
ACCOUNTING Corporation) was incorporated in California in 1984. The
POLICIES Company changed its name to Kanakaris Communications, Inc.
from Desience Corporation on October 20, 1997. See note 12.
The Company designs and installs trading desks for the
investment industry. The Company has supplied Operation
Console (OPCON) modular systems to data and network centers
worldwide. The Company assists in the planning process by
providing a blueprint floor plan of OPCON layouts and
oversees the product manufacturing and the installation
processes.
CASH EQUIVALENTS
For purposes of the statement of cash flows, cash includes
all cash and investments with original maturities to the
Company of three months or less.
INVENTORIES
Inventories consisting of parts and finished goods are
recorded at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, less
accumulated depreciation. Depreciation and amortization on
capital leases and property, plant and equipment is
determined using the straight-line method over the estimated
useful lives of the assets or terms of the lease.
Expenditures for maintenance and repairs are expensed when
incurred and betterments are capitalized. Gains and losses
on sale of property, plant and equipment are reflected in
net income.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product or
performance of services.
INCOME TAXES
Deferred income taxes are provided in amounts sufficient to
give effect to temporary differences between financial and
tax reporting, principally related to depreciation.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average of
the 10,000 shares outstanding for each year.
- --------------------------------------------------------------------------------
F-53
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Continued
- --------------------------------------------------------------------------------
1. SUMMARY OF CONCENTRATION OF CREDIT RISK
SIGNIFICANT Financial instruments which potentially subject the Company
ACCOUNTING to concentration of credit risk consist primarily of trade
POLICIES receivables. In the normal course of business, the Company
Continued provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when
realized, have been within the range of management's
expectations.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such account and
believes it is not exposed to any significant credit risk on
cash and cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. PROPERTY AND Property and equipment consist of the following at cost:
EQUIPMENT
SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
--------------------------------------------
Leasehold improvements $ 750 $ 15,523 $ 15,523
Furniture and fixtures 272,796 276,472 276,472
--------------------------------------------
273,546 291,995 291,995
Less accumulated
depreciation and
amortization (263,708) (279,410) (274,340)
--------------------------------------------
$ 9,838 $ 12,585 $ 17,655
============================================
- --------------------------------------------------------------------------------
F-54
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Continued
- --------------------------------------------------------------------------------
3. LONG-TERM Long-term debt consists of the following:
DEBT
SEPTEMBER 30,
---------------------------------------
1997 1996 1995
---------------------------------------
8% note payable
to a company
requiring monthly
payments of
$7,513 including
interest. This
note was not paid
in accordance
with its terms,
secured by
security
agreement $ - $ 70,629 $ 72,427
---------------------------------------
Less current portion - (70,629) (72,427)
---------------------------------------
Long-term debt $ - $ - $ -
=======================================
4. RELATED The Company had amounts due from the stockholder for the
PARTY years ending September 30, 1996 and 1995. As a result of the
TRANSACTIONS death of the stockholder in June of 1997, the amounts of
stockholder advances were eliminated by offsetting the
amount due with certain liabilities. The liabilities
included approximately $6,000 of business/personal expenses
of the stockholder, $79,000 of special borrowings (notes
payable), $85,000 of an old note payable, and approximately
$209,000 of accrued compensation which an employee has agree
to forego.
Included in general and administration expenses is $52,500,
$53,000, and $55,000 for the years ending September 30,
1997, 1996, and 1995, respectively, for services provided by
the stockholder.
- --------------------------------------------------------------------------------
F-55
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Continued
- --------------------------------------------------------------------------------
5. INCOME The current provision for income taxes represents federal
TAXES income taxes and includes taxes withheld on royalties by
foreign countries.
The provision for income taxes is different than amounts
which would be provided by applying the statutory federal
income tax rate to income before provision for income taxes
for the following reasons:
SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
--------------------------------------------
Federal income tax (benefit)
provision at statutory rate $ 56,000 $ (11,000) $ 24,000
State taxes 12,800 (1,200) 5,800
Change in valuation allowance (68,000) 13,000 (29,000)
Other
--------------------------------------------
$ 800 $ 800 $ 800
============================================
SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
--------------------------------------------
Net operating loss $ 128,000 $ 796,000 $ 183,000
Valuation allowance (128,000) (196,000) (183,000)
Accrued payroll - - -
--------------------------------------------
$ - $ - $ -
============================================
The Company has net operating loss carryover of
approximately $318,000, which is available to offset future
income taxes. They begin to expire in 2006. Since
substantial changes in the Company's ownership have
occurred, there will be an annual limitation of the amount
of NOL carryforwards which can be utilized.
- --------------------------------------------------------------------------------
F-56
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Continued
- --------------------------------------------------------------------------------
6. PREFERRED The Company is authorized to issued up to 1,000,000 shares
STOCK of $.01 par value preferred stock. The preferred stock can
be issued under various series and terms. There was no
preferred stock issued and outstanding at September 30,
1997, 1996, and 1995.
7. FORGIVENESS During 1997, an officer of the Company forgave the Company
OF PAYABLES of $70,000 of accrued salary payable from a previous year.
8. SUPPLEMENTAL During the year ended September 30, 1997:
CASH FLOW
INFORMATION o The Company reduced related party advances by $378,909,
accounts payable by $5,938, notes payable by $164,000,
and accrued payroll by $208,969.
YEAR ENDED
SEPTEMBER 30,
-----------------------------------------
1997 1996 1995
-----------------------------------------
Interest $ 6,316 $ 15,139 $ 38,699
=========================================
Income taxes $ 800 $ 800 $ 800
=========================================
9. FAIR VALUE OF None of the Company's financial instruments are held for
FINANCIAL trading purposes. The Company estimates that the fair value
INSTRUMENTS of all financial instruments at September 30, 1997, does not
differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance
sheet. The estimated fair value amounts have been determined
by the Company using available market information and
appropriate valuation methodologies. Considerable judgement
is necessarily required in interpreting market data to
develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
- --------------------------------------------------------------------------------
F-57
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Continued
- --------------------------------------------------------------------------------
10. COMMITMENTS In the normal course of business, there may be various other
AND legal actions and proceedings pending which seek damages
CONTINGENCIES against the Company. Management believes that the amount, if
any, that may result from these claims, will not have a
material adverse effect on the financial statements.
11. SIGNIFICANT The Company purchases materials and inventory from two
SUPPLIERS significant suppliers. Purchases from these suppliers are as
follows:
YEAR SUPPLIER A SUPPLIER B
---- ---------------------------------
1997 $ 262,233 $ 303,714
1996 $ 299,173 $ 234,875
1995 $ 542,772 $ 238,235
12. SUBSEQUENT NAME CHANGE
EVENTS On October 10, 1997, the Company entered into an agreement
with Kanakaris Internet Works where all of the Company's
shares were exchanged for a 4% royalty on gross sales that
the Company has in perpetuity. The Company became a
wholly-owned subsidiary of Kanakaris Internet Works. The
Company, on October 20, 1997, changed its name to Kanakaris
Communications, Inc. from Desience Corporation.
In addition, on November 25, 1997, the Company's new parent
entered into an agreement where it was acquired by Big Tex
Enterprises. As part of this agreement, Big Tex Enterprises
changed its name to Kanakaris Communications, Inc.
- --------------------------------------------------------------------------------
F-58
<PAGE>
You should rely only on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only when it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
------------------------
TABLE OF CONTENTS
PAGE
----
Risk Factors............................................................... 2
Forward-Looking Statements................................................. 5
Use of Proceeds............................................................ 6
Price Range of Our Common Stock............................................ 6
Dividend Policy............................................................ 6
Capitalization............................................................. 7
Selected Consolidated Financial Data....................................... 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
Business................................................................... 12
Management................................................................. 23
Resales of Shares Covered by this
Prospectus............................................................... 26
Principal and Selling Security Holders..................................... 26
Plan of Distribution....................................................... 28
Certain Relationships and Related Transactions............................. 29
Description of Capital Stock............................................... 30
Legal Matters.............................................................. 34
Experts.................................................................... 34
Change in Independent Accountants.......................................... 34
Where You Can Find More Information........................................ 35
Index to Financial Statements.............................................. F-1
------------------------
1,783,334 Shares
KANAKARIS
COMMUNICATIONS, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 1999
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, do not expressly limit the
liability of our company's directors for monetary damages. However, our Bylaws
provide that every person who was or is a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or a
person of whom he is the legal representative is or was a director or officer of
our company or is or was serving at the request of our company or for its
benefit as a director or officer of another corporation, or as our company's
representative in a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless to the fullest extent legally permissible under
the General Corporation Law of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys' fees, judgments, fines and
amounts paid or to be paid in settlement) reasonably incurred or suffered by him
in connection therewith.
Our Bylaws provide that the expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding must be paid by our
company as they are incurred and in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by our
company. Such right of indemnification is a contract right that is not exclusive
of any other right such directors, officers or representatives may have,
including rights under any bylaw, agreement, vote of shareholders, provision of
law and any other rights.
Our Bylaws provide further that our Board of Directors may cause our
company to purchase and maintain insurance on behalf of any person who is or was
a director or officer of our company, or is or was serving at the request of our
company as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred in any such
capacity or arising out of such status, whether or not our company would have
the power to indemnify such person.
Certain of the Selling Security Holders and our company each have
agreed to indemnify the other and their respective officers, directors and other
controlling persons against certain liabilities in connection with this
registration, including liabilities under the Securities Act of 1933, and to
contribute to payments such persons may be required to make in respect thereof.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with the
offering described in this Registration Statement:
SEC registration fee.............................. $ 1,034
NASD filing fee................................... 0
Printing and engraving expenses................... 200
Legal fees and expenses........................... 95,000
Blue Sky fees and expenses........................ 1,000
Accounting fees and expenses...................... 5,000
Miscellaneous..................................... 7,000
----------
Total....................................... $ 109,234
==========
All of the above expenses will be paid by the Registrant.
