<PAGE>
As filed with the Securities and Exchange Commission on March 3, 2000
Registration No. 333-________
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
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
------------------
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to Offering Price Aggregate Registration
Securities to be Registered be Registered (1) per Unit Offering Price (2) Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock 2,568,046 $1.47 $3,775,028 $996.61
====================================================================================================================
</TABLE>
(1) In the event of a stock split, stock dividend, or similar transaction
involving common stock of the Registrant, in order to prevent dilution,
the number of shares registered shall be automatically increased to cover
the additional shares in accordance with Rule 416(a) under the Securities
Act.
(2) Estimated solely for the purpose of determining the registration fee.
Calculated pursuant to Rule 457(c) under the Securities Act, on the basis
of the average of the bid and asked price per share as reported for such
securities by the NASD's OTC Bulletin Board on February 28, 2000.
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, MARCH 3, 2000
PROSPECTUS
Kanakaris Communications, Inc.
2,568,046 Shares of Common Stock
The 2,568,046 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.
, 2000
<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 December 31, 1999, we had an accumulated deficit of
$10,080,624. 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 have entered into an agreement with the
selling security holders pursuant to which the selling security holders will
purchase debentures in the aggregate principal amount of $1,000,000 and will
receive warrants to purchase an aggregate of 300,000 shares of common stock
within 30 days following the date of this prospectus if certain conditions
relating to the market price of our common stock are met. In addition, 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>
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. Kanakaris or Mr. Lotspeich could have a material adverse effect on our
company. We are the sole beneficiary of a term life insurance policy in the face
amount of eight million dollars covering Mr. Kanakaris. We have not entered into
any employment agreement with Mr. Kanakaris, Mr. Lotspeich or any other officer
of our company.
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
Quarter Ended December 31, 1999:...........................$ .9375 $ .52
The closing price of our common stock on March 2, 2000 was $1.625.
At March 3, 2000, there were approximately 256 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 December 31, 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>
December 31, 1999
-------------
<S> <C>
Cash and cash equivalents......................................... $ 141,572
=============
Long-term debt.................................................... 46,526
=============
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 27,520,050 shares(1)........ 27,520
Additional paid-in capital................................... 9,003,584
Treasury stock............................................... (201,920)
Stock subscriptions.......................................... (1,260)
Accumulated deficit.......................................... (10,080,424)
-------------
Total stockholders' deficiency............................. (1,242,500)
-------------
Total capitalization.............................................. $ (1,054,402)
=============
</TABLE>
- -------------------
(1) Excludes 5,150,000 shares of common stock issuable pursuant to the exercise
of stock options outstanding as of December 31, 1999, at a weighted average
exercise price of $.55 per share, all of which were exercisable on December
31, 1999. Also excludes 1,783,334 shares of common stock issuable pursuant
to the conversion of convertible debentures outstanding as of December 31,
1999, all of which were convertible on December 31, 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. The
selected data presented below for the three month periods ended December 31,
1998 and 1999 are derived from the unaudited statements of our company included
elsewhere in this prospectus. Historical results are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
FEBRUARY 25, 1997 FISCAL YEAR ENDED THREE MONTHS ENDED
(INCEPTION) TO SEPTEMBER 30, DECEMBER 31,
SEPTEMBER 30, ------------- ------------- -----------------------------
1997 1998 1999 1998 1999
------------- ------------- ------------- ------------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C>
Net sales................................ $ 8,475 $ 919,905 $ 968,758 $ 227,255 $ 93,588
Cost of sales............................ - 481,349 661,707 124,988 67,830
------------- ------------- ------------- ------------- -------------
Gross profit........................ 8,475 438,556 307,051 102,267 25,758
Operating expenses:
Marketing and advertising........... 14,717 98,110 822,306 701 211,175
Provision for bad debt.............. - 300,000 1,000 - -
General and administrative.......... 764,774 4,105,320 2,849,944 182,146 1,533,188
------------- ------------- ------------- ------------- -------------
Total operating expenses.......... 779,491 4,503,430 3,673,250 182,847 1,744,363
------------- ------------- ------------- ------------- -------------
Operating loss.................... (771,016) (4,064,874) (3,366,199) (80,580) (1,718,605)
Other expense (income) net............... (5,135) 8,475 (175,661) 3,004 2,321
------------- ------------- ------------- ------------- -------------
Net loss.......................... $ (765,881) $ (4,056,399) $ (3,541,860) $ (77,576) $ (1,716,284)
============= ============= ============= ============= =============
Net loss attributable to
common shares................... $ (765,881) $ (4,056,399) $ (3,541,860) $ (77,576) $ (1,716,284)
============= ============= ============= ============= =============
Basic and diluted net loss per
common share............................ $ (.2733) $ (.2813) $ (.15) $ (.0040) $ (.0640)
============= ============= ============= ============= =============
Weighted average common
shares used in determining
net loss per share...................... 2,802,154 14,419,873 22,945,540 19,080,612 26,811,483
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, DECEMBER 31,
------------------------------------ ------------
1997 1998 1999 1999
---- ---- ---- ----
CONSOLIDATED BALANCE SHEETS DATA:
<S> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 53,804 $ 5,415 $ 155,063 $ 141,572
Working capital (deficiency)............................. 79,326 (411,984) (1,189,834) (1,696,627)
Total assets............................................. 309,763 787,970 1,000,303 792,582
Long-term debt........................................... - 20,753 - 46,526
Total stockholders' equity (deficiency).................. 290,990 160,421 (623,616) (1,242,500)
</TABLE>
8
<PAGE>
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 250 on-demand
movies available with full-screen scalability and television quality. We have
over 300 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, Mitsubishi and many others.
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."
To date, substantially 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.
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 December
31, 1999, we had an accumulated deficit of $10,080,424. 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.
Any of these factors could cause operating results to vary
significantly from prior periods and period-to-period. As a result, we believe
that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance. Fluctuations in our operating results could cause the price of our
common stock to fluctuate substantially.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net sales decreased $133,667 or 58.8%, from $227,255 for the three
months ended December 31, 1998 to $93,588 for the three months ended December
31, 1999. This decrease in total sales was primarily due to a decrease in sales
of our OPCON Module System which the Company believes to be a result of normal
fluctuations in the timing of orders for the Company's products. The portion of
net sales derived from our e-commerce businesses decreased $24,828 or 98.9%,
from $25,106 for the three months ended September 30, 1998 to $278 for the three
months ended December 31, 1999 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 decreased $108,839 or 53.8%, from
$202,149 for the three months ended December 31, 1998 to $93,310 for the three
months ended December 31, 1999.
Gross profit decreased $76,509 or 74.8%, from $102,267 for the year
ended December 31, 1998 to $25,758 for the three months ended December 31, 1999.
The decrease in gross profit and corresponding decrease in gross margin from
45.0% to 27.5% was primarily due to the purchase of intangible movie rights for
use on our web sites.
Total operating expenses increased $1,561,516 from $182,847
for the three months ended December 31, 1998 to $1,744,363 for the three months
ended September 30, 1999. This increase in total operating expenses was
primarily due to a significant increase in our consulting fees from $11,000 for
the three months ended December 31, 1998 to $1,065,480 for the three months
ended December 31, 1999 and an increase in marketing and investment costs and
professional fees from $25,201 for the three months ended December 31, 1998 to
$427,888 for the three months ended December 31, 1999.
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.
10
<PAGE>
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. During the fourth quarter of the year ended September
30, 1999, we generated net sales of $196,591. Because our cost of sales was
$204,455 during that period, we incurred a negative gross profit of $7,864. This
negative gross profit was primarily due to a significant increase in web hosting
and design costs relating to our NetBooks.com and NetMovieMania.com web sites
without a commensurate increase in our net sales.
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. During the
fourth quarter of the year ended September 30, 1999, we incurred a net loss of
$1,376,387 primarily due to an increase in marketing costs related to promoting
our company and its products and services, an increase in interest expense
related to our newly issued debentures, an increase in professional fees related
to the preparation of this prospectus and an increase in consulting fees.
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.
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 December 31, 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.
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As of December 31, 1999, we had a negative working capital of
$1,696,627 and an accumulated deficit of $10,080,424. As of that date, we had
$141,572 in cash and cash equivalents and $46,428 in accounts receivable. We
also had obligations under our debentures in the amount of $957,500.
Cash used in our operating activities totaled $506,079 for the three
months ended December 31, 1999 as compared to $40,908 for the three months ended
December 31, 1998. Cash provided by our investing activities totaled $52,088 for
the three months ended December 31, 1999 as compared to no cash provided by our
investing activities for the three months ended December 31, 1998.
Cash provided by our financing activities was $440,500 for the three
months ended December 31, 1999. $337,500 of that amount was raised through the
issuance of our debentures. Cash provided by our financing activities was
$57,125 for the three months ended December 31, 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.
In January 2000, our convertible debentures that were outstanding as of
December 31, 1999 were converted into an aggregate of 1,783,334 shares of our
common stock. In addition, during February 2000 we issued $1,000,000 of our 10%
Convertible Subordinated Debentures due February 1, 2001. The net proceeds of
that offering, after the payment of finder's fees and before the payment of
other related expenses, was $870,000.
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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IMPACT OF YEAR 2000
We have not experienced any significant problems as a result of the
arrival of the Year 2000. Although no significant problems have materialized to
date, we will continue to monitor our systems (both IT and non-IT) throughout
the Year 2000, including the proper recognition of the leap year.
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 250 on-demand
movies available with full-screen scalability and television quality. We have
over 300 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, Mitsubishi and many others.
To date, substantially 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 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.
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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. We also design and manufacture computer command centers used
by corporations and governmental agencies. We are focused on downloadable
Internet content and anticipate that this component 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
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
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.
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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 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 250
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.
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.
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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 250 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 implementing a 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, Inc. 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.
Currently, online booksellers account for about three percent of the
market for books, and industry experts believe that this market share is
growing. 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.
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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. In February 1999, we entered
into an alliance with ION Systems, Inc. for use of their secure online download
technologies. Using this 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 will be
made available on a book-by-book basis 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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We are also working with ION Systems, Inc. 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 partners 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.
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, Pacific Bell and
many others.
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 saw increased business from South America, including multiple orders from
Venezuela, and also saw 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.
We are a leader in the design and production of quality metal products.
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. 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.
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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 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, which was approximately $40,000 in January 2000.
ION SYSTEMS, INC.
Our license agreement with ION Systems, Inc. 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, Inc. 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 Systems' 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, Inc. is $100.00, and the royalties for each
book sale and product sale are 20% and 5%, respectively, of gross revenue.
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.
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.
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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 and the advertisement we placed in the February 15, 2000 issue of the
international edition 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.
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.
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<PAGE>
o Most of our full-length movies start to stream and can begin
to be viewed in approximately one minute rather than having a
downloading process of a few hours before the movie can be
viewed, as required on many other web sites.
o We currently have over 250 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. 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
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.
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.
21
<PAGE>
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 February 18, 2000, we employed or contracted a total of 7
employees and 5 consultants on a full or part-time basis. We have 9 full-time
and 3 hourly workers. Eight 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.
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. The claims against Mr. Kanakaris individually have been dismissed. We
have engaged counsel to analyze the complaint and vigorously defend us against
all of Mr. Adams' claims.
22
<PAGE>
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 vigorously defend us against all of
Institutional Management's claims.
We have also counterclaimed against Institutional Management and
commenced a third-party action against certain Institutional Management
affiliates, namely Power Media Group, Pinnacle Management, Inc., and Frank
Custable. In our counterclaim and cross-claims, we seek injunctive relief to
block any further transfer of the converted shares, and damages for, among other
things, breach of a consulting agreement, fraud, conversion and unjust
enrichment. We intend to vigorously pursue all available remedies against the
aforementioned parties. Alpha Tech has also filed an action for interpleader, by
which it is tendering to the court stock certificates that it holds and to which
the parties are laying claim. Institutional Management and our company, as
claimants, are nominal defendants therein.
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.
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<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.................................. 53 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 President of Desience Corporation since
June 1997. He has served as our Vice Chairman of the Board and 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, President and 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.
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<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
ANNUAL COMPENSATION
-------------------
NAME AND
PRINCIPAL POSITION SALARY BONUS
------------------ ------ -----
Alex Kanakaris........... $105,000 $73,378
Chairman of the Board,
President and Chief
Executive Officer
Branch Lotspeich........ $105,000 $18,838
Vice Chairman of the
Board and President of
Desience Corporation
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.
25
<PAGE>
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.
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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of our
company pursuant to the foregoing provisions, or otherwise, we have 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.
PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of March 3, 2000 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.
The following calculations of the percentages of outstanding shares are
based on 29,881,045 shares of our common stock outstanding as of March 3, 2000.
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 and interest payable thereon that are convertible within sixty days
of March 3, 2000, as described in the footnotes below. Percentage of ownership
is calculated pursuant to Securities and Exchange Commission Rule 13d-3(d)(i).
The number of shares being offered by the selling security holders
represents (i) 200% of the shares of common stock issuable to the selling
security holders upon conversion of debentures and as payment of interest
thereunder and (ii) the shares of common stock issuable to selling security
holders upon exercise of warrants issued to the selling security holders.
Because the number of shares of common stock issuable upon conversion
of the debentures and as payment of interest thereon is dependent in part upon
the market price of the common stock prior to a conversion and is subject to
certain conversion limitations described elsewhere in this prospectus, the
actual number of shares of common stock that will then be issued in respect of
such conversions or interest payments and, consequently, offered for sale under
this registration statement, cannot be determined at this time. We have
contractually agreed to include herein 2,568,046 shares of common stock issuable
upon conversion of the debentures, payment of interest thereunder and exercise
of the warrants issued to the selling security holders and have disregarded the
conversion limitations for purposes of the table below.
26
<PAGE>
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>
Alex F. Kanakaris..................... 5,015,147(3) 15.21% - 5,015,147(3) 15.21%
David Valenti
519 Idaho Avenue
Santa Monica, CA 90403................ 2,497,280(4) 8.27% - 2,497,280(4) 8.27%
Branch Lotspeich...................... 2,474,976(5) 7.96% - 2,477,976(5) 7.96%
Bank Insinger de Beaufort
Herengtecht 551
1017 BW Amsterdam
Netherlands........................... 1,284,022(6) 4.12% 1,284,022(6) - -
John Robert McKay..................... 1,000,000(7) 3.31% - 1,000,000(7) 3.31%
AJW Partners, LLC
155 First Street, Suite B
Mineola, NY 11501..................... 642,012(8) 2.10% 642,012(8) - -
New Millenium Capital Partners II, LLC
155 First Street, Suite B
Mineola, NY 11501..................... 642,012(8) 2.10% 642,012(8) - -
David T. Shomaker(9).................. 175,000 * - 175,000 *
All directors and executive
officers as a group
(4 persons)(10)....................... 11,162,403 25.10% - 11,162,403 25.10%
</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 being offered are sold pursuant to this
prospectus.
(3) Consists of 1,915,147 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 2,100,000 shares of common stock
issuable upon exercise of options. As of the date of this prospectus,
none of these shares were registered or entitled to be registered for
resale under the Securities Act.