II-2
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1998, the Registrant issued an aggregate of 27,000 shares of
common stock to two accredited investors in a private offering in exchange for
$20,000 in cash.
In June 1998, the Registrant issued 1,200 shares of common stock to one
individual in a private offering in exchange for shares of Kanakaris
InternetWorks, Inc.
In June 1998, the Registrant issued 98,800 shares of common stock to
one consultant in a private offering in exchange for consulting services
rendered.
In July 1998, the Registrant issued an 75,000 shares of common stock to
one accredited investor in a private offering in exchange for cash.
In July 1998, the Registrant issued 400,000 shares of common stock to
one consultant in a private offering in exchange for consulting services
rendered.
In July 1998, the Registrant issued an aggregate of 13,313 shares of
common stock to eleven individuals in private offerings in exchange for shares
of Kanakaris InternetWorks, Inc.
In August 1998, the Registrant issued 450,000 shares of common stock to
three accredited investors in private offerings in exchange for cash.
In August 1998, the Registrant issued 40,000 shares of common stock to
one individual in a private offering in exchange for shares of Kanakaris
InternetWorks, Inc.
In December 1998, the Registrant issued an aggregate of 525,000 shares
of common stock to one accredited investor in a private offering in exchange for
$31,500 in cash.
In January 1999, the Registrant issued an aggregate of 1,711,667 shares
of common stock to two accredited investors in private offerings in exchange for
$102,700 in cash.
In January 1999, the Registrant issued 200,000 shares of common stock
to one consultant in a private offering in exchange for consulting services
rendered with an estimated value of $84,000.
In February 1999, the Registrant issued 1,130,669 shares of common
stock to one accredited investor in a private offering in exchange for $67,840
in cash.
In February 1999, the Registrant issued 100,000 shares of common stock
to one entity as consideration for the purchase of the domain name Netbook.com
with an estimated value of $106,000.
In March 1999, the Registrant issued 150,000 shares of common stock to
one consultant in a private offering in exchange for services rendered with an
estimated value of $175,500.
In April 1999, the Registrant issued 635,000 shares of common stock to
two accredited investors in a private offering in exchange for $317,500 in cash.
In April 1999, the Registrant issued 35,000 shares of common stock to
one consultant in a private offering in exchange for services rendered with an
estimated value of $91,875.
In April 1999, the Registrant issued an aggregate of 416,100 shares of
common stock to five consultants in a private offering, 406,000 shares of which
were issued in exchange for services rendered with an estimated value of
$583,625 and 10,100 shares of which were issued in satisfaction of certain
accounts payable by the Registrant in the amount of $10,000.
In June 1999, the Registrant issued an aggregate of 345,000 shares of
common stock to five consultants in a private offering in exchange for services
rendered with an estimated value of $452,640.
In July 1999, the Registrant issued 50,000 shares of common stock in a
private offering to one consultant in exchange for services rendered with an
estimated value of $53,125.
II-3
<PAGE>
In August 1999, the Registrant issued an aggregate of 255,000 shares of
common stock to four investors in private offerings in exchange for $100,000 in
cash.
In August 1999, the Registrant issued an aggregate of 337,000 shares of
common stock to six consultants in private offerings in exchange for consulting
services rendered with an estimated value of $358,063.
In October 1999, the Registrant issued 25,000 shares of common stock in
a private offering to one consultant in exchange for services rendered with an
estimated value of $18,750.
In November 1999, the Registrant issued an aggregate of 1,001,000
shares of common stock to two consultants in private offerings in exchange for
consulting services rendered with an estimated value of $750,750.
In December 1999, the Registrant issued an aggregate of 136,000 shares
of common stock to four accredited investors in private offerings in exchange
for $68,000 in cash
In December 1999, the Registrant issued 400,000 shares of common stock
to one consultant for consulting services rendered with an estimated value of
$200,000.
Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
II-4
<PAGE>
<TABLE>
<CAPTION>
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1................................ Articles of Incorporation of the Registrant filed with the
Nevada Secretary of State on November 1, 1991*
3.2................................ Certificate of Amendment of Articles of Incorporation of
the Registrant filed with the Nevada Secretary of State on
June 26, 1997*
3.3................................ Certificate of Amendment of Articles of Incorporation of
the Registrant filed with the Nevada Secretary of State on
November 26, 1997*
3.4................................ Certificate of Amendment of Articles of
Incorporation of the Registrant filed with the
Nevada Secretary of State on March 3, 1999*
3.5................................ Certificate of Designation of Class A Convertible
Preferred Stock of the Registrant filed with the Nevada
Secretary of State on March 9, 1999*
3.6................................ By-Laws of the Registrant*
4.1................................ Specimen Common Stock Certificate***
4.2................................ Kanakaris Communications, Inc. 1999 Stock Incentive Plan***
4.3................................ Form of Qualified Stock Option Agreement***
4.4................................ Form of Non-Qualified Stock Option Agreement***
4.5................................ Debenture Purchase Agreement dated as of August 5, 1999
between Alliance Equities and the Registrant**
4.6................................ Debenture Purchase Agreement dated as of September 29, 1999
between the Purchaser named therein and the Registrant***
4.7................................ Kanakaris Communications, Inc. 10% Convertible Subordinated
Debenture due August 4, 2000 made by the Registrant in
favor of Alliance Equities**
4.8................................ Kanakaris Communications, Inc. 10% Convertible Subordinated
Debenture due September 29, 2000 made by the Registrant
in favor of the Payee named therein***
4.9................................ Stock Escrow and Security Agreement dated as of November 1,
1999 between the Registrant, Owen Naccarato and the Holder
named therein***
4.10............................... Registration Rights Agreement dated as of August 5, 1999
by and between Alliance Equities and the Registrant**
4.11............................... Registration Rights Agreement dated as of September 29, 1999
by and between the Registrant and the Purchaser named therein***
5.1................................ Opinion of Rutan & Tucker, LLP
II-4
<PAGE>
10.1............................... Stock Purchase Agreement dated as of October 10, 1997 by
and between Christel H. Uttenbogaart and Kanakaris
InternetWorks, Inc.***
10.2............................... Acquisition Agreement dated as of November 25, 1997 between
Big Tex Enterprises, Inc. and Kanakaris InternetWorks, Inc.***
10.3............................... Windows Media (TM) Technology Promotion Agreement dated
February 18, 1999 between Microsoft Corporation and the
Registrant***
10.4............................... GEO Publishing, Inc. WebRadio(TM) Webcasting Service
Agreement - Live 24/7 Audio Streaming dated June 15,
1999 between GEO Publishing Inc. and the Registrant***
10.5............................... Sublease Agreement dated as of October 8, 1999 by and between
Belfiore-Fitzgerald and the Registrant***
10.6............................... License Agreement dated as of February 18, 1999 between the
Registrant and ION Systems, Inc.***
10.7............................... First Amendment to License Agreement dated effective as of
March 22, 1999 by and between the Registrant and ION
Systems, Inc. ***
10.8............................... Agreement dated October 21, 1999 between eConnect and the
Registrant***
10.9............................... Memorandum of Understanding dated November 1, 1999 by and
between SyCoNet.com Inc. and the Registrant***
10.10.............................. Custom Content Service Agreement dated August 23, 1999 between
ScreamingMedia.Net, Inc. and the Registrant***
10.11.............................. On-Line Classifieds/On-Line Auctions/On-Line Personals Internet
Content Provider Agreement dated effective August 1, 1999
between InXsys Broadcast Networks, Inc. and the Registrant***
10.12.............................. Memorandum of Understanding dated February 25, 1999 between
the Registrant and Alliance Equities***
10.13.............................. Memorandum of Understanding dated April 7, 1999 between the
Registrant and Alliance Equities***
10.14.............................. Promissory Note dated May 19, 1997 made by Branch Lotspeich
in favor of Kanakaris InternetWorks, Inc.***
10.15.............................. Promissory Note dated February 27, 1997 made by David Valenti
in favor of Kanakaris InternetWorks, Inc.***
10.16.............................. Promissory Note dated February 26, 1997 made by Alex Kanakaris
in favor of Kanakaris InternetWorks, Inc.***
10.17.............................. Promissory Note dated September 30, 1997 made by Alex
Kanakaris in favor of Kanakaris InternetWorks, Inc.***
10.18.............................. Promissory Note dated April 7, 1997 made by John McKay in favor
of Kanakaris InternetWorks, Inc.***
10.19.............................. Promissory Note dated January 8, 1998 made by John McKay
in favor of Kanakaris InternetWorks, Inc.***
10.20.............................. Promissory Note dated January 8, 1998 made by Alex Kanakaris in
favor of Kanakaris InternetWorks, Inc.***
10.21.............................. Promissory Note dated January 8, 1998 made by Branch Lotspeich
in favor of Kanakaris InternetWorks, Inc.***
II-5
<PAGE>
10.22.............................. Promissory Note dated January 8, 1998 made by David Valenti in
favor of Kanakaris InternetWorks, Inc.***
10.23.............................. Windows Media(TM) ICP Broadband Jumpstart Program Agreement
dated effective as of December 7, 1999 between the Registrant
and Microsoft Corporation***
10.24.............................. encoding.com Terms and Conditions and related purchase orders
10.25.............................. Revolving Line of Credit Agreement dated as of December 10, 1999
by and between the Registrant and Alliance Equities
16.1............................... Letter On Change in Certifying Accountant****
21.1............................... Subsidiaries of the Registrant***
23.1............................... Consent of Weinberg & Company, P.A., independent
certified public accountants
23.2............................... Consent of Weinberg & Company, P.A., independent certified
public accountants
23.3............................... Consent of Tanner & Co., independent certified public
accountants
23.4............................... Consent of Rutan & Tucker, LLP (contained in the
opinion included as Exhibit 5.1)
27.1............................... Financial Data Schedule
- ---------------
</TABLE>
* Filed as an exhibit to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on August 10, 1999 (Registration No.
333-84909) and incorporated herein by reference.
** Supersedes an incomplete version which was inadvertently filed as an
exhibit to the Registrant's Form SB-2 filed with the Securities and
Exchange Commission on August 10, 1999 (Registration No. 333-84909).
*** Filed as an exhibit to the Registrant's Amendment No. 1 to Form SB-2
filed with the Securities and Exchange Commission on November 19, 1999
(Registration No. 333-84909) and incorporated herein by reference
**** Filed as an exhibit to the Registrant's Amendment No. 2 to Form SB-2
filed with the Securities and Exchange Commission on November 24, 1999
(Registration No. 333-84909) and incorporated herein by reference.
II-6
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the Registration Statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) That, for determining liability under the Securities Act, each such
post-effective amendment shall be treated as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any
of the securities being registered that remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Costa Mesa, State of California, on December 20,
1999.
KANAKARIS COMMUNICATIONS, INC.
By: /S/ ALEX F. KANAKARIS
--------------------------------------
Alex F. Kanakaris, Chairman of the
Board, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<CAPTION>
<S> <C> <C>
/S/ ALEX F. KANAKARIS Chairman of the Board, December 20, 1999
- ---------------------------- President, Chief Executive
Alex F. Kanakaris Officer, and Director
(Principal Executive
Officer)
/S/ BRANCH LOTSPEICH Vice Chairman of the Board, December 20, 1999
- ---------------------------- Secretary and Director
Branch Lotspeich
* Acting Chief Financial December 20, 1999
- ---------------------------- Officer (Principal Financial
David Thomas Shomaker Officer)
* Director December 20, 1999
- ----------------------------
John Robert McKay
* By: /S/ ALEX F. KANAKARIS
-----------------------
Alex F. Kanakaris
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
<TABLE>
EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
5.1................................ Opinion of Rutan & Tucker, LLP
10.24.............................. encoding.com Terms and Conditions and related purchase orders
10.25.............................. Revolving Line of Credit Agreement dated as of December 10, 1999
by and between the Registrant and Alliance Equities
23.1............................... Consent of Weinberg & Company, P.A., independent
certified public accountants
23.2............................... Consent of Weinberg & Company, P.A., independent certified
public accountants
23.3............................... Consent of Tanner & Co., independent certified public
accountants
23.4............................... Consent of Rutan & Tucker, LLP (contained in the opinion
included in Exhibit 5.1)
27.1............................... Financial Data Schedule
II-9
</TABLE>
December 20, 1999
Kanakaris Communications, Inc.
3303 Harbor Boulevard, Suite F-3
Costa Mesa, California 92629
Re: Registration Statement on Form S-3 re 1,783,334 Shares of Common
Stock (Registration No.
----------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Kanakaris Communications, Inc., a Nevada
corporation (the "Company"), in connection with the filing of a Registration
Statement to which this opinion is an Exhibit (the "Registration Statement")
with respect to the offer and sale of up to an aggregate of 1,783,334 shares of
the Company's Common Stock, $.001 par value per share (the "Shares"), all of
which are issuable upon conversion of the Company's 10% Convertible Subordinated
Debentures (the "Debentures"), as described in the Registration Statement, by
the holders thereof (the "Selling Security Holders").
We are familiar with the corporate actions taken and proposed to be
taken by the Company in connection with the authorization, issuance and sale of
the Shares and have made such other legal and factual inquiries as we deem
necessary for purposes of rendering this opinion.
We have assumed the genuineness of all signatures, the authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as copies, the authenticity of the originals of
such copied documents, and, except with respect to the Company, that all
individuals executing and delivering such documents were duly authorized to do
so.
Based on the foregoing and in reliance thereon, and subject to the
qualifications and limitations set forth below, we are of the opinion that the
Shares to be issued upon conversion of the Debentures have been duly authorized
and reserved and, when issued upon conversion of each of the Debentures in
accordance with its terms, will be validly issued, fully paid and
non-assessable.
<PAGE>
Kanakaris Communications, Inc.
December 20, 1999
Page 2
You have informed us that the Selling Security Holders may sell the
Shares from time to time on a delayed or continuous basis. This opinion is
limited to the laws of the State of California, Chapter 78 of the Nevada Revised
Statutes and federal law as in effect on the date hereof, exclusive of state
securities and blue sky laws, rules and regulations, and to all facts as they
presently exist.
We hereby consent to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement and to
the filing of this opinion as Exhibit 5.1 to the Registration Statement. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the General Rules and Regulations of the Securities and Exchange
Commission.
Very truly yours,
/S/ RUTAN & TUCKER, LLP
encoding.com Terms and Conditions
1. CONTROLLING TERMS. The terms and conditions of sale contained herein shall
apply to all provisions of encoding services and related services by
encoding.com, inc. ("encoding.com") and to all purchase orders or other offers
accepted by encoding.com related thereto (collectively, the "Service"). These
terms and conditions may in some instances conflict with or add to some of the
terms and conditions affixed to the purchase order or procurement document
issued by the Customer. In such case, the terms and conditions contained herein
shall govern exclusively and ACCEPTANCE OF CUSTOMER'S ORDER IS EXPRESSLY
CONDITIONED UPON CUSTOMER'S ACCEPTANCE OF THE TERMS AND CONDITIONS CONTAINED
HEREIN irrespective of whether the Customer accepts these conditions by oral or
written acknowledgement, by implication or by acceptance of or payment for the
provision of the Service ordered hereunder based on the content, materials
and/or elements (collectively, the "Content") provided to encoding.com by
Customer.
2. TERMS OF PAYMENT. All charges will be COD unless credit has been approved in
advance by encoding.com. Payment must be made in US dollars and may be made in
cash, cashier's check, money order, travelers checks, check drawn on local bank
or Visa/MasterCard. All COD orders must be paid for and picked up Monday through
Friday between the hours of 9:00 A.M. and 5:00 P.M. Credit terms are net 15
days. Interest at the maximum rate allowed by law will be charged on all
accounts not paid within 30 days unless previous arrangements have been made
with the encoding.com. ANY CLAIMS FOR ADJUSTMENT IN CONNECTION WITH AN INVOICE
MUST BE PRESENTED IN WRITING WITHIN 10 DAYS OF THE DATE OF THE INVOICE IN
QUESTION.
3. PRICES; LIENS. Prices for the Service are those shown on the face of this
acknowledgment, provided, however, that if such prices are based on the purchase
of a minimum quantity of Service and Customer fails to purchase such minimum
quantity, encoding.com has the right to collect from Customer the difference
between the price paid by Customer for the Service purchased and encoding.com's
standard price for such Service in quantity actually purchased by Customer.
encoding.com shall have a lien and security interest on tapes, CDs, files and
other property delivered by Customer to encoding.com and/or made by encoding.com
therefrom for the balance of any account due us by the Customer, including
collection and attorney's fees. Customer hereby authorizes encoding.com to
execute and file, on Customer's behalf, a financing or other statement
evidencing this security interest. When necessary, Customer agrees to execute
necessary documentation for perfecting such security interest.
4. SHIPPING. If encoding.com provides shipping and handling services for
Customer's materials, surcharges will apply. Shipping and delivery dates are
approximate. In no event, for any reason whether or not beyond encoding.com's
control, shall encoding.com be liable to Customer or any other party for any
losses, damages or liability for delay in delivery of shipped materials; nor
shall any delay in delivery of shipped materials constitute grounds for
cancellation of Customer's work order.
<PAGE>
5. DELIVERY. The delivery dates set forth on this acknowledgment are approximate
only, and encoding.com is not liable for any damages to Customer, nor shall
encoding be in breach of its obligations to the Customer, because of any
delivery made within a reasonable time after the slated delivery date.
encoding.com may by written notice to Customer change any deliver date, and such
date shall become the agreed upon delivery date unless Customer objects to such
date in writing delivered to encoding.com within ten (10) days of receipt of
encoding.com's notice. encoding.com shall not be liable for any late delivery
caused by the failure of the Customer to provide in a timely manner any
necessary information to affect such deliver.
6. FORCE MAJEURE. encoding.com is not liable for any failure to deliver, delay
in delivery of, any Service due to a cause beyond its control, including but not
limited to acts of God, fires, typhoons, earthquakes, labor disputes,
governmental actions or inability to obtain materials, components, energy,
encoding facilities, or transportation. In the event of any such delay, the date
of delivery or performance hereunder shall be extended by a period equal to the
time to or by reason of such delay. If encoding.com's production is curtailed
for any of the above reasons, encoding.com may allocate its production among its
various customers. Such allocation shall be in a commercially fair and
reasonable manner.
7. STORAGE. It is the Customer's responsibility to arrange for removal of
materials from encoding.com at the completion of each project. At the Customer's
request, encoding.com will store tapes and Content for a maximum of 60 days.
encoding.com reserves the right to ship tapes and/or Content to the Customer,
freight collect, at the conclusion of the 60 day period or to charge a storage
fee or to otherwise dispose of the materials.
8. RIGHT TO REFUSE SERVICE. encoding.com reserves the right to refuse service
and/or process any Content which encoding.com, in its sole discretion, deems
unlawful, pornographic, degrading, likely to incite prejudice or passion or
otherwise inappropriate.