(4) Consists of 2,197,280 shares of common stock issued and outstanding and
300,000 shares of common stock issuable upon exercise of options.
(5) Consists of 1,274,976 shares of common stock issued and outstanding and
1,200,000 shares of common stock issuable upon exercise of options. As
of the date of this prospectus, none of these shares were registered or
entitled to be registered for resale under the Securities Act.
(6) Represents 1,134,022 shares of common stock issuable upon conversion of
debentures and as payment of interest thereon and 150,000 shares of
common stock issuable upon exercise of warrants.
(7) Consists of 655,000 shares of common stock issued and outstanding and
345,000 shares of common stock issuable upon exercise of options. As of
the date of this prospectus, none of these shares were registered or
entitled to be registered for resale under the Securities Act.
(8) Represents 567,012 shares of common stock issuable upon conversion of
debentures and as payment of interest thereon and 75,000 shares of
common stock issuable upon exercise of warrants.
(9) Mr. Shomaker is a partner of Haynie & Co., which owns 175,000 shares of
our company's common stock.
(10) Consists of 4,020,123 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 3,645,000 shares of common stock
issuable upon exercise of options.
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
The selling security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of our common stock being offered pursuant to this prospectus on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
selling security holders may use any one or more of the following methods when
selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account
o an exchange distribution in accordance with the rules of the
applicable exchange
o privately negotiated transactions
o short sales
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share
o a combination of any of these methods of sale
o any other method permitted by applicable law
The selling security holders may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus.
The selling security holders may also engage in short sales against the
box, puts and calls and other transactions in securities of our company or
derivatives of our company securities and may sell or deliver shares in
connection with these trades. The selling security holders may pledge their
shares to their brokers under the margin provisions of customer agreements. If a
selling security holder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In such event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
28
<PAGE>
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling security holders. We have agreed to indemnify the selling security
holders against specified losses, claims, damages and liabilities, including
liabilities under the Securities Act.
DESCRIPTION OF CONVERTIBLE DEBENTURES
The securities being offered by the selling security holders consist of
shares of common stock that are issuable upon the conversion of convertible
debentures and upon the exercise of warrants that we issued in a private
offering in February 2000. The debentures are in the original principal amount
of $1,000,000. The debentures bear an interest rate of 10% per annum. In this
transaction, we also issued five-year warrants to purchase an aggregate of
300,000 shares of our common stock at an initial exercise price of $1.90 per
share.
The debentures are convertible into common stock at a rate equal to the
lowest of $.97 or 66.66% of the average closing bid price for the common stock
during the 20 trading days immediately preceding the conversion date.
However, the debentures may not be converted into common stock, nor may
the holder receive shares in payment of interest, if the debenture holder and
any affiliate would, as a result, beneficially own more than 4.999% of our
company's issued and outstanding shares of common stock. This limitation could
be waived by the holder as to itself by giving 5 days' prior notice to us.
Further, as a separate restriction, a holder may not convert the debentures into
common stock, nor may the holder receive shares in payment of interest, if as a
result, he together with his affiliates would beneficially own in excess of
9.999% of our company's issued and outstanding common stock. This provision can
also be waived by the holder as to itself by giving 15 days' prior notice to us.
Finally, we may not issue upon conversion in excess of 19.999% of the number of
shares of common stock outstanding immediately prior to the closing of the sale
of the debentures (subject to adjustment) if the common stock is then listed for
trading on the Nasdaq National Market or the Nasdaq Small Cap Market and we have
not obtained shareholder approval for such issuance. However, the conversion
limitations do not preclude a holder from converting and selling all or a
portion of the outstanding principal amount of the debentures that would result
in the beneficial ownership by such holder of less than 4.999% of 9.999% (as
applicable) of the shares of common stock then outstanding, and thereafter
converting and selling an additional similar portion of its holdings. In this
manner such holder could over time receive and sell a number of shares of common
stock in excess of 4.999% or 9.999% (as applicable) of the shares of common
stock outstanding while never beneficially owning more than 4.999% or 9.999% (as
applicable) at any one time.
As security for our performance of our obligation to issue shares upon
conversion of the debentures, we were required to deposit into an escrow account
1,290,000 shares of our common stock underlying those debentures (subject to
certain adjustments). If we fail to issue the appropriate number of shares of
common stock upon conversion of the debentures, the escrow agent will transfer
the appropriate number of escrow shares to the holder. The escrow arrangement
terminates when the debentures have been converted or redeemed by us or
otherwise repaid to the holders in full. Upon termination of the escrow
arrangement, the shares of our common stock, if any, remaining in the escrow
account will be returned to us.
The number of shares being offered by the selling security holders
represents (i) 200% of the shares of common stock issuable to the selling
security holders upon conversion of the debentures and as payment of interest
thereunder and (ii) the shares of common stock issuable to selling security
holders upon exercise of the warrants issued to the selling security holders.
Because the number of shares of common stock issuable upon conversion of the
debentures and as payment of interest thereon is dependent in part upon the
market price of the common stock prior to a conversion, the actual number of
shares of common stock that will then be issued in respect of such conversions
or interest payments and, consequently, offered for sale under this registration
statement, cannot be determined at this time. We have contractually agreed to
include herein 2,568,046 shares of common stock issuable upon conversion of the
debentures, payment of interest thereunder and exercise of the warrants issued
to the selling security holders.
29
<PAGE>
This prospectus does not cover the sale or other transfer of the
debentures or warrants or the issuance of shares of common stock to holders of
debentures upon conversion or to holders of warrants upon exercise. If a selling
security holder transfers its debentures or warrants prior to conversion or
exercise, the transferee of the debentures or warrants may not sell the shares
of common stock issuable upon conversion or exercise of the debentures or
warrants under the terms of this prospectus unless this prospectus is
appropriately amended or supplemented by us.
For the period a holder holds our debentures or warrants, 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 conversion of the debentures or exercise of the warrants. The
holders of the debentures and warrants may be expected to voluntarily convert
their debentures or exercise their warrants when the conversion or exercise
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 or warrants remain outstanding may be adversely affected.
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 December 31, 1999, $46,525 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
December 31, 1999, the outstanding principal balance of this note was $29,760.
Effective as of February 27, 1997, David Valenti, who is currently one
of our principal stockholders 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 December 31, 1999, the
outstanding principal balance of this note was $29,760.
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 December 31, 1999, the outstanding
principal balance of this note was $10,199.52.
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
December 31, 1999, the outstanding principal balance of this note was $5,760.
30
<PAGE>
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 December 31, 1999, the outstanding principal balance of this note
was $76,500, 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 December 31, 1999, the outstanding
principal balance of this note was $7,199.28.
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 December 31, 1999, the
outstanding principal balance of this note was $12,480.
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 December 31, 1999, the
outstanding principal balance of this note was $6,000.
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 December 31, 1999, the outstanding
principal balance of this note was $7,680.
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, $2,000 per month from November 1999 through January 2000 and
$4,000 per month commencing in February 2000.
On December 27, 1999, our company executed an unsecured promissory note
in favor of Branch Lotspeich in the principal amount of $35,000, with interest
at an annual rate of 5%. Payment of principal and accrued interest is due on or
before January 10, 2002, with monthly payments of at least 5% of the outstanding
balance to be made beginning in February 2000. As of February 23, 2000, the
outstanding principal balance of this note was $17,500.
On January 7, 2000, our company's Desience Division executed an
unsecured promissory note in favor of Alex Kanakaris in the principal amount of
$35,000, with interest at an annual rate of 5%. Payment of principal and accrued
interest is due on or before May 10, 2000. This note has been repaid in full.
31
<PAGE>
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 March 3,
2000, there were 29,881,045 shares of common stock outstanding held by
approximately 256 holders of record and 1,000,000 shares of Class A Convertible
Preferred Stock outstanding held by Alex Kanakaris, a director and the Chairman
of the Board, 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.
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.
32
<PAGE>
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.
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.
33
<PAGE>
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.
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.
34
<PAGE>
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
Consolidated Balance Sheet at December 31, 1999 (unaudited).................F-49
Consolidated Statements of Operations for the Three Months Ended
December 31, 1999 and 1998 (unaudited).................................F-51
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 (unaudited).................................F-52
Consolidated Statement of Changes in Stockholders' Equity for the
Three Months Ended December 31, 1999 (unaudited).......................F-54
Notes to Consolidated Financial Statements December 31, 1999 (unaudited)....F-55
KANAKARIS COMMUNICATIONS, INC.
(FORMERLY DESIENCE CORPORATION)
Page
----
Report of Independent Public Accountants....................................F-59
Consolidated Balance Sheets at September 30, 1997, 1996 and 1995............F-60
Consolidated Statements of Operations and Accumulated Deficit for
the Years Ended September 30, 1997, 1996 and 1995......................F-61
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995......................................F-62
Notes to Financial Statements for the Years Ended September 30,
1997, 1996 and 1995....................................................F-63
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>
<PAGE>
<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>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - continued
<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
BALANCE, SEPTEMBER 30, 1999 $(8,364,140) $ (201,920) $ (1,260) $ (623,616)
=========================== ============ =========== ============ =============
</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 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"). SyCoNet will 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>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 141,572
Accounts receivable 46,428
Inventories 250
Advances to suppliers 700
Current maturities of notes receivable -
shareholders and related parties 61,695
Interest receivable 4,807
Prepaid expenses 36,477
-------------
TOTAL CURRENT ASSETS 291,929
-------------
Property and equipment, net of accumulated
depreciation and amortization 37,144
-------------
Other assets:
Notes receivable - shareholders and
related parties - noncurrent 123,644
Organization costs - net 1,300
Security deposits 700
Goodwill - net of amortization 337,865
-------------
TOTAL OTHER ASSETS 463,509
-------------
TOTAL ASSETS $ 792,582
=============
F-49
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 908,778
Convertible debentures 957,500
Notes payable 35,000
Due to former shareholder of subsidiary 74,441
Other accrued liabilities 12,837
-------------
TOTAL CURRENT LIABILITIES 1,988,556
Long-term liabilities:
Royalties payable 46,526
-------------
TOTAL LIABILITIES 2,035,082
-------------
Stockholders' (deficiency) equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; 1,000,000 Class A Convertible issued
and outstanding 10,000
Common stock, $0.001 par value; 100,000,000
shares authorized; 27,520,050 issued and
outstanding 27,520
Additional paid-in capital 9,003,584
Accumulated deficit (10,080,424)
Less subscription receivable
(1,260,000 shares, common) (1,260)
Less cost of treasury stock
(99,024 shares, common) (201,920)
-------------
TOTAL STOCKHOLDERS' (DEFICIENCY) EQUITY (1,242,500)
-------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIENCY) EQUITY $ 792,582
=============
F-50
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Net sales $ 93,588 $ 227,255
Cost of sales 67,830 124,988
--------------- ---------------
GROSS PROFIT 25,758 102,267
--------------- ---------------
Operating expenses:
Executive compensation 98,112 26,905
Salaries 42,325 53,595
Employee benefits 1,622 -
Payroll taxes 11,148 3,011
Consulting fees 1,065,480 11,000
Royalties 2,333 12,943
Travel and entertainment 35,249 1,791
Telephone and utilities 12,652 6,914
Marketing and investment costs 211,175 701
Professional fees 216,713 24,500
Rent 7,899 8,565
Office and other expenses 17,607 14,806
Equipment rental and expense 953 1,315
Insurance 7,539 8,407
Depreciation and amortization 10,495 7,731
Taxes - other 2,400 -
Bank charges 661 663
--------------- ---------------
TOTAL OPERATING EXPENSES 1,744,363 182,847
--------------- ---------------
Loss before interest and other income (1,718,605) (80,580)
Interest and other income 2,321 3,004
--------------- ---------------
Net loss $ (1,716,284) $ (77,576)
=============== ===============
Net loss per common share -
basic and diluted $ (.06) $ (.01)
=============== ===============
Weighted average common shares
outstanding - basic and diluted 26,811,483 19,080,612
=============== ===============
</TABLE>
F-51
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,716,284) $ (77,576)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of goodwill 6,563 6,059
Depreciation and amortization 3,932 1,672
Consulting, incurred in exchange for common stock 1,029,400 -
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable 107,832 7,582
Inventory (250) (2,084)
Prepaid expenses 24,336 (1,390)
Advances to suppliers (700) 7,139
Interest receivable (2,403) (3,004)
Increase (decrease) in:
Accounts payable and accrued expenses (24,432) 13,708
Royalties payable 53,240 15,785
Customer deposits - (5,983)
Other current liabilities 12,837 26
--------------- ---------------
Net cash used in operating activities (506,079) (40,908)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,306) -
Decrease in notes receivable -
shareholders and related parties 61,694 -
Decrease in security deposits 700 -
--------------- ---------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 52,088 -
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) notes payable 35,000 (2,275)
Proceeds from convertible debt 337,500 59,400
Proceeds from sale of common stock 136 -
Proceeds from additional paid in capital 67,864 -
--------------- ---------------
TOTAL FROM FINANCING ACTIVITIES 440,500 57,125
--------------- ---------------
</TABLE>
F-52
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Net (decrease) increase in cash
and cash equivalents $ (13,491) $ 16,217
Cash and cash equivalents, beginning of period 155,063 5,415
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 141,572 $ 21,632
=============== ===============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended December 31, 1999, the Company issued 1,426,000
shares of common stock for consulting services having a fair value of
$1,029,400.
F-53
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
<CAPTION>
Common Stock Preferred Stock Additional
-------------------- ------------------- Paid-In Accumulated Treasury Stock
Shares Amount Shares Amount Capital Deficit Stock Subscriptions Total
---------- -------- --------- -------- ----------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
September 30, 1999 25,958,050 $ 25,958 1,000,000 $ 10,000 $ 7,907,746 $ (8,364,140) $ (201,920) $ (1,260) $ (623,616)
Stock issued for
cash: 136,000 136 - - 67,864 - - - 68,000
Stock issued for:
Consulting fees 1,401,000 1,401 - - 1,009,249 - - - 1,010,650
Professional
services 25,000 25 - - 18,725 - - - 18,750
Net (loss) for the
three months ended
December 31, 1999 - - - - - (1,716,284) - - (1,716,284)
---------- -------- --------- -------- ----------- ------------- ----------- --------- ------------
BALANCES
DECEMBER 31, 1999 27,520,050 $ 27,520 1,000,000 $ 10,000 $ 9,003,584 $(10,080,424) $ (201,920) $ (1,260) $(1,242,500)
========== ======== ========= ======== =========== ============= =========== ========= ============
</TABLE>
F-54
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Basis of presentation
- ---------------------
The condensed financial statements included herein have been prepared by
Kanakaris Communications, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes that the disclosures are adequate to make the information presented not
misleading when read in conjunction with the Company's financial statements for
the year ended September 30, 1999. The financial information presented reflects
all adjustments, which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The results of
operations for the three months ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full year ending September 30,
2000, or any other period.
Business Organization and Activity
- ----------------------------------
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.
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. 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.