9. CUSTOMER WARRANTIES. Customer represents and warrants that (a) Customer has
sufficient rights in the Content to use it in the manner contemplated by this
acknowledgment, (b) the Context does not infringe upon or violate any patent,
copyright, trade secret, trademark or other intellectual property right of any
third party or any obscenity law or other applicable law, rule or regulation in
any jurisdiction in which the Content may be viewed or retrieved, (c)
encoding.com's provision of the Service and/or hosting of the Content hereunder
will not infringe upon or violate any patent, copyright, trade secret, trademark
or other intellectual property right of any third party, including but not
limited to any and all performance license rights, mechanical license rights,
synchronization license rights and rights under the Digital Performance Right to
Sound Recordings Act of 1995, or any obscenity law, or other applicable law,
rule or regulation in any jurisdiction in which the Content can be viewed or
retrieved, and (d) the Content and encoding.com's provision of the Service on
behalf of Customer is not for any illegal, obscene, offensive or immoral
purpose.
10. ENCODING.COM LIMITED WARRANTY; LIMITED LIABILITY; EXCLUSION OF CONSEQUENTIAL
DAMAGES. It is understood and agreed that the Customer's materials are
transported, received, processed, used and stored at Customer's risk.
ENCODING.COM SHALL NOT BE LIABLE FOR ANY LOST PROFITS OR OTHER DAMAGES CAUSED BY
THE LOSS, DAMAGE OR DESTRUCTION OF MATERIALS BELONGING TO THE CUSTOMER OR ANY
OTHER PERSON WHILE IN TRANSIT OR POSSESSION OF ENCODING.COM UNLESS CAUSED BY THE
-2-
<PAGE>
NEGLIGENCE OF ENCODING.COM, IN WHICH EVENT, THE LIABILITY OF ENCODING.COM SHALL
BE LIMITED TO THE REPLACEMENT OF A SIMILAR QUANTITY OF BLANK TAPE OR MAGNETIC OR
OPTICAL MEDIA TO THE MATERIALS WHICH WERE LOST, DAMAGED OR DESTROYED. EXCEPT FOR
SUCH REPLACEMENT, ENCODING.COM SHALL HAVE NO FURTHER LIABILITY REGARDING THE
LOSS, DAMAGE OR DESTRUCTION OF SUCH MATERIALS. ENCODING.COM SHALL NOT BE LIABLE
TO CUSTOMER OR ANY OTHER PERSON FOR ANY ACT OR OMISSION OF ANY PERSON SELECTED
BY ENCODING.COM TO PERFORM SERVICES OR FURNISH MATERIALS TO CUSTOMER, IF
MATERIALS FURNISHED BY ENCODING.COM ARE FOUND TO BE DEFECTIVE IN MANUFACTURE.
ENCODING.COM SHALL REPLACE SUCH MATERIALS WITH A SIMILAR QUANTITY OF BLANK TAPE,
OR MAGNETIC OR OPTICAL MEDIA, PROVIDED THE CUSTOMER NOTIFIES ENCODING.COM IN
WRITING WITHIN THIRTY DAYS AFTER SHIPMENT OF SUCH DEFECT. EXCEPT FOR SUCH
REPLACEMENT, ENCODING.COM SHALL HAVE NO FURTHER LIABILITY IN CONNECTION WITH
SUCH DEFECTIVE MATERIALS. ENCODING.COM MAKES NO WARRANTY EXPRESSED OR IMPLIED
WITH RESPECT TO THE MATERIALS OR SERVICES PROVIDED IT ASSUMES NO RESPONSIBILITY
FOR THE CHARACTER OR QUALITY OF MATERIALS OR SERVICES PROVIDED BY IT.
ENCODING.COM EXPRESSLY DISCLAIMS ALL WARRANTIES EXPRESSED OR IMPLIED, STATUTORY
OR OTHERWISE, INCLUDING ANY IMPLIED WARRANTY OR MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. ALL WARRANTIES WITH RESPECT TO THE SERVICE ARE STRICTLY
LIMITED TO THOSE SET FORTH IN THIS ACKNOWLEDGMENT. IN NO EVENT WILL ENCODING.COM
BE LIABLE TO THE CUSTOMER FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, OR
INCIDENTAL DAMAGES EVEN IF ENCODING.COM HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. NOTWITHSTANDING THE FOREGOING, ENCODING.COM MAKES NO
REPRESENTATION OR WARRANTIES OF ANY TYPE WHATSOEVER REGARDING THE HOSTING OF ANY
CONTENT ON ITS NETWORK OR ANY SUBCONTRACTOR'S OR OTHER PARTY'S NETWORK OR THE
PERFORMANCE OR RELIABILITY OF ANY SUCH NETWORK, OR ANY CONNECTION TO,
TRANSMISSION OVER, RESULTS OF OR USE OF ANY NETWORK OR ANY SUBCONTRACTOR'S OR
OTHER PARTY'S NETWORK OR THE PERFORMANCE OR RELIABILITY OF ANY SUCH NETWORK, OR
ANY CONNECTION TO, TRANSMISSION OVER, RESULTS OF OR USE OF ANY NETWORK
CONNECTION OR FACILITIES PROVIDED (OR FAILED TO BE PROVIDED) UNDER THIS
ACKNOWLEDGMENT AND ENCODING.COM MAKES NO WARRANTY WHATSOEVER FOR PRODUCTS OR
SERVICES NOT ACTUALLY PRODUCED OR PROVIDED BY ENCODING.COM.
11. INDEMNIFICATION BY CUSTOMER. Customer agrees to defend, protect, indemnify
and hold encoding.com harmless from and against all claims of any kind, whether
based in contract, in tort (including negligence or strict liability), or
resulting from (a) services provided by encoding.com on behalf of Customer
hereunder, except for any damages arising exclusively out of any material breach
of this acknowledgment by encoding.com, (b) any use by encoding.com of any data
or files provided by Customer to encoding.com under this acknowledgment, (c) any
breach by Customer of the acknowledgment, including without limitation any
failure by Customer to observe or satisfy any terms or conditions of this
acknowledgment, (d) any violation of any applicable federal, state or local laws
-3-
<PAGE>
with regard to the transmission and use of information and content, including
laws related to privacy, publicity, the Communications Decency Act of 1996,
arising out of the Customer Content, (e) any infringement of any United States
or other patent, trademark, copyright, trade secret or other intellectual
property right, including but not limited to any and all performance license
rights, mechanical license rights, synchronization license rights and rights
under the Digital Performance Right in Sound Recordings Act of 1995, relating to
the Content supplied by Customer to encoding.com or the Services provided
hereunder, or (f) otherwise for any losses, expenses, damages and liabilities,
direct, indirect, special or consequential which may arise out of Customer's
use, distribution or sale of goods or services covered hereby except those
caused solely by the sole gross negligence of encoding.com.
12. ACKNOWLEDGMENT. Customer acknowledges that encoding.com, in its sole
discretion, may subcontract all or part of the hosting services to be provided
hereunder. CUSTOMER FURTHER ACKNOWLEDGES THAT ENCODING.COM WILL HAVE NO
LIABILITY FOR THE FAILURE OF ANY NETWORK OR SERVER IN CONNECTION WITH THE
HOSTING OF ANY CONTENT.
13. ORDER CANCELLATION. If an order for the Service is cancelled, Customer must
pay for orders scheduled for delivery or performance within ninety (90) days of
encoding.com's receipt of cancellation notice.
14. MISCELLANEOUS. Any waiver by encoding.com of any default by the Customer
hereunder shall not be deemed to be a continuing waiver of such default or a
waiver of any other default or of any of the terms and conditions of this
acknowledgment. The terms and conditions of this acknowledgment may not be
superseded, modified, or amended except in a writing stating that it is a
modification and signed by an authorized representative of each party hereto,
provided, however, that encoding.com may modify the specifications of the
Service provided hereunder if the modification does not change the form,
[illegible] or function of the Service. This acknowledgment (not including any
of the terms and conditions of the Customer's purchase order or any similar
document issued by Customer), constitutes the entire agreement between the
Customer and encoding.com with regard to the Service listed on the face of this
acknowledgment, and expressly supersedes and replaces any prior or
contemporaneous agreements, written or oral, relating to such goods or services.
This acknowledgment is governed by, construed and enhanced in accordance with
the laws of the State of Washington, without regard to conflict of laws
provisions. Both parties agree that any litigation or arbitration between the
parties shall take place in King County, Washington, and both parties waive any
objection to personal jurisdiction or venue in any forum located in that county.
In any suit or action brought to enforce any term, condition or covenant of this
acknowledgment or to recover damages arising from any breach of the
acknowledgment, the losing party shall pay the prevailing party's reasonable
attorneys' fees and all other costs and expenses which may be incurred by the
prevailing party in any suit, action or in any reviews or appeals therefrom.
I AGREE TO TERMS AND CONDITIONS LISTED.
- ---------------------------------------
/s/ Alex Kanakaris 8/18/99
- ------------------ -------
SIGNATURE Date
-4-
<PAGE>
KANAKARIS COMMUNICATIONS, INC.
3303 Harbor Blvd. F-3
Costa Mesa, CA 92626
Tel: (714) 444-0530
Fax: (714) 540-5970
August 19, 1999 P.O. No. 102346
Darren Grimstead
Encoding.com
3406 E. Union
Seattle, WA 98122
Purchase Order
1 Advance payment on contract to encode 250 motion pictures at $62,000.00
various speeds.