F-55
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
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.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiary Kanakaris InternetWorks, Inc., and
Kanakaris InternetWorks, Inc.'s wholly-owned subsidiary, Desience Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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".
Note Payable
- ------------
As of December 31, 1999, the Company had a $35,000 note payable to an officer.
Interest accrues at 5% annually. Principal and accrued interest due January
2002.
Letters of Intent
- -----------------
On November 1, 1999 the Company signed a Memorandum of Understanding with
SyCoNet.Com, Inc. ("SyCoNet"). SyCoNet will 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.
F-56
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Internet Data Center Services Agreements
- ----------------------------------------
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.
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 provide the consumer with the ability to purchase
programming by Same-as-Cash, or by Enhanced Credit Card payments. ICP will be
formed as a Nevada Corporation and will authorize 1,000,000 shares of stock of
which the Company will receive 400,000 shares and eConnect will receive 400,000
shares. It is anticipated that the Company will have managing control of ICP.
Subsequent Events
- -----------------
In 1999, the Company filed a complaint in the Los Angeles Superior Court against
its former securities attorney. In January of 2000, the complaint was settled
for $250,000 receivable over a 3 year period of which $30,000 has been received.
All amounts due on this matter were reserved as uncollectable as of September
30, 1999.
In January 2000, holders of all of the Company's then outstanding 10%
Convertible Subordinated Debentures converted their debentures into an aggregate
of 1,783,334 shares of the Company's common stock.
The Company signed an agreement with ValueClick in January of 2000 whereby
ValueClick will drive advertisers to the Kanakaris web site. The Company will
receive $.20 each time a customer clicks on a ValueClick-served ad. The Company
will also receive $.03 per click whenever a customer clicks on a KKRS-referred
web site.
In February 2000, the Company issued $1,000,000 of its 10% Convertible
Subordinated Debentures due February 1, 2001 to three accredited investors. Net
proceeds to the Company after the payment of finders' fees and prior to the
payment of any other related offering expenses was $870,000.
In February 2000, the Company entered into an agreement with Wave Systems Corp.,
which provides the transactional capability to enable the Company to implement
the subscription and pay-per-view revenue collection portion of its
Internet-based business plan.
F-57
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Segment Information
- -------------------
For The Three Months Ended December 31
Internet Modular
Commerce Consoles Total
-------- -------- -----
1999
Revenues $ 278 $ 93,310 $ 93,588
Segment Profit (Loss) (1,696,803) (19,481) (1,716,284)
Total Assets 666,243 126,339 792,582
Additions To Long-
Lived Assets 9,724 582 10,306
Depreciation And 9,730 765 10,495
Amortization
1998
Revenues $ 25,106 $ 202,149 $ 227,255
Segment Profit (Loss) (54,403) (23,173) (77,576)
Total Assets 638,946 155,326 794,272
Additions To Long- - - -
Lived Assets
Depreciation And 7,181 550 7,731
Amortization
F-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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................................................................... 13
Management................................................................. 24
Principal and Selling Security Holders..................................... 26
Plan of Distribution....................................................... 28
Description of Convertible Debentures...................................... 29
Certain Relationships and Related Transactions............................. 30
Description of Capital Stock............................................... 32
Transfer Agent and Registrar............................................... 33
Legal Matters.............................................................. 33
Experts.................................................................... 34
Change in Independent Accountants.......................................... 34
Where You Can Find More Information........................................ 34
Index to Financial Statements.............................................. F-1
------------------------
2,568,046 Shares
KANAKARIS
COMMUNICATIONS, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 2000
<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.............................. $ 997
NASD filing fee................................... 0
Printing and engraving expenses................... *
Legal fees and expenses........................... *
Blue Sky fees and expenses........................ *
Accounting fees and expenses...................... *
Miscellaneous..................................... *
----------
Total....................................... $ *
==========
All of the above expenses will be paid by the Registrant.
* To be provided by amendment.
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.
During August and September 1999, the Registrant issued an aggregate of
$1,070,000 of its 10% Convertible Subordinated Debentures to four accredited
investors in two private offerings. The net offering proceeds were approximately
$998,500 in cash.
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.
In January 2000, the Registrant issued an aggregate of 483,661 shares
of common stock to seven consultants in private offerings in exchange for
consulting services rendered with an estimated value of $724,032.
In January 2000, the Registrant issued an aggregate of 1,783,334 shares
of common stock to four accredited investors upon conversion of 10% convertible
debentures.
In January 2000, the Registrant issued 14,000 share of common stock
upon partial exercise by a former employee of an option with an exercise price
of $.25 per share.
In February 2000, the Registrant issued 30,000 share of common stock
upon partial exercise by a former employee of an option with an exercise price
of $.25 per share.
In February 2000, the Registrant issued 50,000 shares of common stock
to one consultant in a private offering in exchange for consulting services
rendered with an estimated value of $84,375.
In February 2000, the Registrant issued an aggregate of $1,000,000 of
10% convertible debentures and accompanying warrants to purchase up to 300,000
shares of common stock to three accredited investors in a private offering. The
net offering proceeds were approximately $870,000 in cash.
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................................ Convertible Debenture Purchase Agreement dated as of
February 4, 2000 between the investors named therein
and the Registrant
4.3................................ 10% Convertible Debenture due February 1, 2001 made
by the Registrant in favor of New Millenium Capital
Partners II, LLC
4.4................................ 10% Convertible Debenture due February 1, 2001 made
by the Registrant in favor of AJW Partners, LLC
4.5................................ 10% Convertible Debenture due February 1, 2001 made
by the Registrant in favor of Bank Insinger de
Beaufort
4.6................................ Stock Purchase Warrant dated as of February 4, 2000
issued by the Registrant to New Millenium Capital
Partners II, LLC
4.7................................ Stock Purchase Warrant dated as of February 4, 2000
issued by the Registrant to AJW Partners, LLC
4.8................................ Stock Purchase Warrant dated as of February 4, 2000
issued by the Registrant to Bank Insinger de
Beaufort
4.9................................ Stock Escrow and Security Agreement dated as of February 4,
2000 between the Registrant, Owen Naccarato and the investors
named therein
4.10............................... Registration Rights Agreement dated as of February 4, 2000
by and between the Registrant and the investors named therein
5.1................................ Opinion of Rutan & Tucker, LLP*****
II-5
<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-6
<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****
10.26.............................. Promissory Note dated January 7, 2000 made by the Registrant
in favor of Alex F. Kanakaris
10.27.............................. Promissory Note dated December 27, 1999 made by the Registrant
in favor of Branch Lotspeich
10.28.............................. Non-Qualified Stock Option Agreement dated December 31,
1999 between the Registrant and Alex F. Kanakaris
10.29.............................. Non-Qualified Stock Option Agreement dated December 31,
1999 between the Registrant and Branch Lotspeich
10.30.............................. Non-Qualified Stock Option Agreement dated December 31,
1999 between the Registrant and John R. McKay
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
24.1............................... Power of Attorney (contained on the signature page to
this registration statement)
- ---------------
</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.
** 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.
**** Filed as an exhibit to the Registrant's Amendment No. 3 to Form SB-2
filed with the Securities and Exchange Commission on December 21, 1999
(Registration No. 333-84909) and incorporated herein by reference.
***** To be filed by amendment.
II-7
<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-8
<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 February 29,
2000.
KANAKARIS COMMUNICATIONS, INC.
By: /S/ ALEX F. KANAKARIS
--------------------------------------
Alex F. Kanakaris, Chairman of the
Board, President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of Kanakaris Communications, Inc., a Nevada corporation, which is
filing a Registration Statement on Form SB-2 with the Securities and Exchange
Commission under the provisions of the Securities Act of 1933, as amended,
hereby constitute and appoint Alex Kanakaris and Branch Lotspeich, and each of
them, their true and lawful attorneys-in-fact and agents; with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign such Registration Statement and any or all
amendments to the Registration Statement, including a Prospectus or an amended
Prospectus therein, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all interests and purposes as they might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
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, February 29, 2000
- ---------------------------- President, Chief Executive
Alex F. Kanakaris Officer, and Director
(Principal Executive
Officer)
/S/ BRANCH LOTSPEICH Vice Chairman of the Board, February 29, 2000
- ---------------------------- Secretary and Director
Branch Lotspeich
/S/ DAVID T. SHOMAKER Acting Chief Financial February 29, 2000
- ---------------------------- Officer (Principal Financial
David T. Shomaker Officer)
/S/ JOHN ROBERT MCKAY Director February 29, 2000
- ----------------------------
John Robert McKay
II-9
</TABLE>
<PAGE>
<TABLE>
EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
4.2................................ Convertible Debenture Purchase Agreement dated as of
February 4, 2000 between the investors named therein
and the Registrant
4.3................................ 10% Convertible Debenture due February 1, 2001 made
by the Registrant in favor of New Millenium Capital
Partners II, LLC
4.4................................ 10% Convertible Debenture due February 1, 2001 made
by the Registrant in favor of AJW Partners, LLC
4.5................................ 10% Convertible Debenture due February 1, 2001 made
by the Registrant in favor of Bank Insinger de
Beaufort
4.6................................ Stock Purchase Warrant dated as of February 4, 2000
issued by the Registrant to New Millenium Capital
Partners II, LLC
4.7................................ Stock Purchase Warrant dated as of February 4, 2000
issued by the Registrant to AJW Partners, LLC
4.8................................ Stock Purchase Warrant dated as of February 4, 2000
issued by the Registrant to Bank Insinger de
Beaufort
4.9................................ Stock Escrow and Security Agreement dated as of February 4,
2000 between the Registrant, Owen Naccarato and the investors
named therein
4.10............................... Registration Rights Agreement dated as of February 4, 2000
by and between the Registrant and the investors named therein
10.26.............................. Promissory Note dated January 7, 2000 made by the Registrant
in favor of Alex F. Kanakaris
10.27.............................. Promissory Note dated December 27, 1999 made by the Registrant
in favor of Branch Lotspeich
10.28.............................. Non-Qualified Stock Option Agreement dated December 31,
1999 between the Registrant and Alex F. Kanakaris
10.29.............................. Non-Qualified Stock Option Agreement dated December 31,
1999 between the Registrant and Branch Lotspeich
10.30.............................. Non-Qualified Stock Option Agreement dated December 31,
1999 between the Registrant and John R. McKay
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
II-10
</TABLE>
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Among
KANAKARIS COMMUNICATIONS, INC.
and
THE INVESTORS SIGNATORY HERETO
Dated as of February 4, 2000
- --------------------------------------------------------------------------------
<PAGE>
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "AGREEMENT"), dated as
of February 4, 2000, among KANAKARIS COMMUNICATIONS, INC., a Nevada corporation
(the "COMPANY"), and the investors signatory hereto (each such investor is a
"PURCHASER" and all such investors are, collectively, the "PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchasers and the
Purchasers, severally and not jointly, desire to purchase from the Company an
aggregate principal amount of $1,000,000 of the Company's 10% Convertible
Debentures, due February 1, 2001, which shall be in the form of EXHIBIT A (the
"DEBENTURES") and which are convertible into shares of the Company's Class A
Common Stock, no par value per share (the "COMMON STOCK").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy are
hereby acknowledged, the Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 THE CLOSING
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchasers and the Purchasers
shall, severally and not jointly, purchase from the Company the Debentures for
an aggregate purchase price of $1,000,000. The closing of the purchase and sale
of the Debentures (the "CLOSING") shall take place at the offices of Owen
Naccarato, Esq. ("ESCROWEE"), having an office at 19600 Fairchild, Suite 260,
Irvine, CA, 92612 immediately following the execution hereof or such later date
as the parties shall agree. The date of the Closing is hereinafter referred to
as the "CLOSING DATE."
(b) Prior to the Closing Date, the parties shall deliver or
shall cause to be delivered the following: (A) the Company shall deliver to
Escrowee for the benefit of the Purchasers (1) the Debentures in the aggregate
principal amount indicated below each Purchaser's name on the signature page to
this Agreement, registered in the name of each such Purchaser, three (3) Common
Stock purchase warrants for every ten (10) dollars of principal amount indicated
below each Purchaser's name on the signature page of this Agreement , each in
the form of EXHIBIT D, registered in the name of the appropriate Purchasers,
pursuant to which the Purchasers shall have the right at any time and from time
to time thereafter through the fifth (5th) anniversary of the Closing Date to
acquire an aggregate of 300,000 shares of Common Stock, at an exercise price per
share (subject to adjustment as provided therein) equal to $1.90 (collectively,
the "WARRANTS"), (3) the legal opinion of Rutan & Tucker, LLP, outside counsel
to the Company in the form acceptable to the parties hereto, and (4) all other
documents, instruments and writings required to have been delivered at or prior
to the Closing by the Company pursuant to this Agreement, including (A) an
executed Registration Rights Agreement, dated the date hereof, by and among the
Company and the Purchasers, in the form of EXHIBIT B (the "REGISTRATION RIGHTS
<PAGE>
AGREEMENT"), (B) an executed Escrow Agreement, dated the date hereof, by and
among the Company and the Purchasers, in the form of EXHIBIT F (the "ESCROW
AGREEMENT"), (E) the Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT E, delivered to and acknowledged by the Company's transfer agent (the
"TRANSFER AGENT INSTRUCTIONS"), and (B) each Purchaser shall deliver to
Escrowee, for delivery to the Company the purchase price for the Debentures
indicated below such Purchaser's name on the signature page to this Agreement in
United States dollars in immediately available funds by wire transfer to an
account designated in writing by the Company for such purpose, and to Escrowee
for delivery upon funding, all documents, instruments and writings required to
have been delivered at or prior to the Closing Date by such Purchaser pursuant
to this Agreement, including, without limitation, an executed Registration
Rights Agreement, Security Agreement.
(c) The Company and the Buyers agree that, upon the
declaration of effectiveness of the Registration Statement to be filed pursuant
to the Registration Rights Agreement (the "EFFECTIVE DATE"), provided that the
trading price of the Common Stock is at least $1.75 for the ten (10) consecutive
trading days immediately preceding the Effective Date, the Buyers will be
obligated to purchase additional debentures ("ADDITIONAL DEBENTURES") in the
aggregate principal amount of One Million Dollars ($1,000,000) and additional
warrants ("ADDITIONAL WARRANTS") to purchase an aggregate of 300,000 shares of
Common Stock for an aggregate purchase price of One Million Dollars
($1,000,000), with the closing of such purchase to occur within thirty (30) days
of the Effective Date. The terms of the Additional Debentures and the Additional
Warrants shall be identical to the terms of the Debentures and the Warrants to
be issued on the Closing Date, provided that the Initial Conversion Price (as
defined in the Debentures) for the Additional Debentures shall be ninety-seven
hundredths of one dollar ($.97). The Common Stock underlying the Additional
Debentures and the Additional Warrants shall be Registrable Securities (as
defined in the Registration Rights Agreement) and shall be included in the
Registration Statement to be filed pursuant to the Registration Rights Agreement
1.2 CERTAIN DEFINED TERMS. For purposes of this Agreement,
"CONVERSION PRICE," "ORIGINAL ISSUE DATE" and "TRADING DAY" shall have the
meanings set forth in the Debentures; "BUSINESS DAY" shall mean any day except
Saturday, Sunday and any day which shall be a federal legal holiday or a day on
which banking institutions in the State of New York or the State of California
are authorized or required by law or other governmental action to close.
-2-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
makes the following representations and warranties to the Purchasers:
(a) ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Nevada, with the requisite corporate power and authority to
own and use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in SCHEDULE
2.1(a) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is an entity,
duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as
applicable), with the full power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Each of the Company
and the Subsidiaries is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (x) adversely affect the legality,
validity or enforceability of the Debentures or any of this Agreement, the
Registration Rights Agreement, the Warrants, or the Security Agreement
(collectively, the "TRANSACTION DOCUMENTS"), (y) have or result in a material
adverse effect on the results of operations, assets, prospects, or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
or (z) adversely impair the Company's ability to perform fully on a timely basis
its obligations under any of the Transaction Documents (any of (x), (y) or (z),
a "MATERIAL ADVERSE EFFECT").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents and the Debentures has been duly executed by the
Company and, when delivered (or filed, as the case may be) in accordance with
the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms. Neither
the Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, by-laws or other charter documents.
(c) CAPITALIZATION. The number of authorized, issued and
outstanding capital stock of the Company is set forth in SCHEDULE 2.1(c). No
shares of Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as a result of the purchase and sale of the
Debentures and the Warrants and except as disclosed in SCHEDULE 2.1(c), there
are no outstanding options, warrants, script rights to subscribe to, calls or
-3-
<PAGE>
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person (as
defined below) any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically disclosed
in the SEC Documents (as defined below) or SCHEDULE 2.1(c), no Person or group
of related Persons beneficially owns (as determined pursuant to Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")), or has the right to acquire by agreement with or by obligation binding
upon the Company, in excess of 5% of the Common Stock. A "PERSON" means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any kind.
(d) ISSUANCE OF THE DEBENTURES AND THE WARRANTS. The
Debentures and the Warrants are duly authorized and, when issued and paid for in
accordance with the terms hereof, will be duly and validly issued, fully paid
and nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind (collectively, "LIENS"). The Company has on the date hereof
and will, at all times while the Debentures and the Warrants are outstanding,
maintain an adequate reserve of duly authorized shares of Common Stock, reserved
for issuance to the holders of the Debentures and the Warrants, to enable it to
perform its conversion, exercise and other obligations under this Agreement, the
Debentures and the Warrants. Such number of reserved and available shares of
Common Stock is not less than the sum of (i) 200% of the number of shares of
Common Stock which would be issuable upon conversion in full of the Debentures,
assuming such conversion occurred on the Original Issue Date for the Debentures,
the Filing Date or the Effectiveness Date (each as defined in the Registration
Rights Agreement), whichever yields the lowest Conversion Price, (ii) the number
of shares of Common Stock issuable upon exercise of the Warrants, and (iii) the
number of shares Common Stock which would be issuable upon payment of interest
on the Debentures, assuming the Debentures are outstanding for one year and all
interest is paid in shares of Common Stock (such number of shares of Common
Stock as contemplated in clauses (i)-(iii), the "INITIAL MINIMUM"). All such
authorized shares of Common Stock shall be duly reserved for issuance to the
holders of the Debentures and the Warrants. The shares of Common Stock issuable
upon conversion of the Debentures, as payment of interest thereon and upon
exercise of the Warrants are collectively referred to herein as the "UNDERLYING
SHARES." The Debentures, the Warrants and the Underlying Shares are collectively
referred to herein as, the "SECURITIES." When issued in accordance with the
Debentures and the Warrants, the Underlying Shares will be duly authorized,
validly issued, fully paid and nonassessable, free and clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its articles of incorporation, bylaws or other charter
documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
-4-
<PAGE>
a Company debt or otherwise) to which the Company or any Subsidiary is a party
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including Federal and state
securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, have or result in a
Material Adverse Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, could not have or
result in a Material Adverse Effect.
(f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor
any Subsidiary is required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court or
other Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filings required pursuant to Section
3.11, (ii) the filing with the Securities and Exchange Commission (the
"COMMISSION") of a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale of the Underlying
Shares by the Purchasers (the "UNDERLYING SHARES REGISTRATION STATEMENT"), (iii)
the application(s) to the Nasdaq National Market or OTC Bulletin Board
("NASDAQ") for the listing of the Underlying Shares for trading on the NASDAQ or
OTC Bulletin Board (and with any other national securities exchange or market on
which the Common Stock is then listed), (iv) applicable Blue Sky filings and (v)
in all other cases where the failure to obtain such consent, waiver,
authorization or order, or to give such notice or make such filing or
registration could not have or result in, individually or in the aggregate, a
Material Adverse Effect (collectively, the "REQUIRED APPROVALS").
(g) LITIGATION; PROCEEDINGS. Except as specifically disclosed
in SCHEDULE 2.1(g), there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (Federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, have or result in a Material Adverse Effect.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (and no event has occurred
which has not been waived which, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has the Company
or any Subsidiary received notice of a claim that it is in default under or that
it is in violation of, any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party or by which it or any of its
properties is bound, (ii) is in violation of any order of any court, arbitrator
or governmental body, or (iii) is in violation of any statute, rule or
regulation of any governmental authority, except as could not individually or in
the aggregate, have or result in a Material Adverse Effect. The security
-5-
<PAGE>
interests granted to the Purchasers pursuant to the Security Agreement will
convey and grant to the Purchasers a first priority security interest in all of
the Collateral (as such terms is defined in such agreements).
(i) PRIVATE OFFERING. Assuming the accuracy of the
representations and warranties of the Purchasers set forth in Sections
2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchasers as
contemplated hereby are exempt from the registration requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT"). Neither the Company
nor any Person acting on its behalf has taken any action that could subject the
offering, issuance or sale of the Securities to the registration requirements of
the Securities Act.
(j) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed
all reports required to be filed by it under the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the
date hereof (or such shorter period as the Company was required by law to file
such material) (the foregoing materials being collectively referred to herein as
the "SEC DOCUMENTS" and, together with the Schedules to this Agreement as well
as due diligence materials delivered to Purchasers prior to the date hereof, the
"DISCLOSURE MATERIALS") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Documents prior to the expiration
of any such extension. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Documents, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. All material
agreements to which the Company is a party or to which the property or assets of
the Company are subject have been filed as exhibits to the SEC Documents as
required. The financial statements of the Company included in the SEC Documents
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved ("GAAP"), except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. Since January 5, 2000, (a) there has
been no event, occurrence or development that has or that could result in a
Material Adverse Effect, (b) the Company has not incurred any liabilities
(contingent or otherwise) other than (x) liabilities incurred in the ordinary
course of business consistent with past practice and (y) liabilities not
required to be reflected in the Company's financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (c) the Company
has not altered its method of accounting or the identity of its auditors and (d)
the Company has not declared or made any payment or distribution of cash or
other property to its stockholders or officers or directors (other than in
compliance with existing Company stock option plans) with respect to its capital
stock, or purchased, redeemed (or made any agreements to purchase or redeem) any
shares of its capital stock. The Company last filed audited financial statements
with the Commission on January 5, 2000, and has not received any comments from
the Commission in respect thereof.
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(k) INVESTMENT COMPANY. The Company is not, and is not an
Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(l) CERTAIN FEES. Except for certain fees payable by the
Company to The N.I.R. Group, LLC, no fees or commissions will be payable by the
Company to any broker, financial advisor or consultant, finder, placement agent,
investment banker or bank with respect to the transactions contemplated by this
Agreement.
(m) SOLICITATION MATERIALS. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) FORM S-3 ELIGIBILITY. Assuming that between the date
hereof and January 11, 2001, the Company (i) timely files all reports required
to be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, and (ii) does not default on any of its material debt
obligations, the Company will be eligible to use Form S-3 promulgated under the
Securities Act to register its securities, on January 11, 2001, for resale with
the Commission.
(o) EXCLUSIVITY. The Company shall not issue and sell the
Debentures to any Person other than the Purchasers other than with the specific
prior written consent of Majority in Interest of the Purchasers.
(p) SENIORITY. No indebtedness of the Company is senior to the
Debentures in right of payment, whether with respect to interest or upon
liquidation, dissolution or otherwise.
(q) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. Except as
specified in SCHEDULE 2.1 (q) hereto, the Company has not, in the two years
preceding the date hereof, received notice (written or oral) from the NASDAQ OTC
Bulletin Board or any other stock exchange, market or trading facility on which
the Common Stock is or has been listed (or on which it has been quoted) to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such exchange or market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such maintenance requirements.
(r) PATENTS AND TRADEMARKS. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and rights which are necessary
or material for use in connection with its business, and which the failure to so
have would have a Material Adverse Effect (collectively, the "INTELLECTUAL
PROPERTY RIGHTS"). To the best knowledge of the Company all such Intellectual
Property Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights.
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(s) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as
set forth on SCHEDULE 6(b) to the Registration Rights Agreement, the Company has
not granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) REGULATORY PERMITS. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
Federal, state or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Documents, except where the
failure to possess such permits could not, individually or in the aggregate,
have or result in a Material Adverse Effect ("MATERIAL PERMITS"), and neither
the Company nor any such Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
(u) TITLE. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property and personal property owned
by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all Liens, except for Liens as do not materialy
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its Subsidiaries. Any
real property and facilities held under lease by the Company and its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.
(v) DISCLOSURE. The Company confirms that it has not provided
any of the Purchasers or its agents or counsel with any information that
constitutes or might constitute material non-public information. The Company
understands and confirms that the Purchasers shall be relying on the foregoing
representations in effecting transactions in securities of the Company. All
disclosure provided to the Purchasers regarding the Company, its business and
the transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company are true and correct and do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby represents and warrants to the Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority, to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder. The
purchase by such Purchaser of the Securities hereunder has been duly authorized
by all necessary action on the part of such Purchaser. Each of this Agreement,
the Registration Rights Agreement, the Escrow Agreement, the Security Agreement
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and the Intellectual Property Security Agreement has been duly executed and
delivered by such Purchaser and constitutes the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the
Securities for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof or
interest therein, without prejudice, however, to such Purchaser's right, subject
to the provisions of this Agreement and the Registration Rights Agreement, at
all times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act and in
compliance with applicable state securities laws or under an exemption from such
registration. Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any amount of time.
(c) PURCHASER STATUS. At the time such Purchaser was offered
the Debentures and the Warrant, it was, and at the date hereof it is, and at
each exercise date under the Warrant, it will be, an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(d) EXPERIENCE OF THE PURCHASER. Such Purchaser, either alone
or together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. Such
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) ACCESS TO INFORMATION. Such Purchaser acknowledges that it
has reviewed the Disclosure Materials and has been afforded (i) the opportunity
to ask such questions as it has deemed necessary of, and to receive answers
from, representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its representatives or counsel shall modify, amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the Disclosure Materials and the Company's representations and warranties
contained in the Transaction Documents.
(g) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
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other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) RELIANCE. Such Purchaser understands and acknowledges that
(i) the Securities are being offered and sold to it without registration under
the Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
The Company acknowledges and agrees that each of the
Purchasers makes no representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in this
Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein. The Company
hereby consents to and agrees to register on the books of the Company and with
any transfer agent for the securities of the Company any transfer of Securities
by a Purchaser to an Affiliate of such Purchaser or to one or more funds or
managed accounts under common management with such Purchaser, and any transfer
among any such Affiliates or one or more funds or managed accounts, provided
that the transferee certifies to the Company that it is an "accredited investor"
as defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes (subject to the qualifications
hereof). Any such transferee shall agree in writing to be bound by the terms of
this Agreement and shall have the rights of a Purchaser under this Agreement and
the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
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Except as otherwise provided herein, Underlying Shares shall
not contain the legend set forth above nor any other legend if the conversion of
Debentures, the payment of interest thereon, and exercise of the Warrants or
other issuances of Underlying Shares as contemplated hereby, by the Debentures
or the Warrants occurs at any time while an Underlying Shares Registration
Statement is effective under the Securities Act or, in the event there is not an
effective Underlying Shares Registration Statement, at such time, in the opinion
of counsel to the Company, such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission). The Company shall cause
its counsel to issue the legal opinion included in the Transfer Agent
Instructions to the Company's transfer agent on the day that the Underlying
Shares Registration Statement is declared effective by the Commission. The
Company agrees that, in the event any Underlying Shares are issued with a legend
in accordance with this Section 3.1(b), it will, within three (3) Trading Days
after request therefor by a Purchaser, provide such Purchaser with a certificate
or certificates representing such Underlying Shares, free from such legend at
such time as such legend would not have been required under this Section 3.1(b)
had such issuance occurred on the date of such request. The Company may not make
any notation on its records or give instructions to any transfer agent of the
Company which enlarge the restrictions of transfer set forth in this Section.
However, the Company may provide appropriate instructions to any transfer agent
of the Company to enforce the provisions of this Section 3.1(b) when the
Underlying Shares Registration Statement is not effective. Notwithstanding
anything to the contrary contained in this section 3.1(b), Underlying Shares may
contain the foregoing legend while an Underlying Shares Registration Statement
is effective ONLY IF the Company delivers to the Purchasers along with any such
certificates complete and current prospectus with regard to the resale of such
Underlying Shares.
3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Debentures and
payment of interest thereon in accordance with the terms of the Debentures, and
(ii) exercise of the Warrants in accordance with their terms, will result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares upon (x) conversion of the
Debentures and payment of interest thereon in accordance with the terms of the
Debentures, and (y) exercise of the Warrants in accordance with their terms, is
unconditional and absolute, subject to the limitations set forth herein in the
Debentures or pursuant to the Warrants, regardless of the effect of any such
dilution.
3.3 FURNISHING OF INFORMATION. As long as the Purchasers own
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as the Purchasers own Securities, if
the Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchasers and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for the Purchasers to sell the Securities under Rule 144 promulgated
under the Securities Act. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell Underlying
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including the legal opinion referenced above in this Section. Upon the request
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of any such Person, the Company shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
3.4 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers.
3.5 INCREASE IN AUTHORIZED SHARES. If on any date the Company would be,
if a notice of conversion or exercise (as the case may be) were to be delivered
on such date, precluded from (a) issuing 200% of the number of Underlying Shares
as would then be issuable upon a conversion in full of the Debentures and as
payment of any accrued and unpaid interest in respect thereof in shares of
Common Stock, or (b) issuing the number of Underlying Shares upon exercise in
full of the Warrants (the "CURRENT REQUIRED MINIMUM"), in either case, due to
the unavailability of a sufficient number of authorized but unissued or reserved
shares of Common Stock, then the Board of Directors of the Company shall
promptly (and in any case, within 30 Business Days from such date) prepare and
mail to the stockholders of the Company proxy or consent solicitation materials
requesting authorization to amend the Company's Articles of Incorporation to
increase the number of shares of Common Stock which the Company is authorized to
issue to at least such number of shares as reasonably requested by the
Purchasers in order to provide for such number of authorized and unissued shares
of Common Stock to enable the Company to comply with its issuance, conversion
exercise and reservation of shares obligations as set forth in this Agreement,
the Debentures and the Warrants (the sum of (x) the number of shares of Common
Stock then outstanding plus all shares of Common Stock issuable upon exercise of
all outstanding options, warrants and convertible instruments, and (y) the
Current Required Minimum, shall be a reasonable number). In connection
therewith, the Board of Directors shall (a) adopt proper resolutions authorizing
such increase, (b) recommend to and otherwise use its best efforts to promptly
and duly obtain stockholder approval to carry out such resolutions (and hold a
special meeting of the stockholders no later than the 60th day after delivery of
the proxy materials relating to such meeting) and (c) within five (5) Business
Days of obtaining such stockholder authorization (or such later period as
prescribed by statute), file an appropriate amendment to the Company's Articles
of Incorporation to evidence such increase.