Total $62,000.00
-5-
<PAGE>
September 28, 1999
Alex Kanakaris
KKRS.net
3303 Harbor Blvd., F-3
Costa Mesa, CA 92626
Dear Alex:
This document will serve as the outline of the agreed upon payment terms
discussed in today's phone conversation. Per our conversation we discussed the
extending of payment terms with interest to Q1, 2000, if 50% of the current
balance was paid within 10 business days.
Existing balance at completion of 250 movie project $188,437.50 due on or before
December 31, 1999.
Proposed pricing of pending 200 movie project $216,000 (Microsoft to cover
$16,000), payment terms are as follows: encoding.com agrees to extend Kanakaris
Communications (aka KKRS.net) payment terms of $66,666.66 per month plus 1 and
1/2% interest per month (billed for monthly completion of content in 1999) for
three consecutive months with payment beginning January of 2000. This agreement
is entered into based on the following conditions:
- -Kanakaris Communications will pay 50% of current balance ($94,000) within 10
days of signing this agreement
- -Kanakaris Communications agrees to supply encoding.com the remaining films of
the 250 movie project and all of the proposed 200 movie project on or before
December 31, 1999
By signing below this agreement is hereby entered into on this date, September
28, 1999.
/s/ Alex Kanakaris
- -----------------------
Alex Kanakaris
President
Sincerely,
/s/ Darren Grimstead
Darren Grimstead
Partner Ambassador
-6-
<PAGE>
ENCODING.COM SALES ORDER FORM
Date: AUGUST 10, 1999 Client Name: KANAKARIS
Client PO #: 0 Order Name: WM 4.0 LAUNCH PARTNER
<TABLE>
<CAPTION>
ESTIMATED ENCODING SERVICES $
$258,750.00
- --------------------------------------------------------------------------------------------------------- --------------------------
OTHER SERVICES EST. TRT EST. # OF CAPT,
(MINUTES) TRACKS, SCANS COST DISC. % EXTENDED PRICE $
-------- --------------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
AUDIO ONLY - DIGITAL WATERMARKING (PER MINUTE) 0 0 $0.00 0 $0.00 $0.00
AUDIO ONLY - DIGITAL WATERMARKING (PER TRACK) 0 0 $0.00 0 $0.00 $0.00
AUDIO ONLY - BASIC DATA ENTRY (PER TRACK) 0 0 $0.00 0 $0.00 $0.00
AUDIO ONLY - ADDITIONAL DATA ENTRY (PER TRACK) 0 0 $0.00 0 $0.00 $0.00
NON-CD DATA ENTRY 0 0 $0.00 0 $0.00 $0.00
SCREEN GRABS (PER SCREEN GRAB) 0 0 $0.00 0 $0.00 $0.00
VIDEO - SEGMENT LOCATION (PER CAPTURE) 0 0 $0.00 0 $0.00 $0.00
EDITING 0 0 $0.00 0 $0.00 $0.00
VIDEO INDEXING - AUTOMATIC 0 0 $0.00 0 $0.00 $0.00
VIDEO INDEXING - MANUAL 0 0 $0.00 0 $0.00 $0.00
CONSULTING 0 0 $0.00 0 $0.00 $0.00
DEVELOPMENT 0 0 $0.00 0 $0.00 $0.00
VIDEO LOGO PLACEMENT (PER CAPTURE) 0 0 $0.00 0 $0.00 $0.00
VIDEO WATERMARKING (PER MINUTE) 0 0 $0.00 0 $0.00 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FILE TRANSFER, DELIVERY, STORAGE & HOSTING FEES
EST. TOT. FILE
HOSTING FEES (SEE ATTACHED SHEET) $ FILE TRANSFER FEES SIZE (MB) $
----- -------------- ------------
<S> <C> <C>
$0.00 0.0 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EST.
DELIVERY MEDIA COSTS QUANTITY DELIVERY MEDIA FEE DISC. % EXTENDED PRICE $
-------- --------------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C>
250 CD-R (UP TO 10) $25.00 25 $18.75 $4,687.50
0 CD-R (>10) $5.00 0 $5.00 $0.00
0 DDS2-DAT $150.00 0 $150.00 $0.00
0 DLT $250.00 0 $250.00 $0.00
0 JAZ DISK $200.00 0 $200.00 $0.00
0 ZIP DISK $45.00 0 $45.00 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EST. # OF
MONTHLY STORAGE FEES MASTERS FEE DISC. % EXTENDED PRICE $
-------- --------------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C>
CD 0 $0.50 0 $0.50 $0.00
TAPES 0 $1.25 0 $1.25 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EST.
SHIPPING COSTS QUANTITY SHIPPING METHOD $
-------- --------------------------------------------------- ---------
<S> <C> <C> <C>
0 FEDEX FIRST OVERNIGHT (BY 8 A.M.) $0.00
0 FEDEX PRIORITY OVERNIGHT (BY 10 A.M.) $0.00
0 FEDEX STANDARD OVERNIGHT (BY 3 P.M.) $0.00
0 FEDEX 2 DAY $0.00
0 RPS GROUND (3-7 DAYS) $0.00
0 COURIER (SAME DAY) $0.00
0 CUSTOMER PICKUP/GIVE TO ACCOUNT MANAGER $0.00
ESTIMATED SUBTOTAL $263,437.50
RUSH CHARGES (%) 0 $0.00
0 MINIMUM ORDER DISCOUNT % 0
-
0 DEMO ESTIMATED TOTAL $263,437.50
-
</TABLE>
Client Signature: /s Alex Kanakaris
-----------------
Date: 8/18/99
-----------------
<TABLE>
<CAPTION>
<S> <C>
3406 E. Union Street, Seattle, WA 98122 (206) 568-2600 (206) 329-3276 http://www.encoding.com
</TABLE>
<PAGE>
ENCODING.COM SALES ORDER FORM
Date: SEPTEMBER 17, 1999 Client Name: KANAKARIS
Client PO #: 0 Order Name: Next 200
<TABLE>
<CAPTION>
ESTIMATED ENCODING SERVICES $
$208,500.00
- --------------------------------------------------------------------------------------------------------- --------------------------
OTHER SERVICES EST. TRT EST. # OF CAPT,
(MINUTES) TRACKS, SCANS COST DISC. % EXTENDED PRICE $
-------- --------------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
AUDIO ONLY - DIGITAL WATERMARKING (PER MINUTE) 0 0 $0.00 0 $0.00 $0.00
AUDIO ONLY - DIGITAL WATERMARKING (PER TRACK) 0 0 $0.00 0 $0.00 $0.00
AUDIO ONLY - BASIC DATA ENTRY (PER TRACK) 0 0 $0.00 0 $0.00 $0.00
AUDIO ONLY - ADDITIONAL DATA ENTRY (PER TRACK) 0 0 $0.00 0 $0.00 $0.00
NON-CD DATA ENTRY 0 0 $0.00 0 $0.00 $0.00
SCREEN GRABS (PER SCREEN GRAB) 0 0 $0.00 0 $0.00 $0.00
VIDEO - SEGMENT LOCATION (PER CAPTURE) 0 0 $0.00 0 $0.00 $0.00
EDITING 0 0 $0.00 0 $0.00 $0.00
VIDEO INDEXING - AUTOMATIC 0 0 $0.00 0 $0.00 $0.00
VIDEO INDEXING - MANUAL 0 0 $0.00 0 $0.00 $0.00
CONSULTING 0 0 $0.00 0 $0.00 $0.00
DEVELOPMENT 0 0 $0.00 0 $0.00 $0.00
VIDEO LOGO PLACEMENT (PER CAPTURE) 0 0 $0.00 0 $0.00 $0.00
VIDEO WATERMARKING (PER MINUTE) 0 0 $0.00 0 $0.00 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FILE TRANSFER, DELIVERY, STORAGE & HOSTING FEES
EST. TOT. FILE
HOSTING FEES (SEE ATTACHED SHEET) $ FILE TRANSFER FEES SIZE (MB) $
----- -------------- ------------
<S> <C> <C>
$0.00 0.0 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EST.
DELIVERY MEDIA COSTS QUANTITY DELIVERY MEDIA FEE DISC. % EXTENDED PRICE $
-------- --------------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C>
300 CD-R (UP TO 10) $25.00 0 $25.00 $7,500.00
0 CD-R (>10) $5.00 0 $5.00 $0.00
0 DDS2-DAT $150.00 0 $150.00 $0.00
0 DLT $250.00 0 $250.00 $0.00
0 JAZ DISK $200.00 0 $200.00 $0.00
0 ZIP DISK $45.00 0 $45.00 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EST. # OF
MONTHLY STORAGE FEES MASTERS FEE DISC. % EXTENDED PRICE $
-------- --------------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C>
CD 0 $0.50 0 $0.50 $0.00
TAPES 0 $1.25 0 $1.25 $0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EST.
SHIPPING COSTS QUANTITY SHIPPING METHOD $
-------- --------------------------------------------------- ---------
<S> <C> <C> <C>
0 FEDEX FIRST OVERNIGHT (BY 8 A.M.) $0.00
0 FEDEX PRIORITY OVERNIGHT (BY 10 A.M.) $0.00
0 FEDEX STANDARD OVERNIGHT (BY 3 P.M.) $0.00
0 FEDEX 2 DAY $0.00
0 RPS GROUND (3-7 DAYS) $0.00
0 COURIER (SAME DAY) $0.00
0 CUSTOMER PICKUP/GIVE TO ACCOUNT MANAGER $0.00
ESTIMATED SUBTOTAL $216,000.00
RUSH CHARGES (%) 0 $0.00
0 MINIMUM ORDER DISCOUNT % 0
-
0 DEMO ESTIMATED TOTAL $216,000.00
-
</TABLE>
Client Signature: /s Alex Kanakaris
-----------------
Date: 9/27/99
-----------------
<TABLE>
<CAPTION>
<S> <C>
3406 E. Union Street, Seattle, WA 98122 (206) 568-2500 (206) 328-3276 http://www.encoding.com
</TABLE>
REVOLVING LINE OF CREDIT AGREEMENT
This REVOLVING LINE OF CREDIT AGREEMENT (this "Line of Credit") by and
between KANAKARIS COMMUNICATIONS, INC., a Nevada Corporation with principal
offices in Costa Mesa, California (the "Company"), and ALLIANCE EQUITIES, a
Florida corporation (the "Lender") is dated as of December 10, 1999, and based
on an executed Memorandum of Understanding between the Company and the Lender
dated February 25, 1999.
WITNESSETH
WHEREAS, the Lender has agreed to make available to the Company, a
Seven Million Dollar ($7,000,000) Revolving Line of Credit, and that
indebtedness incurred by the Company in utilizing the line of credit may be
paid, at the election of the Company, either in cash or through the issuance of
the Company's Common Stock without penalty.
WHEREAS, the parties intend to create a schedule whereby the Company
may draw up to Five Hundred Thousand Dollars ($500,000) per month on the total
Line of Credit herein based upon a written request submitted by the Company to
the Lender and agreed upon by the parties.
NOW, THEREFORE, FOR VALUE RECEIVED, the Company hereby promises to pay
to the Lender or registered assigns, any and all indebtedness incurred by the
Company's election to utilize the Line of Credit up to the principal sum of
SEVEN MILLION DOLLARS ($7,000,000) on or before December 10, 2001, with interest
(simple interest computed on the basis of a 360-day year of twelve 30-day
months) on the unpaid principal amount hereof at the rate of ten percent (10%)
per annum unless converted into Common Stock of Company prior thereto by the
Company or the Lender according to the terms set forth in a Promissory Note to
be executed by the Parties upon election by the Company to utilize the Line of
Credit. The Company further agrees that without the express written agreement of
the Lender, the Company will not, from the date of execution herein, take out
any indebtedness senior to the Line of Credit, as defined by the term Senior
Indebtedness in Section 3 herein.
The Lender hereby represents and promises that the Lender has and will
make available to the Company a total principal sum of Seven Million Dollars
($7,000,000), on a non-exclusive basis, to be utilized by Company pursuant to
the provisions herein upon request by the Company to utilize the Lender's Line
of Credit.
The Line of Credit extended herein by Lender expires two (2) years from
the date of execution of this herein Revolving Line of Credit Agreement, unless
terminated otherwise by mutual agreement of the Lender and Company upon thirty
(30) days written notice.
<PAGE>
1. NOTICE. The Company shall give written notice to the Lender of the
Company's intention to utilize any or all of the available Line of Credit. Upon
receipt of such notice, the Lender and the Company will execute a Promissory
Note evidencing the terms and conditions of the transaction. The Promissory Note
to be executed will contain the terms and conditions contained herein in this
Agreement.
2. PAYMENTS. Interest on the unpaid principal portion of this Line of
Credit accrues and is payable upon maturity of the Line of Credit and only if
not converted prior to maturity by the Lender or Company. Should neither
conversion nor partial conversion occur prior to maturity, then Interest is
payable to the Lender of record of this Line of Credit on the principal amount
remaining due and payable, whether at maturity or by acceleration or otherwise
and thereafter, at the rate of ten percent (10%) per annum on all due and/or
overdue principal amount and (to the extent permitted by applicable law) on any
overdue interest until paid. No interest shall be payable on any amount of this
Line of Credit converted into Common Stock hereunder. The undersigned may prepay
all or part of the outstanding principal balance of this Line of Credit,
together with all accrued but unpaid interest thereon, at any time prior to
conversion by either party without penalty. All payments of principal of and
interest on this Line of Credit shall be in such coin or currency of the United
States of America as at the time of payment shall be legal tender for payment of
public and private debts.
3. CERTAIN DEFINITIONS. For purposes of this Line of Credit, the
following terms shall have the following respective meanings:
"COMMON STOCK" shall mean the Company's common stock, $.001 par value
per share and restricted in connection with the terms of transfer or sale under
Securities and Exchange Commission Rule 144.
"COMMON STOCK DEEMED OUTSTANDING" shall mean, at any given time, the
number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section 3.
"INSOLVENCY OR LIQUIDATION PROCEEDING" shall mean (i) any insolvency
or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding, relative to the Company or
to its creditors, as such, or to its assets, or (ii) any liquidation,
dissolution, reorganization or winding up of the Company, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy, or (iii) any
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the company.
"MARKET PRICE" of any security shall mean the average of the closing
prices of such security's sales on all national securities exchanges and the
OTC/BB on which such security may at the time be listed or on the NASDAQ System
for which real-time transaction reporting is required by an effective
transaction reporting plan, or, if there has been no sale on any such exchange
or quotation system on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
security is not so listed or quoted, the average of the highest bid and lowest
2
<PAGE>
asked prices on such day in the domestic over-the-counter market as reported by
the National Quotation Bureau, Incorporated, or any similar successor
organization, in each such case averaged over a period of twenty-one (21) days
consisting of the day as of which "Market Price" is being determined and the
thirty (30) consecutive business days prior to such day. If at any time such
security is not listed on any national securities exchange or quoted in the
NASDAQ System or the over-the-counter market, the "Market Price" will be the
fair value thereof determined as the last sale price for the Common Stock
including but not limited to the last sale price on the OTC/BB, pink sheets or
other non-national exchange or market.
"REORGANIZATION SECURITIES" shall mean shares of stock of the Company,
or its successor, as reorganized, or other securities of the Company or any
other person provided for by a plan of reorganization, the payment of which is
subordinated, at least to the same extent as this Line of Credit, to the payment
of all Senior Indebtedness which may at the time be outstanding and the
principal of which is due no earlier than the principal of this Line of Credit,
provided that the rights of the Lenders of the Senior Indebtedness are not
impaired thereby.
"REPRESENTATIVE" shall mean the trustee, agent or other
representative for Lenders of all or any of the Senior Indebtedness, if any,
designated in the indenture, agreement or other document creating, evidencing or
governing such Senior Indebtedness or pursuant to which it was issued, or
otherwise duly designated by the Lenders of such Senior Indebtedness.
"SENIOR INDEBTEDNESS" shall mean the principal of all indebtedness of
the Company regardless of whether incurred on, before or after the date of this
Line of Credit (i) for money borrowed from any bank, savings and loan or other
financial institution, and is evidenced by Line of Credits, bonds, debentures or
other written obligations and such Line of Credits, bonds, debentures or other
written obligations are interest being securities only and are not convertible
or issued in connection with the issue of warrants or options, whether separate
or attached, or some other rights to receive stock or participate in the
earnings of the Company in any form, including dividend distributions, and (ii)
in connection with any renewals or extensions of any indebtedness described in
(i) above; provided, however, that the term shall not include indebtedness which
by the terms of the instrument creating or evidencing it is subordinated to or
on a parity with this Line of Credit.
4. CONVERSION.
4.1 RIGHT TO CONVERT. At any time prior to Maturity, the Company
may convert all or any portion of the outstanding principal amount of this Line
of Credit into a number of shares of the Company's Common Stock, which carries
piggy-back and registration rights, computed by dividing such principal amount
by the Conversion Price (as defined in Section 4.4) then in effect. At any time
prior to Maturity, Lender may convert up to fifty percent (50%) of the principal
amount outstanding of this Line of Credit into a number of shares of the
Company's Common Stock computed by dividing such principal amount requested for
conversion by the Conversion Price (as defined in Section 4.4) then in effect.
3
<PAGE>
4.2 AUTOMATIC CONVERSION.
(a) This Line of Credit shall automatically be converted
in amounts as stated and into shares of Common Stock immediately upon: (i) the
failure of the Company to make payment of principal and interest due and payable
on or before December 10, 2001, ("Maturity"), in which case the entire Line of
Credit balance not converted at that time will become converted, or (ii) the
closing of a financing for the account of the Company in which the aggregate
gross proceeds received by the Company, equal or exceed Seven Million Dollars
($7,000,000), in which case a total of fifty percent (50%) of the original Line
of Credit amount (defined as the aggregate of amounts previously converted at
that time plus non-converted amounts equaling a maximum of 50% of the entire
original Line of Credit amount) will be converted. Should conversion occur under
Section 4.2 (a) (i), then the Conversion Price shall be as defined in Section
4.4 herein. Should conversion occur under Section 4.2 (a) (ii), the portion of
the Line of Credit converted thereunder shall be automatically converted into
Common Stock of the Company at the average Market Price of the Company Common
Stock as exists thirty (30) days prior to the conversion thereunder.
(b) Upon the occurrence of an event specified in paragraph
4.2(a), this Line of Credit shall be converted automatically without any further
action by the Lenders of this Line of Credit and whether or not this Line of
Credit is surrendered to the Company, provided, however, that the Company shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless this Line of Credit is either delivered to
the Company, as hereinafter provided, or the Lender notifies the Company or any
transfer agent, as hereinafter provided, that this Line of Credit has been lost,
stolen, or destroyed and executes an agreement satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith.
4.3 CONVERSION PROCEDURE.
(a) Any party desiring to convert any portion of this Line
of Credit shall provide written Notice of its intent to the other party.
Company's conversion of any portion of this Line of Credit shall be made with a
demand that Lender surrender the Line of Credit within seven (7) days receipt of
such notice ("Demand Period"). Thereafter within the Demand Period, Company
shall issue Common Stock to Lender and/or provide written notification of its
election to convert and issue Common Stock at some future time and Lender shall
surrender this Line of Credit for replacement. Company shall thereafter issue a
replacement Line of Credit indicating changes made due to conversion thereunder.