3.6 RESERVATION AND LISTING OF UNDERLYING SHARES. (a) The Company shall
(i) in the time and manner required by NASDAQ and such other exchange, market or
quotation system on which the Common Stock is traded, prepare and file with the
NASDAQ (and such other national securities exchange or market or trading or
quotation facility) an additional shares listing application covering a number
of shares of Common Stock which is not less than the Initial Minimum, (ii) take
all steps necessary to cause such shares of Common Stock to be approved for
listing in the OTC Bulletin Board or NASDAQ (as well as on any such other
national securities exchange or market or trading or quotation facility on which
the Common Stock is then listed) as soon as possible thereafter, and (iii)
provide to the Purchasers evidence of such listing, and the Company shall
maintain the listing of its Common Stock thereon. If the number of Underlying
Shares issuable upon conversion in full of the then outstanding Debentures, as
payment of interest thereon, and upon exercise of the then unexercised portion
of the Warrants exceeds 85% of the number of Underlying Shares previously listed
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on account thereof with NASDAQ (and any such other required exchanges), then the
Company shall take the necessary actions to immediately list a number of
Underlying Shares as equals no less than the then Current Required Minimum.
(b) The Company shall maintain a reserve of shares of Common
Stock for issuance upon conversion of the Debentures and for payment of interest
thereupon in shares of Common Stock and upon exercise in full of the Warrants in
accordance with this Agreement, the Debentures and the Warrants, respectively,
in such amount as may be required to fulfill its obligations in full under the
Transaction Documents, which reserve shall equal no less than the then Current
Required Minimum.
3.7 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent
Instructions, Conversion Notice (as defined in EXHIBIT A) and Form of Election
to Purchase under the Warrants set forth the totality of the procedures with
respect to the conversion of the Debentures and exercise of the Warrants,
including the form of legal opinion, if necessary, that shall be rendered to the
Company's transfer agent and such other information and instructions as may be
reasonably necessary to enable the Purchasers to convert their Debentures and
exercise their Warrants as contemplated in the Debentures and the Warrants (as
applicable).
3.8 NOTICE OF BREACHES. Each of the Company and the Purchasers shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained therein to be
incorrect or breached as of the Closing Date. However, no disclosure by either
party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
3.9 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company
shall honor conversions of the Debentures and exercises of the Warrants and
shall deliver Underlying Shares in accordance with the respective terms,
conditions and time periods set forth in the Debentures and the Warrants.
3.10 SUBSEQUENT REGISTRATIONS. (a) The Company shall not, directly or
indirectly, without the prior written consent of the Purchasers, offer, sell,
grant any option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition) any of its or its
Affiliates' equity or equity-equivalent securities (including the issuance of
any debt or other instrument is at any time over life thereof convertible into
or exchangeable for Common Stock or any other transaction intended to be exempt
or not subject to registration under the Securities Act (a "SUBSEQUENT
PLACEMENT") for a period of 180 days after the later to occur of the
Effectiveness Date (as defined in the Registration Rights Agreement) and the
date that the Commission first declares effective an Underlying Shares
Registration Statement, except (i) the granting of options or warrants to
employees, consultants, officers and directors, and the issuance of shares upon
exercise of options granted, under any stock option plan heretofore or
hereinafter duly adopted by the Company, (ii) shares of Common Stock issuable
upon exercise of any currently outstanding warrants and upon conversion of any
currently outstanding convertible securities of the Company, in each case only
if such security is disclosed in SCHEDULE 2.1(c), (iii) shares of Common Stock
or Common Stock Equivalents (as defined in the Debentures) permitted to be
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issued without giving rise to an Event of Default under Sections 3(a)(xii) or
3(a)(xiii)(a) of the Debentures, and (iv) shares of Common Stock issuable upon
conversion of Debentures, as payment of interest thereon and upon exercise of
the Warrants in accordance with the Debentures or the Warrants, respectively,
unless (A) the Company delivers to the Purchasers a written notice (the
"SUBSEQUENT PLACEMENT NOTICE") of its intention effect such Subsequent
Placement, which Subsequent Placement Notice shall describe in reasonable detail
the proposed terms of such Subsequent Placement, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Placement shall be
effected, and attached to which shall be a term sheet or similar document
relating thereto and (B) the Purchasers shall not have notified the Company by
5:00 p.m. (New York City time) on the tenth (10th) Trading Day after their
receipt of the Subsequent Placement Notice of their willingness to cause the
Purchasers to provide (or to cause its sole designee to provide), subject to
completion of mutually acceptable documentation, financing to the Company on the
same terms set forth in the Subsequent Placement Notice. If the Purchasers shall
fail to notify the Company of their intention to enter into such negotiations
within such time period, the Company may effect the Subsequent Placement
substantially upon the terms and to the Persons (or Affiliates of such Persons)
set forth in the Subsequent Placement Notice; PROVIDED, that the Company shall
provide the Purchasers with a second Subsequent Placement Notice, and the
Purchasers shall again have the right of first refusal set forth above in this
paragraph (a), if the Subsequent Placement subject to the initial Subsequent
Placement Notice shall not have been consummated for any reason on the terms set
forth in such Subsequent Placement Notice within thirty (30) Trading Days after
the date of the initial Subsequent Placement Notice with the Person (or an
Affiliate of such Person) identified in the Subsequent Placement Notice. If the
Purchasers shall indicate a willingness to provide financing in excess of the
amount set forth in the Subsequent Placement Notice, then each Purchaser shall
be entitled to provide financing pursuant to such Subsequent Placement Notice up
to an amount equal to such Purchaser's pro rata portion of the aggregate
principal amount of Debentures purchased by the Purchasers under this Agreement,
but the Company shall not be required to accept financing from the Purchasers in
an amount in excess of the amount set forth in the Subsequent Placement Notice.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the Registration's Rights Agreement to be registered, in the Underlying Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to paragraph (a)(i), (ii) and
(iv) of Section 3.10(a), the Company shall not, for a period of not less than 90
Trading Days after the date that the Underlying Shares Registration Statement is
declared effective by the Commission, without the prior written consent of the
Purchasers (i) issue or sell any of its or any of its Affiliates' equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) register for resale any securities of the Company. Any
days that a Purchaser is not permitted to sell Underlying Shares under the
Underlying Shares Registration Statement shall be added to such 90 Trading Day
period for the purposes of (i) and (ii) above.
3.11 CERTAIN SECURITIES LAWS DISCLOSURES; PUBLICITY. The Company shall:
(i) on the Closing Date issue a press release acceptable to the Purchasers
disclosing the transactions contemplated hereby and (ii) timely file with the
Commission a Form D promulgated under the Securities Act as required under
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Regulation D promulgated under the Securities Act and provide a copy thereof to
the Purchasers promptly after the filing thereof. The Company shall, no less
than two (2) Business Days prior to the filing of any disclosure required by
clause (ii) above, provide a copy thereof to the Purchasers. No such filing or
disclosure may be made that mentions the Purchasers by name without the prior
consent of the Purchasers. Such filings shall be subject to Section 4.11 hereof.
3.12 TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. Except in connection
with the sale of all or substantially all of the assets of the Company or
licensing arrangements in the ordinary course of the Company's business, the
Company shall not transfer, sell or otherwise dispose of any Intellectual
Property Rights, or allow any of the Intellectual Property Rights to become
subject to any Liens, or fail to renew such Intellectual Property Rights (if
renewable and it would otherwise lapse if not renewed), without the prior
written consent of the Purchasers.
3.13 USE OF PROCEEDS. The Company shall use the net proceeds from the
funds delivered to it for working capital purposes only and not for the
satisfaction of any Company debt (which, for such purposes, shall include
accounts payable) in excess of $200,000 or to redeem any Company equity or
equity-equivalent securities or to pay in excess of $20,000 to settle any
litigation or claim against the Company or any Subsidiary.
3.14 REIMBURSEMENT. If any Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which a Purchaser is a named party, the Company
will pay such Purchaser the charges, as reasonably determined by such Purchaser,
for the time of any officers or employees of such Purchaser devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearings,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company in connection with or as a result of the consummation of
the Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the applicable Purchaser or entity in connection with
the transactions contemplated by this Agreement.
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3.15 FORM S-3 ELIGIBILITY. The Company use its best efforts to, become
eligible to register for resale its securities pursuant to Form S-3 promulgated
under the Securities Act as soon as possible.
3.16 CERTAIN TRADING RESTRICTIONS. The Purchasers will not enter into
any Short Sales (as hereinafter defined) at a price below the Initial Conversion
Price (as defined in the Debentures), PROVIDED, that the limitations set forth
in this Section shall cease to be in effect on the date that an Underlying
Shares Registration Statement is first declared effective by the Commission or
if, by the Effectiveness Date, the Underlying Shares Registration Statement has
not been declared effective by the Commission and, thereafter, shall resume on
the date, if any, the Underlying Shares Registration Statement is declared
effective by the Commission. For purposes of this Section, a "Short Sale" by a
Purchaser shall mean a sale of Common Stock by such Purchaser that is marked as
a short sale and that is made at a time when there is no equivalent offsetting
long position in Common Stock held by such Purchaser. For purposes of
determining whether there is an equivalent offsetting long position in Common
Stock held by a Purchaser, Underlying Shares that have not yet been issued but
for which the Company has received a Conversion Notice (with respect to
Debentures) or Form of Election to Purchase (with respect to Warrants), as the
case may be, shall be deemed held long by a Purchaser.
ARTICLE IV
MISCELLANEOUS
4.1 FEES AND EXPENSES. Each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all stamp and other taxes and duties levied in connection with the
issuance of the Securities.
4.2 ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents,
together with the Exhibits and Schedules thereto, and the Transfer Agent
Instructions contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and schedules.
4.3 NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Agreement later than 6:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
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If to the Company: Kanakaris Communications, Inc.
3303 Harbor Boulevard, F-3
Costa Mesa, CA 92626
Facsimile No.: (714) 549-8970
Attn: Alex Kanakaris
With a copy to: Larry Cerutti, Esq.
Rutan & Tucker, LLP
611 Anton Boulevard, 14th Floor
Costa Mesa, CA 92626
Facsimile No.: (714) 546-9035
If to a Purchaser: To the address set forth under such Purchaser's
name on the signature pages hereto.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and each of the Purchasers or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought. No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter.
4.5 HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
4.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchasers. Except as set
forth in Section 3.1(a), the Purchasers may not assign this Agreement or any of
the rights or obligations hereunder without the consent of the Company. This
provision shall not limit each Purchaser's right to transfer securities or
transfer or assign rights under the Registration Rights Agreement.
4.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective successors and
permitted assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other Person.
4.8 GOVERNING LAW. The corporate laws of the State of
California shall govern all issues concerning the relative rights of the Company
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and its stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in Nassau and Suffolk Counties, respectively, New York,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of the any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such
court, that such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law.
4.9 SURVIVAL. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Debentures and the Warrants.
4.10 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 PUBLICITY. The Company and the Purchasers shall consult
with each other in issuing any press releases or otherwise making public
statements or filings and other communications with the Commission or any
regulatory agency or stock market or trading facility with respect to the
transactions contemplated hereby and neither party shall issue any such press
release or otherwise make any such public statement, filings or other
communications without the prior written consent of the other, which consent
shall not be unreasonably withheld or delayed, except that no prior consent
shall be required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement, filing or other communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the names of the Purchasers, or include the
names of the Purchasers in any filing with the Commission, or any regulatory
agency, trading facility or stock market without the prior written consent of
the Purchasers, except to the extent such disclosure (but not any disclosure as
to the controlling Persons thereof) is required by law, in which case the
Company shall provide the Purchasers with prior notice of such disclosure.
4.12 SEVERABILITY. In case any one or more of the provisions
of this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affecting or impaired thereby and the parties will attempt to
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agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.13 REMEDIES. In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each of
the Purchasers will be entitled to specific performance of the obligations of
the Company under the Transaction Documents. The Company and each of the
Purchasers agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of its obligations described in the
foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
4.14 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS.
The obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this
Secured Convertible Debenture Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
------------------------------------
Name: Alex Kanakaris
Title: President
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: FIRST STREET MANAGER II, LLC
By: /s/ Glenn A. Arbeitman
------------------------------------
Name: Glenn A. Arbeitman
Title: Manager
155 First Street, Suite B
Mineola, New York 11501
Facsimile No.: 516-739-7115
Debentures Purchase Price: $250,000
AJW PARTNERS, LLC
By: SMS GROUP, LLC
By: /s/ Corey S. Ribotsky
------------------------------------
Name: Corey S. Ribotsky
Title: Manager
155 First Street, Suite B
Mineola, New York 11501
Facsimile No.: 516-739-7115
Debentures Purchase Price: $250,000
BANK INSINGER DE BEAUFORT
By: /s/ Frans Kee / R. Mooij
------------------------------------
Name: Frans Kee / R. Mooij
Title: Directors
--------------------------
--------------------------
Facsimile No.:[ ]
Attn:[ ]
Debentures Purchase Price: $500,000
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. 1 $250,000
-------------
10% CONVERTIBLE DEBENTURE
DUE FEBRUARY 1, 2001
THIS DEBENTURE is issued by KANAKARIS COMMUNICATIONS, INC. a corporation having
a principal place of business at 3303 Harbor Boulevard, F-3, Costa Mesa, CA
92626 (the "COMPANY"), and is designated as the Company's 10% Convertible
Debentures, due February 1, 2001 (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to NEW MILLENNIUM
CAPITAL PARTNERS II, LLC, or its registered assigns (the "HOLDER"), the
principal sum of TWO HUNDRED FIFTY THOUSAND AND NO/100 ($250,0000) on February
1, 2001 or such earlier date as the Debentures are required or permitted to be
repaid as provided hereunder (the "MATURITY DATE") and to pay interest to the
Holder on such principal sum at the rate of 10% per annum, payable on a
quarterly basis on March 31, June 30, September 30 and December 31 of each year
while such Debentures are outstanding (each an "INTEREST PAYMENT DATE") and on
each Conversion Date (as defined herein) for such principal amount, commencing
on the earlier to occur of a Conversion Date for such principal amount and March
31, 2000, in cash or shares of Common Stock (as defined in Section 7). Subject
to the terms and conditions herein, the decision whether to pay interest
hereunder in Common Stock or cash shall be at the discretion of the Company.
Interest shall accrue daily commencing on the Original Issue Date (as defined in
Section 7) until payment in full of the principal sum, together with all accrued
and unpaid interest and other amounts which may become due hereunder, has been
made. Any interest not paid on any Interest Payment Date shall continue to
accrue and shall be due and payable upon conversion of the Debentures. Interest
hereunder will be paid to the Person (as defined in Section 7) in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of Debentures (the "DEBENTURE REGISTER"). All overdue
<PAGE>
accrued and unpaid interest shall entail a late fee at the rate of 15% per annum
(to accrue daily, from the date such interest is due hereunder through and
including the date of payment), payable in cash. Not less than ten (10) Trading
Days (as defined in Section 7) prior to Interest Payment Date, the Company shall
provide the Holder notice of its intention to pay interest in cash or shares of
Common Stock (the Company may indicate in such notice that the election
contained in such notice shall continue for later periods until revised). If
interest is paid in shares of Common Stock, the number of shares of Common Stock
issuable on account of such interest shall equal the cash amount of such
interest on such Interest Payment Date divided by the Conversion Price (as
defined below) on such date. Notwithstanding anything to contrary set forth
herein, for purposes of determining the number of shares of Common Stock that
are issuable as payment of interest hereunder, the Conversion Price shall not be
subject to any floor.
Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of interest on the principal
amount if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to pay interest hereunder in shares of Common Stock;
(ii) after the Interest Effectiveness Date (as defined in
Section 7) such shares (x) are not registered for resale pursuant to an
effective Underlying Shares Registration Statement (as defined in Section 7) and
(y) may not be sold without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act (as defined in Section 7), as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the applicable
Holder and such transfer agent (if the Company is permitted and elects to pay
interest in shares of Common Stock under this clause (ii) prior to the Interest
Effectiveness Date and thereafter an Underlying Shares Registration Statement
shall be declared effective by the Commission (as defined in Section 7), the
Company shall, within three (3) Trading Days after the date of such declaration
of effectiveness, exchange such shares for shares of Common Stock in accordance
with the terms and conditions contained in the Purchase Agreement (as defined in
Section 7).
(iii) such shares are not listed or quoted on either the
Nasdaq National Market ("NASDAQ") or on the New York Stock Exchange, American
Stock Exchange or the Nasdaq SmallCap Market or OTC Bulletin Board (each, a
"SUBSEQUENT MARKET");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares would result in a violation of
Section 4(a)(ii)(A).
This Debenture is subject to the following additional provisions:
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<PAGE>
SECTION 1. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
SECTION 2 Prior to due presentment to the Company for transfer
of this Debenture, the Company and any agent of the Company may treat the Person
(as defined in Section 7) in whose name this Debenture is duly registered on the
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
SECTION 3. EVENTS OF DEFAULT.
(a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest
on or liquidated damages in respect of, this Debenture, free of any
claim of subordination except in accordance with a subordination
agreement executed by the Holder, as and when the same shall become due
and payable (whether on the applicable Interest Payment Date, a
Conversion Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of any of, this Debenture, the Purchase Agreement, the
Registration Rights Agreement (as defined in Section 7) or the Security
Agreements (as defined in Section 7), and such failure or breach shall
not have been remedied within 30 days after the date on which notice of
such failure or breach shall have been given;
(iii) the Company or any of its subsidiaries shall commence,
or there shall be commenced against the Company or any such subsidiary
a case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period
of 60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any
subsidiary thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of
creditors; or the Company shall fail to pay, or shall state that it is
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any
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<PAGE>
subsidiary thereof shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company or any subsidiary
thereof for the purpose of effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding fifty thousand dollars ($50,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall be delisted from either the NASDAQ
or a Subsequent Market or shall be suspended from trading on the NASDAQ
without resuming trading and/or being relisted thereon or on a
Subsequent Market or having such suspension lifted, as the case may be,
within two (2) days;
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 7), shall agree to sell or dispose
all or in excess of 50% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction), or shall redeem or repurchase more than a de minimis
number of shares of Common Stock or other equity securities of the
Company (other than redemptions of Underlying Shares (as defined in
Section 7));
(vii) an Underlying Shares Registration Statement shall not
have been declared effective by the Commission on or prior to the 120th
day after the date hereof (the "Effectiveness Date").
(viii) if, during the Effectiveness Period, the effectiveness
of the Underlying Shares Registration Statement lapses for any reason
for more than an aggregate of five (5) Trading Days (which need not be
consecutive days), or the Holder shall not be permitted to resell
Registrable Securities under the Underlying Shares Registration
Statement for more than an aggregate of five (5) Trading Days (which
need not be consecutive days);
(ix) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as defined below) relating
thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the
Commission on or prior to the Effectiveness Date, which shall be
covered by Section 3(a)(vii));
(xi) the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth (10th) day after a
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<PAGE>
Conversion Date pursuant to Section 4(b) or the Company shall provide
notice to the Holder, including by way of public announcement, at any
time, of its intention not to comply with requests for conversions of
any Debentures in accordance with the terms hereof;
(xii) the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In within seven (7) days after notice
is deemed delivered hereunder;
(xiii) the Company shall issue any shares of Common Stock or
Common Stock Equivalents (as defined herein) in connection with or to
any present or future lender or creditor of the Company or any
subsidiary thereof other than Common Stock or Common Stock Equivalents
which are restricted and which have no demand or "piggy back"
registration rights;
(xiv) the Company shall agree to pay or settle any litigation
or claim for an amount in stock or cash that exceeds the insurance
coverage for such litigation or claim; or
(xv) the Company shall restructure any material portion of its
present or future debt obligations or payables.
(b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, immediately
due and payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the sum of (i) the Optional Prepayment Price (as defined in
Section 7) plus (ii) the product of (A) the number of Underlying Shares issued
in respect of conversions hereunder or as payment of interest hereunder, in
either case, within thirty (30) days of the date of a declaration of an Event of
Default and then held by the Holder and (B) the Per Share Market Value (as
defined in Section 7) on the date prepayment is due or the date the full
prepayment price is paid, whichever is greater. Interest shall accrue on the
prepayment amount hereunder from the seventh day after such amount is due (being
the date of an Event of Default) through the date of prepayment in full thereof
at the rate of 15% per annum. All Debentures and Underlying Shares for which the
full repayment price hereunder shall have been paid in accordance herewith shall
be promptly surrendered to or as directed by the Company. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
SECTION 4. CONVERSION.
(a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall
be convertible into shares of Common Stock at the option of the Holder, in whole
or in part at any time and from time to time, after the Original Issue Date
(subject to the limitations on conversion set forth in Section 4(a)(ii) hereof).
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The number of shares of Common Stock issuable upon a conversion hereunder shall
be determined by dividing the outstanding principal amount of this Debenture to
be converted, plus all accrued but unpaid interest thereon, by the Conversion
Price. The Holder shall effect conversions by surrendering the Debentures (or
such portions thereof) to be converted, together with the form of conversion
notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each
Conversion Notice shall specify the principal amount of Debentures to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in
a Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.
(ii) CERTAIN CONVERSION RESTRICTIONS
(A)(1) A Holder may not convert Debentures or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act (as defined in Section 7) and
the rules promulgated thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of interest on, the Debentures held by such Holder after
application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of Debentures are convertible shall be in the sole discretion
of the Holder. The provisions of this Section may be waived by a Holder (but
only as to itself and not to any other Holder) upon not less than 5 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver.
(2) A Holder may not convert Debentures or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, the Debentures held by such Holder after application of this
Section. The Holder shall have the sole authority and obligation to determine
whether the restriction contained in this Section applies and to the extent that
the Holder determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
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other Holder) upon not less than 15 days prior notice to the Company. Other
Holders shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading on the
NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the
Shareholder Approval (as defined below), then the Company may not issue in
excess of [ ________ ] shares of Common Stock upon conversions of Debentures or
as payment of interest thereon in shares of Common Stock, which number shall be
subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x)
(such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals
19.999% of the number of shares of Common Stock outstanding immediately prior to
the closing of transactions set forth in the Purchase Agreement. If on any
Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the
Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding Debentures and as payment of interest
thereon in shares of Common Stock, together with any shares of Common Stock
previously issued upon conversion of Debentures and as payment of interest
thereon, would exceed the Issuable Maximum, and (C) the Company shall not have
previously obtained the vote of shareholders (the "SHAREHOLDER APPROVAL"), if
any, as may be required by the applicable rules and regulations of the Nasdaq
Stock Market (or any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum pursuant to the terms
hereof, then the Company shall issue to the Holder so requesting a conversion a
number of shares of Common Stock equal to the Issuable Maximum and, with respect
to the remainder of the principal amount of Debentures then held by such Holder
for which a conversion in accordance with the Conversion Price would result in
an issuance of shares of Common Stock in excess of the Issuable Maximum (the
"EXCESS PRINCIPAL"), the converting Holder shall have the option to require the
Company to either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not later
than the 75th day after such request, or (2) pay cash to the converting Holder
in an amount equal to the OptionalPrepayment Amount for the Excess Principal. If
the Company fails to pay the OptionalPrepayment Amount in full pursuant to this
Section, the Company will pay interest thereon at a rate of 15% per annum to the
converting Holder, accruing daily from the Conversion Date until such amount,
plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any
Conversion Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of trading restrictions representing the number
of shares of Common Stock being acquired upon the conversion of Debentures
(subject to the limitations set forth in Section 4(a)(ii) hereof), (ii)
Debentures in a principal amount equal to the principal amount of Debentures not
converted, (iii) a bank check in the amount of accrued and unpaid interest (if
the Company has elected or is required to pay accrued interest in cash), and
(iv) if the Company has elected and is permitted hereunder to pay accrued
interest in shares of Common Stock, certificates, which shall be free of trading
restrictions (other than those required by Section 3.1 (b) of the Purchase
Agreement), representing such shares of Common Stock; PROVIDED, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of the principal amount of Debentures until
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Debentures are delivered for conversion to the Company, or the Holder notifies
the Company that such Debentures have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid interest
hereunder, are not delivered to or as directed by the applicable Holder by the
third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled
by written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the
principal amount of Debentures tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 4(b)(i), including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid interest hereunder, by the third (3rd) Trading Day
after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $1,000 for each Trading Day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Debentures or as payment of interest thereon by the third (3rd)
Trading Day after the Conversion Date, the Holder may, by notice to the Company,
require the Company to issue shares of Common Stock pursuant to Section 4(c),
except that for such purpose the Conversion Price applicable thereto shall be
the lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such shares will be subject to the
provision of this Section.
(iii) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 4(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid interest hereunder, by the third (3rd) Trading Day after the
Conversion Date, and if after such third (3rd) Trading Day the Holder purchases
(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall
(A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commisions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder anticipated receiving from the conversion at issue multiplied
by (2) the market price of the Common Stock at the time of the sale giving rise
to such purchase obligation and (B) at the option of the Holder, either reissue
Debentures in principal amount equal the principal amount of the attempted
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conversion or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of Debentures with respect to which the market price of
the Underlying Shares on the date of conversion was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) (i) The conversion price (the "CONVERSION PRICE") in
effect on any Conversion Date shall be the lesser of (A) Ninety-seven Hundredths
of One Dollar ($.97) the "INITIAL CONVERSION PRICE") and (B) 66.66% of the
average closing bid price during the twenty (20) Trading Days immediately
preceding the applicable Conversion Date, PROVIDED, that such twenty (20)
Trading Day period shall be extended for the number of Trading Days during such
period in which (A) trading in the Common Stock is suspended by the NASDAQ or a
Subsequent Market on which the Common Stock is then listed, or (B) after the
date declared effective by the Commission, the Underlying Shares Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Shares Registration
Statement may not be used by the Holder for the resale of Underlying Shares. If
(a) an Underlying Shares Registration Statement is not filed on or prior to the
Filing Date (as defined under the Registration Rights Agreement) (if the Company
files such Underlying Shares Registration Statement without affording the Holder
the opportunity to review and comment on the same as required by Section 3(a) of
the Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the Commission
a request for acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act, within five (5) days of the date that the Company is notified
(orally or in writing, whichever is earlier) by the Commission that an
Underlying Shares Registration Statement will not be "reviewed," or not subject
to further review, or (c) the Underlying Shares Registration Statement is not
declared effective by the Commission on or prior to the Effectiveness Date, or
(d) such Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities at any time prior to the expiration of the Effectiveness
Period (as defined in the Registration Rights Agreement), without being
succeeded within ten (10) days by an amendment to such Underlying Shares
Registration Statement or by a subsequent Underlying Shares Registration
Statement filed with and declared effective by the Commission, or (e) the Common
Stock shall be delisted or suspended from trading on the NASDAQ or on any
Subsequent Market for more than three (3) Business Days (which need not be
consecutive days), (f) the conversion rights of the Holders are suspended for
any reason or (g) an amendment to the Underlying Shares Registration Statement
is not filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in order for
the Underlying Shares Registration Statement to be declared effective (any such
failure or breach being referred to as an "EVENT," and for purposes of clauses
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(a), (c), (f) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) day period is exceeded, or for purposes of
clauses (d) and (g) the date which such 10 day-period is exceeded, or for
purposes of clause (e) the date on which such three (3) Business Day-period is
exceeded, being referred to as "EVENT DATE"), then, on the Event Date and on
each monthly anniversary thereof until such time as the applicable Event is
cured, the Company shall pay to the Holder 2.5% of the aggregate principal
amount of the Debentures then outstanding in cash, as liquidated damages and not
as penalty. The provisions of this Section are not exclusive and shall in no way
limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares, or (d) issue
by reclassification of shares of the Common Stock any shares of capital stock of
the Company, then the Initial Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Initial Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of shares
of the Common Stock (excluding treasury shares, if any) outstanding on the date
of issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However, upon
the expiration of any such right, option or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Initial
Conversion Price pursuant to this Section, if any such right, option or warrant
shall expire and shall not have been exercised, the Initial Conversion Price
shall immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Initial Conversion Price made pursuant
to the provisions of this Section after the issuance of such rights or warrants)
had the adjustment of the Initial Conversion Price made upon the issuance of
such rights, options or warrants been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
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purchased upon the exercise of such rights, options or warrants actually
exercised.
(iv) If the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), at any
time while Debentures are outstanding, shall issue shares of Common Stock or
rights, warrants, options or other securities or debt that is convertible into
or exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS")
entitling any Person to acquire shares of Common Stock at a price per share less
than the Conversion Price, then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such shares of Common Stock or
such Common Stock Equivalents plus the number of shares of Common Stock which
the offering price for such shares of Common Stock or Common Stock Equivalents
would purchase at the Conversion Price, and the denominator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
such issuance plus the number of shares of Common Stock so issued or issuable,
PROVIDED, that for purposes hereof, all shares of Common Stock that are issuable
upon conversion, exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued.