Lender's conversion of this Line of Credit will be effected by the surrender
hereof at the principal office of the Company at any time during normal business
hours, together with a written notice by the Lender hereof stating that such
Lender desires to convert the entire portion, or a stated amount, represented by
the Line of Credit into Common Stock. Each conversion of a Line of Credit will
be deemed to have been effected as of the close of business on the date on which
such Line of Credit has been surrendered and such notice has been received, and
at such time, the rights of the Lender of such Line of Credit as such Lender
will cease and the Person or Persons in whose name or names any certificate or
certificates for shares of Common Stock are to be issued upon such conversion
will be deemed to have become the Lender or Lenders of record of the shares of
Common Stock represented thereby.
4
<PAGE>
(b) As soon as possible after a conversion has been
effected (but in any event within ten (10) business days in the case of
subparagraph (i) below), the Company will deliver to the converting Lender:
(i) a certificate or certificates
representing the number of shares of Common Stock issuable by reason of such
conversion in such name or names and such denomination or denominations as the
converting Lender has specified:
(ii) Lender understands that no interest is
due or payable on any amount of the Line of Credit converted hereunder; and
(iii) a replacement Line of Credit
representing the principal amount of the Line of Credit delivered to the Company
in connection with such conversion but which was not converted.
(c) If for any reason the Company is unable to pay any
accrued interest on the Line of Credit being converted, the Company will pay
such accrued interest to the converting Lender as soon thereafter as funds of
the Company are legally available for such payment. At the request of any such
converting Lender, the Company will provide such Lender with written evidence of
its obligation to such Lender.
(d) The issuance of certificates for shares of Common
Stock upon conversion of this Line of Credit will be made without charge to the
Lender of this Line of Credit for any issuance tax in respect thereof or other
cost incurred by the Company in connection with such conversion and the related
issuance of shares of Common Stock. Upon conversion of any portion of the
principal amount of this Line of Credit, the Company will take all such actions
as are necessary in order to insure that the Common Stock issuable with respect
to such conversion will be validly issued, fully paid and nonassessable.
(e) The Company will not close its books against the
transfer of this Line of Credit or of Common Stock issued or issuable upon
conversion of this Line of Credit in any manner which interferes with the timely
conversion of this Line of Credit.
(f) If any fractional interest in a share of Common Stock
would, except for the provisions of this paragraph (f), be deliverable upon any
conversion of any portion of the principal amount of this Line of Credit, the
Company, in lieu of delivering the fractional share therefor, will pay an amount
to the Lender thereof equal to the Market Price of such fractional interest as
of the date of conversion.
5
<PAGE>
4.4 CONVERSION PRICE. The Conversion Price will be the Average Market
price for the Company's Common Stock for the thirty (30) days prior to the
Conversion date.
4.5 SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision will be proportionately reduced, and if the Company at any time
combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.
4.6 CERTAIN EVENTS. If any event occurs of the type contemplated by the
provisions of this Section 4 but not expressly provided for by such provisions,
then the Company's board of directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Lender of this Line of
Credit; provided that no such adjustment will increase the Conversion Price as
otherwise determined pursuant to this Section 4 or decrease the number of shares
of Common Stock, other than through a reverse stock split, issuable upon
conversion of this Line of Credit.
4.7 NOTICES.
(a) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof to the Lender of this Line
of Credit.
(b) The Company will give written notice to the Lender of
this Line of Credit at least ten (10) days prior to the date on which the
Company closes its books or takes a record (i) with respect to any dividend, or
(ii) for determining rights to vote with respect to any, dissolution or
liquidation.
5. DEFAULT.
5.1 EVENTS OF DEFAULT. If any of the following events (herein called
"Events of Default") shall occur:
(a) the Company shall default in the payment of any part
of the principal of this Line of Credit,
(b) the Company shall default in the payment of any
interest on this Line of Credit for more than fifteen (15) days after the same
shall become due and payable,
6
<PAGE>
(c) a court having jurisdiction in the premises shall
enter a decree or order for relief in respect of the Company in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Company or for any
substantial part of its property, or ordering the winding-up or liquidation of
its affairs, and such decree or order shall remain unstayed and in effect for a
period of sixty (60) consecutive days; or
(d) the Company shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, shall consent to the entry of an order for relief in an involuntary case
under any such law, or shall consent to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of the Company or for any substantial part of its property, or
shall make any general assignment for the benefit of creditors, or shall take
any corporate action in furtherance of any of the foregoing,
then and in any such event the Lender of this Line of Credit may at any time
(unless all defaults theretofore or thereupon shall have been remedied) at its
option, by written notice to the Company, declare this Line of Credit to be due
and payable within thirty (30) days of receipt of such notice by Company,
whereupon the non-converted portion of the Line of Credit shall forthwith mature
and become due and payable.
5.2 REMEDIES ON AND NOTICES OF DEFAULT. Subject to the provisions of
Section 6, in case any one or more Events of Default shall occur, the Lender of
this Line of Credit may proceed to protect and enforce the rights of such Lender
by a suit in equity, action at law or other appropriate proceeding, whether for
the specific performance of any agreement contained in this Line of Credit, or
for an injunction against a violation of any of the terms or provisions hereof
or thereof, or in aid of the exercise of any power granted hereby or thereby or
by law. In case of a default under this Line of Credit, the Company will pay to
the Lender of this Line of Credit such further amount as shall be sufficient to
cover the reasonable cost and expense of enforcement, including, without
limitation, reasonable attorneys' fees. If the Lender of this Line of Credit
shall give any notice or take any other action in respect of a claimed default,
the Company shall forthwith give written notice thereof to all other Lenders of
similarly subordinated Line of Credits at the time outstanding, describing the
notice or action and the nature of the claimed default. No course of dealing and
no delay on the part of any Lender of this Line of Credit in exercising any
right shall operate as a waiver thereof or otherwise prejudice such Lender's
rights or the rights of the Lender of any similarly subordinated Line of
Credits. No remedy conferred by this Line of Credit upon the Lender shall be
exclusive of any other remedy referred to herein or now or hereafter available
at law, in equity, by statute or otherwise.
6. SUBORDINATION.
7
<PAGE>
6.1 SUBORDINATED LINE OF CREDITS SUBORDINATE TO SENIOR INDEBTEDNESS.
The provisions of this Section 6 apply notwithstanding anything to the contrary
contained in this Line of Credit. The Company covenants and agrees, and the
Lender of this Line of Credit, by such Lender's acceptance hereof, likewise
covenants and agrees, that, to the extent and in the manner hereinafter set
forth in this Section, the indebtedness represented by this Line of Credit and
the payment of the principal of and interest on this Line of Credit are hereby
expressly made subordinate and subject in right of the prior payment in full of
all Senior Indebtedness.
6.2 PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
(a) In the event of any Insolvency or Liquidation
Proceeding, all Senior Indebtedness shall first be paid in full before the
Lender of this Line of Credit is entitled to receive any direct or indirect
payment or distribution of any cash, property or securities on account of the
principal of or interest on this Line of Credit.
(b) In the event that, notwithstanding the foregoing
provisions of this Section 6.2, the Lender of this Line of Credit shall have
received any payment from or distribution of assets of the Company in an
Insolvency or Liquidation Proceeding or the estate created by the commencement
of any such Insolvency or Liquidation Proceeding, of any kind or character in
respect of this Line of Credit whether in cash, property or securities including
any payment or distribution, which may be payable or deliverable by reason of
the payment of any other indebtedness of the Company being subordinated to the
payment of this Line of Credit) before all Senior Indebtedness is paid in full,
then and in such event such payment or distribution shall be received and held
in trust for and shall be paid over to the Lenders of the Senior Indebtedness
remaining unpaid (or their respective Representatives), to the extent necessary
to pay all such Senior Indebtedness in full after giving effect to any
substantially concurrent payment or distribution to the Lenders of such Senior
Indebtedness, for application to the payment in full of such Senior
Indebtedness.
6.3 SUBROGATION TO RIGHTS OF LENDERS OF SENIOR INDEBTEDNESS. After all
amounts payable under or in respect of Senior Indebtedness are paid in full, the
Lender of this Line of Credit shall be subrogated to the extent of the payments
or distributions made to the Lenders of, or otherwise applied to payment of,
such Senior Indebtedness pursuant to the provisions of this Section 6 (equally
and ratably with the Lenders of all indebtedness of the Company which by its
express terms is subordinate and subject in right of payment to Senior
Indebtedness to substantially the same extent as this Line of Credit is so
subordinate and subject in right of payment and which is entitled to like rights
of subrogation), to the rights of the Lenders of such Senior Indebtedness (or
their respective Representatives) to receive payments and distributions of cash,
property and securities applicable to the Senior Indebtedness until the
principal of and interest on this Line of Credit shall be paid in full. For
purposes of such subrogation, no payments or distributions to the Lenders of the
Senior Indebtedness (or their respective Representatives) of any cash, property
or securities to which the Lender of this Line of Credit would be entitled
except for the provisions of this Section 6, and no payments over pursuant to
the provisions of this Section 6 to the Lenders of Senior Indebtedness (or their
respective Representatives) by the Company or the Lender of this Line of Credit
shall, as among the Company and its creditors (other than Lenders of Senior
Indebtedness and the Lender of this Line of Credit), be deemed to be a payment
or distribution by the Company to or on account of Senior Indebtedness it being
understood that the provisions of this Section 6 are solely for the purpose of
defining the relative rights of the Lenders of Senior Indebtedness on the one
hand and the Lender of this Line of Credit on the other hand.