(v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by multiplying the Initial Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value determined as of the record date mentioned above, and of
which the numerator shall be such Per Share Market Value on such record date
less the then fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors in good faith;
PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, if the Holders of a majority in interest
of the Debentures dispute such valuation, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "APPRAISER") selected in good faith by the holders of a majority in
interest of Debentures then outstanding; and PROVIDED, FURTHER, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
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(vi) In case of any reclassification of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holders shall have the right
thereafter to, at their option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of the Common Stock following such reclassification or share exchange,
and the Holders of the Debentures shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay the aggregate of its outstanding principal amount of
Debentures, plus all interest and other amounts due and payable thereon, at a
price determined in accordance with Section 3(b). The entire prepayment price
shall be paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.
(vii) All calculations under this Section 4 shall be made
to the nearest 1/100th of a cent or share, as the case may be.
(viii) Whenever the Initial Conversion Price is adjusted
pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to
each Holder a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(ix) If (A) the Company shall declare a dividend (or any
other distribution) on the Common Stock; (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock; (C) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of the Debentures, and shall
cause to be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
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of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(x) In case of any (1) merger or consolidation of the
Company with or into another Person that would constitute a Change of Control
Transaction, or (2) sale by the Company of more than one-half of the assets of
the Company (on an as valued basis) in one or a series of related transactions,
or (3) tender or other offer or exchange (whether by the Company or another
Person) pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, stock, cash or property of the
Company or another Person; then a Holder shall have the right to (A) if
permitted under Section 3(b) hereof, exercise its rights of prepayment under
Section 3(b) with respect to such event, (B) convert its aggregate principal
amount of Debentures then outstanding into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled upon such event or series of related events to receive such amount
of securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Debentures could have been converted immediately
prior to such merger, consolidation or sales would have been entitled, (C) in
the case of a merger or consolidation, (x) require the surviving entity to issue
shares of convertible preferred stock or convertible debentures with such
aggregate stated value or in such face amount, as the case may be, equal to the
aggregate principal amount of Debentures then held by such Holder, plus all
accrued and unpaid interest and other amounts owing thereon, which newly issued
shares of preferred stock or debentures shall have terms identical (including
with respect to conversion) to the terms of this Debenture (except, in the case
of preferred stock, as may be required to reflect the differences between equity
and debt) and shall be entitled to all of the rights and privileges of a Holder
of Debentures set forth herein and the agreements pursuant to which the
Debentures were issued (including, without limitation, as such rights relate to
the acquisition, transferability, registration and listing of such shares of
stock other securities issuable upon conversion thereof), and (y) simultaneously
with the issuance of such convertible preferred stock or convertible debentures,
shall have the right to convert such instrument only into shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger or consolidation, or (D) in the
event of an exchange or tender offer or other transaction contemplated by clause
(3) of this Section, tender or exchange its aggregate principal amount of
Debentures for such securities, stock, cash and other property receivable upon
or deemed to be held by holders of Common Stock that have tendered or exchanged
their shares of Common Stock following such tender or exchange, and such Holder
shall be entitled upon such exchange or tender to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Debentures could have been converted (taking into
account all then accrued and unpaid dividends) immediately prior to such tender
or exchange would have been entitled as would have been issued. In the case of
clause (C), the conversion price applicable for the newly issued shares of
convertible preferred stock or convertible debentures shall be based upon the
amount of securities, cash and property that each share of Common Stock would
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receive in such transaction and the Conversion Price in effect immediately prior
to the effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
continue to give the Holders of Debentures the right to receive the securities,
cash and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
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(g) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
3303 Harbor Boulevard, F-3, Costa Mesa, CA 92626 facsimile number (714)
549-8970, attention Chief Executive Officer, with a copy to Larry Cerutti, Esq.,
Rutan & Tucker, LLP, 611 Anton Boulevard, 14th Floor, Costa Mesa, CA 92626,
telephone number (714)641-3450, facsimile number (714)546-9035, or such other
address or facsimile number as the Company may specify for such purposes by
notice to the Holders delivered in accordance with this Section, with a copy to
The N.I.R. Group, LLC, 155 First Street, Suite B, Mineola, NY 11501(facsimile
number (516)739-7115), attention CSR. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 8:00 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days
after deposit in the United States mail, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
SECTION 5. OPTIONAL PREPAYMENT.
(a) The Company shall have the right, exercisable at any time
upon twenty (20) Trading Days prior written notice to the Holders of the
Debentures to be prepaid and accompanied by any waiver required by holders of
senior indebtedness of the Company for such prepayment (the "OPTIONAL PREPAYMENT
NOTICE"), to prepay, all or any portion of the outstanding principal amount of
the Debentures which have not previously been repaid or for which Conversion
Notices have not previously been delivered. The prepayment price applicable to
such prepayments shall equal the Optional Prepayment Price (as defined in
Section 7) and shall be paid in cash. Any such prepayment shall be free of any
claim of subordination. The Holders shall have the right to tender, and the
Company shall honor, Conversion Notices delivered prior to the expiration of the
twentieth (20th) Trading Day after receipt by the Holders of an Optional
Prepayment Notice for such Debentures (the 20th Trading Day after receipt by the
Holders of an Optional Prepayment Notice is referred to herein as the "OPTIONAL
PREPAYMENT DATE").
(b) If any portion of the Optional Prepayment Price shall not
be paid by the Company by the second (2nd) Business Day following the Optional
Prepayment Date, the Optional Prepayment Price shall be increased by 15% per
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annum (to accrue daily) until paid (which amount shall be paid as liquidated
damages and not as a penalty). In addition, if any portion of the optional
Prepayment Price remains unpaid through the expiration of the Optional
Prepayment Date, the Holder subject to such prepayment may elect by written
notice to the Company to either (x) demand conversion in accordance with the
formula and the time period therefor set forth in Section 4 of any portion of
the principal amount of Debentures for which the Optional Prepayment Price, plus
accrued liquidated damages thereof, has not been paid in full (the "UNPAID
PREPAYMENT PRINCIPAL AMOUNT"), in which event the applicable Per Share Market
Value shall be the lower of the Per Share Market Value calculated on the
Optional Prepayment Date and the Per Share Market Value as of the Holder's
written demand for conversion, or (y) invalidate AB INITIO such optional
redemption, notwithstanding anything herein contained to the contrary. If the
Holder elects option (x) above, the Company shall within three (3) Trading Days
such election is deemed delivered hereunder to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Prepayment Principal Amount subject
to such conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (y) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
notice of such election, return to the Holder new Debentures for the full Unpaid
Prepayment Principal Amount. If, upon an election under option (x) above, the
Company fails to deliver the shares of Common Stock issuable upon conversion of
the Unpaid Prepayment Principal Amount within the time period set forth in this
Section, the Company shall pay to the Holder in cash, as liquidated damages and
not as a penalty, $2,500 per day until the Company delivers such Common Stock to
the Holder.
SECTION 6. INTENTIONALLY OMITTED
SECTION 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York or the State of California are authorized or required by law
or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 33% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"COMMISSION" means the Securities and Exchange Commission.
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<PAGE>
"COMMON STOCK" means the Common Stock, $.001 par value per
share, of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"INTEREST EFFECTIVENESS DATE" means the earlier to occur of
(x) the Effectiveness Date and (y) the date that an Underlying Shares
Registration Statement is declared effective by the Commission.
"OPTIONAL PREPAYMENT PRICE" for any Debentures shall equal
120% of principal amount of Debentures to be prepaid, plus all accrued and
unpaid interest thereon.
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"PER SHARE MARKET VALUE" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the NASDAQ or on
such Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or a Subsequent Market
(which shall include, without limitation, the OTC Bulletin Board), the closing
bid price for a share of Common Stock in the over-the-counter market, as
reported by the National Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (c) if the Common Stock is not then reported by the
National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the Holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the principal amount
of Debentures then outstanding.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Secured Convertible Debenture
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of Debentures, as amended, modified or supplemented from
time to time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
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<PAGE>
"SECURITY AGREEMENTS" means the Security Agreement, of even
date herewith between the Company and the original Holder of Debentures, as
amended modified or supplemented from time to time in accordance with its terms.
"TRADING DAY" means (a) a day on which the Common Stock is
traded on the NASDAQ or on such Subsequent Market on which the Common Stock is
then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or
a Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
SECTION 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks PARI PASSU with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.
SECTION 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
SECTION 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
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<PAGE>
SECTION 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company and the Holders hereby irrevocably submit
to the exclusive jurisdiction of the state and federal courts sitting in the
County of Nassau, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or that such suit, action or proceeding is improper. Each of the
Company and the Holder hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
SECTION 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
SECTION 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
SECTION 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
SECTION 15. The payment obligations under this Debenture and
the obligations of the Company to the Holder arising upon the conversion of all
or any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
----------------------------------
Name: Alex Kanakaris
Title: President
Attest:
By: /s/ Branch Lotspeich
----------------------------------
Name: Branch Lotspeich
Title: Vice Chair
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert the attached Debenture into shares of
Class A Common Stock, $.001 par value per share (the "Common Stock"), of
____________________(the "Company") according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
----------------------------------------------------
Date to Effect Conversion
----------------------------------------------------
Principal Amount of Debentures to be Converted
----------------------------------------------------
Number of shares of Common Stock to be Issued
----------------------------------------------------
Applicable Conversion Price
----------------------------------------------------
Signature
----------------------------------------------------
Name
----------------------------------------------------
Address
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. 2 $250,000
-------------
10% CONVERTIBLE DEBENTURE
DUE FEBRUARY 1, 2001
THIS DEBENTURE is issued by KANAKARIS COMMUNICATIONS, INC. a corporation having
a principal place of business at 3303 Harbor Boulevard, F-3, Costa Mesa, CA
92626 (the "COMPANY"), and is designated as the Company's 10% Convertible
Debentures, due February 1, 2001 (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to AJW PARTNERS, LLC,
or its registered assigns (the "HOLDER"), the principal sum of TWO HUNDRED FIFTY
THOUSAND AND NO/100 ($250,0000) on February 1, 2001 or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"MATURITY DATE") and to pay interest to the Holder on such principal sum at the
rate of 10% per annum, payable on a quarterly basis on March 31, June 30,
September 30 and December 31 of each year while such Debentures are outstanding
(each an "INTEREST PAYMENT DATE") and on each Conversion Date (as defined
herein) for such principal amount, commencing on the earlier to occur of a
Conversion Date for such principal amount and March 31, 2000, in cash or shares
of Common Stock (as defined in Section 7). Subject to the terms and conditions
herein, the decision whether to pay interest hereunder in Common Stock or cash
shall be at the discretion of the Company. Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 7) until payment in
full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made. Any interest not
paid on any Interest Payment Date shall continue to accrue and shall be due and
payable upon conversion of the Debentures. Interest hereunder will be paid to
the Person (as defined in Section 7) in whose name this Debenture is registered
on the records of the Company regarding registration and transfers of Debentures
<PAGE>
(the "DEBENTURE REGISTER"). All overdue accrued and unpaid interest shall entail
a late fee at the rate of 15% per annum (to accrue daily, from the date such
interest is due hereunder through and including the date of payment), payable in
cash. Not less than ten (10) Trading Days (as defined in Section 7) prior to
Interest Payment Date, the Company shall provide the Holder notice of its
intention to pay interest in cash or shares of Common Stock (the Company may
indicate in such notice that the election contained in such notice shall
continue for later periods until revised). If interest is paid in shares of
Common Stock, the number of shares of Common Stock issuable on account of such
interest shall equal the cash amount of such interest on such Interest Payment
Date divided by the Conversion Price (as defined below) on such date.
Notwithstanding anything to contrary set forth herein, for purposes of
determining the number of shares of Common Stock that are issuable as payment of
interest hereunder, the Conversion Price shall not be subject to any floor.
Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of interest on the principal
amount if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to pay interest hereunder in shares of Common Stock;
(ii) after the Interest Effectiveness Date (as defined in
Section 7) such shares (x) are not registered for resale pursuant to an
effective Underlying Shares Registration Statement (as defined in Section 7) and
(y) may not be sold without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act (as defined in Section 7), as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the applicable
Holder and such transfer agent (if the Company is permitted and elects to pay
interest in shares of Common Stock under this clause (ii) prior to the Interest
Effectiveness Date and thereafter an Underlying Shares Registration Statement
shall be declared effective by the Commission (as defined in Section 7), the
Company shall, within three (3) Trading Days after the date of such declaration
of effectiveness, exchange such shares for shares of Common Stock in accordance
with the terms and conditions contained in the Purchase Agreement (as defined in
Section 7).
(iii) such shares are not listed or quoted on either the
Nasdaq National Market ("NASDAQ") or on the New York Stock Exchange, American
Stock Exchange or the Nasdaq SmallCap Market or OTC Bulletin Board (each, a
"SUBSEQUENT MARKET");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares would result in a violation of
Section 4(a)(ii)(A).
This Debenture is subject to the following additional provisions:
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<PAGE>
SECTION 1. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
SECTION 2 Prior to due presentment to the Company for transfer
of this Debenture, the Company and any agent of the Company may treat the Person
(as defined in Section 7) in whose name this Debenture is duly registered on the
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
SECTION 3 EVENTS OF DEFAULT.
(a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest
on or liquidated damages in respect of, this Debenture, free of any
claim of subordination except in accordance with a subordination
agreement executed by the Holder, as and when the same shall become due
and payable (whether on the applicable Interest Payment Date, a
Conversion Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of any of, this Debenture, the Purchase Agreement, the
Registration Rights Agreement (as defined in Section 7) or the Security
Agreements (as defined in Section 7), and such failure or breach shall
not have been remedied within 30 days after the date on which notice of
such failure or breach shall have been given;
(iii) the Company or any of its subsidiaries shall commence,
or there shall be commenced against the Company or any such subsidiary
a case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period
of 60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any
subsidiary thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of
creditors; or the Company shall fail to pay, or shall state that it is
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<PAGE>
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company or any subsidiary
thereof for the purpose of effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding fifty thousand dollars ($50,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall be delisted from either the NASDAQ
or a Subsequent Market or shall be suspended from trading on the NASDAQ
without resuming trading and/or being relisted thereon or on a
Subsequent Market or having such suspension lifted, as the case may be,
within two (2) days;
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 7), shall agree to sell or dispose
all or in excess of 50% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction), or shall redeem or repurchase more than a de minimis
number of shares of Common Stock or other equity securities of the
Company (other than redemptions of Underlying Shares (as defined in
Section 7));
(vii) an Underlying Shares Registration Statement shall not
have been declaredeffective by the Commission on or prior to the 120th
day after the date hereof (the "Effectiveness Date").