8
<PAGE>
6.4 RIGHTS OF LENDERS NOT TO BE IMPAIRED. Nothing contained in this
Section 6 or elsewhere in this Line of Credit is intended to or shall:
(a) impair, as among the Company, its creditors other than
Lenders or Senior Indebtedness and the Lender of this Line of Credit, the
obligation of the Company, which is absolute and unconditional to pay to the
Lender of this Line of Credit the principal of and premium, if any, and interest
on this Line of Credit as and when the same shall become due and payable in
accordance with their terms; or
(b) affect the relative rights against the Company of the
Lender of this Line of Credit and creditors of the Company other than the
Lenders of Senior Indebtedness, or
(c) prevent the Lender of this Line of Credit from
exercising all remedies otherwise permitted by applicable law upon default
subject to the rights, if any, under this Section 6 of the Lenders of Senior
Indebtedness to receive payments or distributions otherwise payable or
deliverable to, or received by, such Lender upon the exercise of any such remedy
and subject to the restriction on acceleration set forth in paragraph 6.
6.5 NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or
future Lender of any Senior Indebtedness, or Representative thereof, to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act by any such Lender or Representative thereof, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Line of Credit regardless of any knowledge thereof which any such Lender or
Representative thereof may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the Lenders of Senior Indebtedness (or their Representatives, if applicable)
may, at any time and from time to time, without the consent of or notice to the
Lender of this Line of Credit, without incurring responsibility to the Lender of
this Line of Credit and without impairing or releasing the subordination and
other benefits provided in this Section 6 or the obligations thereunder of the
Lender of this Line of Credit to the Lenders of Senior Indebtedness, do any one
or more of the following all without notice to the Lender of this Line of Credit
and even if any right of reimbursement or subrogation or other right or remedy
of the Lender of this Line of Credit is affected, impaired or extinguished
thereby:
(a) change the manner, place or terms of payment or change
or extend the time of payment of, or renew, exchange, amend or alter, the terms
of any Senior Indebtedness, any security therefor or guaranty thereof or any
liability of the Company or any guarantor to such Lender, or any liability
incurred directly or indirectly in respect thereof, or otherwise amend, renew,
exchange, modify or supplement in any manner Senior Indebtedness or any
instrument evidencing or guaranteeing or securing the same or any agreement
under which Senior Indebtedness is outstanding;
9
<PAGE>
(b) sell, exchange, release, surrender, realize upon,
enforce or otherwise deal with in any manner and any order any property pledged,
mortgaged or otherwise securing Senior Indebtedness or any liability of the
Company or any guarantor to such Lender, or any liability incurred directly or
indirectly in respect thereof;
(c) settle or compromise any Senior Indebtedness or any
other liability of the Company or any guarantor of the Senior Indebtedness to
such Lender or any security therefor or any liability Incurred directly or
indirectly in respect thereof and apply any sums by whomsoever paid and however
realized to any liability (including, without limitation, Senior Indebtedness)
in any manner or order; and
(d) fail to take or to record or otherwise perfect, for
any reason or for no reason, any lien or security interest securing Senior
Indebtedness by whomsoever granted, exercise or delay in or refrain from
exercising any right or remedy against the Company or any security or any
guarantor or any other person, elect any remedy and otherwise deal freely with
the Company and any security and any guarantor of the Senior Indebtedness or any
liability of the Company or any guarantor to such Lender or any liability
incurred directly or indirectly in respect thereof.
6.6 RELIANCE ON COURT ORDERS; EVIDENCE OF STATUS. Upon any payment or
distribution of assets of the Company referred to in Section 6.2, the Lender of
this Line of Credit shall be entitled to rely upon a certificate of the
receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution delivered to the Lender of this Line of
Credit for the purpose of ascertaining the persons entitled to participate in
such payment or distribution, the Lenders of Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Section 6.
In the absence of any such receiver, trustee in bankruptcy, liquidating
trustee, agent or other person, the Lender of this Line of Credit shall be
entitled to rely upon a written notice by a person representing himself to be a
Lender of Senior Indebtedness (or a Representative on behalf of such Lender) as
evidence that such person is a Lender of Senior Indebtedness (or is such a
Representative) for any relevant purpose. In the event that any Lender
determines in good faith that other evidence is required with respect to the
right of any person as a Lender of Senior Indebtedness (or such a
Representative), as to the extent to which such person is entitled to
participate in such payment or distribution, and as to other facts pertinent to
the rights of such person under this Section 6, such Lender may request such
person to furnish evidence to the reasonable satisfaction of such Lender as to
the amount of Senior Indebtedness held by such person, the extent to which such
person is entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such person under this Section 6, and if such
evidence is not furnished such Lender may defer (without liability to any Lender
of Senior Indebtedness or any Representative of such Lender) any payment to such
person pending judicial determination as to the right of such person to receive
such payment or until such time as such Lender shall be otherwise satisfied as
to the right of such person to receive such payment.
10
<PAGE>
6.7 NOT TO PREVENT EVENTS OF DEFAULT. The failure to make a payment on
account of the principal of or interest on this Line of Credit by reason of any
provision of this Section 6 shall not be construed as preventing the occurrence
of a default or an Event of Default under this Line of Credit. Except as
expressly provided in paragraph 6, nothing in this Section 6 shall affect the
rights of the Lender of this Line of Credit to accelerate the maturity of this
Line of Credit in accordance with its terms.
6.8 COMPANY'S RIGHT TO CONVERT NOT WITHHELD. Nothing herein shall
effect or limit the right of the Company to convert the Line of Credit or any
portion thereof at any time prior to Maturity of the Line of Credit.
6.9 AMENDMENTS. Without the prior written consent of the Lenders of the
Senior Indebtedness, the Company and the Lender of this Line of Credit shall not
(i) amend, supplement or otherwise modify any provision of this Section 6, (ii)
accelerate the payment of the principal of or interest on this Line of Credit or
(iii) if such amendment would have a material adverse effect on the Lenders of
the Senior Indebtedness, amend, supplement or otherwise modify any other
provision of this Line of Credit.
7. TERMINATION. This Revolving Line of Credit Agreement shall terminate
two (2) years from the date of execution of this herein Revolving Line of Credit
Agreement, unless terminated otherwise by mutual agreement of the Lender and
Company upon thirty (30) days written notice.
8. GENERAL PROVISIONS.
(a) This Line of Credit shall be governed by and construed
in accordance with the laws of the State of California. If any one or more of
the provisions contained in this Line of Credit shall for any reason be found by
a court of competent jurisdiction to be invalid, illegal or unenforceable in any
respect, the parties agree that such court may modify such provision to the
extent necessary to make it valid, legal and enforceable. In any event, such
provision shall be separable and shall not limit or affect the validity,
legality or enforceability of any other provision thereunder.
(b) Unless otherwise specifically stated herein, all
notices, demands, payments or other communications to be given or delivered
pursuant to this Line of Credit shall be in writing by Fed Ex delivery or
certified mail and shall be given to the Company at its principal executive
offices and to the Lender of this Line of Credit at the Lender's last known
address as shown in the records of the Company.
(c) It is understood that this Line of Credit has been
facilitated through the use of agents, finders and/or brokers representative of
the Company and/or the Lender.
11
<PAGE>
(d) All of the covenants contained herein shall bind the
Company, its successors and assigns.
IN WITNESS WHEREOF, the Company and the Lender have executed and
delivered this Line of Credit on the date first written above.
FOR: KANAKARIS COMMUNICATIONS, INC. (THE "COMPANY")
By: /s/ Alex Kanakaris
-----------------------------------------
Alex Kanakaris, President and CEO
DATED: December 10, 1999
FOR: ALLIANCE EQUITIES (THE "LENDER")
By: /s/ Richard Epstein
----------------------------------------
Richard Epstein, President
DATED: December 10, 1999
12
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Amendment Number Three to the Form SB-2
Registration Statement of Kanakaris Communications, Inc. and Subsidiary our
report for the years ended September 30, 1998, and 1997 dated March 10, 1999
(except for Notes 1(B) and 6(B) as to which the date is September 21, 1999),
relating to the consolidated financial statements of Kanakaris Communications,
Inc. and Subsidiary which appear in such Form SB-2, and to the reference to our
firm under the caption "Experts" in the Prospectus.
/s/ Weinberg & Company, P.A.
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
December 16, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Amendment Number Three to the Form SB-2
Registration Statement of Kanakaris Communications, Inc. and Subsidiary our
report for the years ended September 30, 1999, and 1998 dated December 2, 1999,
relating to the consolidated financial statements of Kanakaris Communications,
Inc. and Subsidiary which appear in such Form SB-2, and to the reference to our
firm under the caption "Experts" in the Prospectus.
/s/ Weinberg & Company, P.A.
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
December 16, 1999
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2
Amendment No. 3 of our report dated January 14, 1998, related to the financial
statements of Kanakaris Communications, Inc. (formerly Desience Corporation),
and to the reference to our Firm under the caption "Experts" in the Prospectus.
/S/ TANNER + CO.
Salt Lake City, Utah
December 20, 1999
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 155,063
<SECURITIES> 0
<RECEIVABLES> 154,110
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 434,085
<PP&E> 50,051
<DEPRECIATION> 12,718
<TOTAL-ASSETS> 1,000,303
<CURRENT-LIABILITIES> 1,623,919
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0
10,000
<COMMON> 25,958
<OTHER-SE> (659,574)
<TOTAL-LIABILITY-AND-EQUITY> 1,000,303
<SALES> 968,758
<TOTAL-REVENUES> 968,758
<CGS> 661,707
<TOTAL-COSTS> 4,334,957
<OTHER-EXPENSES> (32,980)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208,641
<INCOME-PRETAX> (3,541,860)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,541,860)
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