(viii) if, during the Effectiveness Period, the effectiveness
of the Underlying Shares Registration Statement lapses for any reason
for more than an aggregate of five (5) Trading Days (which need not be
consecutive days), or the Holder shall not be permitted to resell
Registrable Securities under the Underlying Shares Registration
Statement for more than an aggregate of five (5) Trading Days (which
need not be consecutive days);
(ix) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as defined below) relating
thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the
Commission on or prior to the Effectiveness Date, which shall be
covered by Section 3(a)(vii));
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<PAGE>
(xi) the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth (10th) day after a
Conversion Date pursuant to Section 4(b) or the Company shall provide
notice to the Holder, including by way of public announcement, at any
time, of its intention not to comply with requests for conversions of
any Debentures in accordance with the terms hereof;
(xii) the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In within seven (7) days after notice
is deemed delivered hereunder;
(xiii) the Company shall issue any shares of Common Stock or
Common Stock Equivalents (as defined herein) in connection with or to
any present or future lender or creditor of the Company or any
subsidiary thereof other than Common Stock or Common Stock Equivalents
which are restricted and which have no demand or "piggy back"
registration rights;
(xiv) the Company shall agree to pay or settle any litigation
or claim for an amount in stock or cash that exceeds the insurance
coverage for such litigation or claim; or
(xv) the Company shall restructure any material portion of its
present or future debt obligations or payables.
(b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, immediately
due and payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the sum of (i) the Optional Prepayment Price (as defined in
Section 7) plus (ii) the product of (A) the number of Underlying Shares issued
in respect of conversions hereunder or as payment of interest hereunder, in
either case, within thirty (30) days of the date of a declaration of an Event of
Default and then held by the Holder and (B) the Per Share Market Value (as
defined in Section 7) on the date prepayment is due or the date the full
prepayment price is paid, whichever is greater. Interest shall accrue on the
prepayment amount hereunder from the seventh day after such amount is due (being
the date of an Event of Default) through the date of prepayment in full thereof
at the rate of 15% per annum. All Debentures and Underlying Shares for which the
full repayment price hereunder shall have been paid in accordance herewith shall
be promptly surrendered to or as directed by the Company. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
SECTION 4. CONVERSION.
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<PAGE>
(a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall
be convertible into shares of Common Stock at the option of the Holder, in whole
or in part at any time and from time to time, after the Original Issue Date
(subject to the limitations on conversion set forth in Section 4(a)(ii) hereof).
The number of shares of Common Stock issuable upon a conversion hereunder shall
be determined by dividing the outstanding principal amount of this Debenture to
be converted, plus all accrued but unpaid interest thereon, by the Conversion
Price. The Holder shall effect conversions by surrendering the Debentures (or
such portions thereof) to be converted, together with the form of conversion
notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each
Conversion Notice shall specify the principal amount of Debentures to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in
a Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.
(ii) CERTAIN CONVERSION RESTRICTIONS
(A)(1) A Holder may not convert Debentures or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act (as defined in Section 7) and
the rules promulgated thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of interest on, the Debentures held by such Holder after
application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of Debentures are convertible shall be in the sole discretion
of the Holder. The provisions of this Section may be waived by a Holder (but
only as to itself and not to any other Holder) upon not less than 5 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver.
(2) A Holder may not convert Debentures or receive shares
of Common Stock as payment of interest hereunder to the extent such conversion
or receipt of such interest payment would result in the Holder, together with
any affiliate thereof, beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act and the rules promulgated thereunder) in
excess of 9.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of, and payment of interest on, the
Debentures held by such Holder after application of this Section. The Holder
shall have the sole authority and obligation to determine whether the
restriction contained in this Section applies and to the extent that the Holder
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<PAGE>
determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 15 days prior notice to the Company. Other
Holders shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading on the
NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the
Shareholder Approval (as defined below), then the Company may not issue in
excess of [ ________ ] shares of Common Stock upon conversions of Debentures or
as payment of interest thereon in shares of Common Stock, which number shall be
subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x)
(such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals
19.999% of the number of shares of Common Stock outstanding immediately prior to
the closing of transactions set forth in the Purchase Agreement. If on any
Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the
Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding Debentures and as payment of interest
thereon in shares of Common Stock, together with any shares of Common Stock
previously issued upon conversion of Debentures and as payment of interest
thereon, would exceed the Issuable Maximum, and (C) the Company shall not have
previously obtained the vote of shareholders (the "SHAREHOLDER APPROVAL"), if
any, as may be required by the applicable rules and regulations of the Nasdaq
Stock Market (or any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum pursuant to the terms
hereof, then the Company shall issue to the Holder so requesting a conversion a
number of shares of Common Stock equal to the Issuable Maximum and, with respect
to the remainder of the principal amount of Debentures then held by such Holder
for which a conversion in accordance with the Conversion Price would result in
an issuance of shares of Common Stock in excess of the Issuable Maximum (the
"EXCESS PRINCIPAL"), the converting Holder shall have the option to require the
Company to either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not later
than the 75th day after such request, or (2) pay cash to the converting Holder
in an amount equal to the OptionalPrepayment Amount for the Excess Principal. If
the Company fails to pay the OptionalPrepayment Amount in full pursuant to this
Section, the Company will pay interest thereon at a rate of 15% per annum to the
converting Holder, accruing daily from the Conversion Date until such amount,
plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any
Conversion Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of trading restrictions representing the number
of shares of Common Stock being acquired upon the conversion of Debentures
(subject to the limitations set forth in Section 4(a)(ii) hereof), (ii)
Debentures in a principal amount equal to the principal amount of Debentures not
converted, (iii) a bank check in the amount of accrued and unpaid interest (if
the Company has elected or is required to pay accrued interest in cash), and
(iv) if the Company has elected and is permitted hereunder to pay accrued
interest in shares of Common Stock, certificates, which shall be free of trading
restrictions (other than those required by Section 3.1 (b) of the Purchase
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Agreement), representing such shares of Common Stock; PROVIDED, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of the principal amount of Debentures until
Debentures are delivered for conversion to the Company, or the Holder notifies
the Company that such Debentures have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid interest
hereunder, are not delivered to or as directed by the applicable Holder by the
third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled
by written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the
principal amount of Debentures tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 4(b)(i), including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid interest hereunder, by the third (3rd) Trading Day
after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $1,000 for each Trading Day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Debentures or as payment of interest thereon by the third (3rd)
Trading Day after the Conversion Date, the Holder may, by notice to the Company,
require the Company to issue shares of Common Stock pursuant to Section 4(c),
except that for such purpose the Conversion Price applicable thereto shall be
the lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such shares will be subject to the
provision of this Section.
(iii) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 4(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid interest hereunder, by the third (3rd) Trading Day after the
Conversion Date, and if after such third (3rd) Trading Day the Holder purchases
(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall
(A) pay in cash to the Holder (in addition to any remedies available to or
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elected by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commisions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder anticipated receiving from the conversion at issue multiplied
by (2) the market price of the Common Stock at the time of the sale giving rise
to such purchase obligation and (B) at the option of the Holder, either reissue
Debentures in principal amount equal the principal amount of the attempted
conversion or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of Debentures with respect to which the market price of
the Underlying Shares on the date of conversion was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) (i) The conversion price (the "CONVERSION PRICE") in
effect on any Conversion Date shall be the lesser of (A) Ninety-seven Hundredths
of One Dollar ($.97) the "INITIAL CONVERSION PRICE") and (B) 66.66% of the
average closing bid price during the twenty (20) Trading Days immediately
preceding the applicable Conversion Date, PROVIDED, that such twenty (20)
Trading Day period shall be extended for the number of Trading Days during such
period in which (A) trading in the Common Stock is suspended by the NASDAQ or a
Subsequent Market on which the Common Stock is then listed, or (B) after the
date declared effective by the Commission, the Underlying Shares Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Shares Registration
Statement may not be used by the Holder for the resale of Underlying Shares. If
(a) an Underlying Shares Registration Statement is not filed on or prior to the
Filing Date (as defined under the Registration Rights Agreement) (if the Company
files such Underlying Shares Registration Statement without affording the Holder
the opportunity to review and comment on the same as required by Section 3(a) of
the Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the Commission
a request for acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act, within five (5) days of the date that the Company is notified
(orally or in writing, whichever is earlier) by the Commission that an
Underlying Shares Registration Statement will not be "reviewed," or not subject
to further review, or (c) the Underlying Shares Registration Statement is not
declared effective by the Commission on or prior to the Effectiveness Date, or
(d) such Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities at any time prior to the expiration of the Effectiveness
Period (as defined in the Registration Rights Agreement), without being
succeeded within ten (10) days by an amendment to such Underlying Shares
Registration Statement or by a subsequent Underlying Shares Registration
Statement filed with and declared effective by the Commission, or (e) the Common
Stock shall be delisted or suspended from trading on the NASDAQ or on any
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Subsequent Market for more than three (3) Business Days (which need not be
consecutive days), (f) the conversion rights of the Holders are suspended for
any reason or (g) an amendment to the Underlying Shares Registration Statement
is not filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in order for
the Underlying Shares Registration Statement to be declared effective (any such
failure or breach being referred to as an "EVENT," and for purposes of clauses
(a), (c), (f) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) day period is exceeded, or for purposes of
clauses (d) and (g) the date which such 10 day-period is exceeded, or for
purposes of clause (e) the date on which such three (3) Business Day-period is
exceeded, being referred to as "EVENT DATE"), then, on the Event Date and on
each monthly anniversary thereof until such time as the applicable Event is
cured, the Company shall pay to the Holder 2.5% of the aggregate principal
amount of the Debentures then outstanding in cash, as liquidated damages and not
as penalty. The provisions of this Section are not exclusive and shall in no way
limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares, or (d) issue
by reclassification of shares of the Common Stock any shares of capital stock of
the Company, then the Initial Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Initial Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of shares
of the Common Stock (excluding treasury shares, if any) outstanding on the date
of issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However, upon
the expiration of any such right, option or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Initial
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Conversion Price pursuant to this Section, if any such right, option or warrant
shall expire and shall not have been exercised, the Initial Conversion Price
shall immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Initial Conversion Price made pursuant
to the provisions of this Section after the issuance of such rights or warrants)
had the adjustment of the Initial Conversion Price made upon the issuance of
such rights, options or warrants been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such rights, options or warrants actually
exercised.
(iv) If the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), at any
time while Debentures are outstanding, shall issue shares of Common Stock or
rights, warrants, options or other securities or debt that is convertible into
or exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS")
entitling any Person to acquire shares of Common Stock at a price per share less
than the Conversion Price, then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such shares of Common Stock or
such Common Stock Equivalents plus the number of shares of Common Stock which
the offering price for such shares of Common Stock or Common Stock Equivalents
would purchase at the Conversion Price, and the denominator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
such issuance plus the number of shares of Common Stock so issued or issuable,
PROVIDED, that for purposes hereof, all shares of Common Stock that are issuable
upon conversion, exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued.
(v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by multiplying the Initial Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value determined as of the record date mentioned above, and of
which the numerator shall be such Per Share Market Value on such record date
less the then fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors in good faith;
PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, if the Holders of a majority in interest
of the Debentures dispute such valuation, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
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Company) (an "APPRAISER") selected in good faith by the holders of a majority in
interest of Debentures then outstanding; and PROVIDED, FURTHER, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(vi) In case of any reclassification of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holders shall have the right
thereafter to, at their option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of the Common Stock following such reclassification or share exchange,
and the Holders of the Debentures shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay the aggregate of its outstanding principal amount of
Debentures, plus all interest and other amounts due and payable thereon, at a
price determined in accordance with Section 3(b). The entire prepayment price
shall be paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.
(vii) All calculations under this Section 4 shall be made
to the nearest 1/100th of a cent or share, as the case may be.
(viii) Whenever the Initial Conversion Price is adjusted
pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to
each Holder a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(ix) If (A) the Company shall declare a dividend (or any
other distribution) on the Common Stock; (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock; (C) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be filed at each office
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or agency maintained for the purpose of conversion of the Debentures, and shall
cause to be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(x) In case of any (1) merger or consolidation of the
Company with or into another Person that would constitute a Change of Control
Transaction, or (2) sale by the Company of more than one-half of the assets of
the Company (on an as valued basis) in one or a series of related transactions,
or (3) tender or other offer or exchange (whether by the Company or another
Person) pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, stock, cash or property of the
Company or another Person; then a Holder shall have the right to (A) if
permitted under Section 3(b) hereof, exercise its rights of prepayment under
Section 3(b) with respect to such event, (B) convert its aggregate principal
amount of Debentures then outstanding into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled upon such event or series of related events to receive such amount
of securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Debentures could have been converted immediately
prior to such merger, consolidation or sales would have been entitled, (C) in
the case of a merger or consolidation, (x) require the surviving entity to issue
shares of convertible preferred stock or convertible debentures with such
aggregate stated value or in such face amount, as the case may be, equal to the
aggregate principal amount of Debentures then held by such Holder, plus all
accrued and unpaid interest and other amounts owing thereon, which newly issued
shares of preferred stock or debentures shall have terms identical (including
with respect to conversion) to the terms of this Debenture (except, in the case
of preferred stock, as may be required to reflect the differences between equity
and debt) and shall be entitled to all of the rights and privileges of a Holder
of Debentures set forth herein and the agreements pursuant to which the
Debentures were issued (including, without limitation, as such rights relate to
the acquisition, transferability, registration and listing of such shares of
stock other securities issuable upon conversion thereof), and (y) simultaneously
with the issuance of such convertible preferred stock or convertible debentures,
shall have the right to convert such instrument only into shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger or consolidation, or (D) in the
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event of an exchange or tender offer or other transaction contemplated by clause
(3) of this Section, tender or exchange its aggregate principal amount of
Debentures for such securities, stock, cash and other property receivable upon
or deemed to be held by holders of Common Stock that have tendered or exchanged
their shares of Common Stock following such tender or exchange, and such Holder
shall be entitled upon such exchange or tender to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Debentures could have been converted (taking into
account all then accrued and unpaid dividends) immediately prior to such tender
or exchange would have been entitled as would have been issued. In the case of
clause (C), the conversion price applicable for the newly issued shares of
convertible preferred stock or convertible debentures shall be based upon the
amount of securities, cash and property that each share of Common Stock would
receive in such transaction and the Conversion Price in effect immediately prior
to the effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
continue to give the Holders of Debentures the right to receive the securities,
cash and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
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thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
3303 Harbor Boulevard, F-3, Costa Mesa, CA 92626 facsimile number (714)
549-8970, attention Chief Executive Officer, with a copy to Larry Cerutti, Esq.,
Rutan & Tucker, LLP, 611 Anton Boulevard, 14th Floor, Costa Mesa, CA 92626,
telephone number (714)641-3450, facsimile number (714)546-9035, or such other
address or facsimile number as the Company may specify for such purposes by
notice to the Holders delivered in accordance with this Section, with a copy to
The N.I.R. Group, LLC, 155 First Street, Suite B, Mineola, NY 11501(facsimile
number (516)739-7115), attention CSR. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 8:00 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days
after deposit in the United States mail, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
SECTION 5. OPTIONAL PREPAYMENT.
(a) The Company shall have the right, exercisable at any time
upon twenty (20) Trading Days prior written notice to the Holders of the
Debentures to be prepaid and accompanied by any waiver required by holders of
senior indebtedness of the Company for such prepayment (the "OPTIONAL PREPAYMENT
NOTICE"), to prepay, all or any portion of the outstanding principal amount of
the Debentures which have not previously been repaid or for which Conversion
Notices have not previously been delivered. The prepayment price applicable to
such prepayments shall equal the Optional Prepayment Price (as defined in
Section 7) and shall be paid in cash. Any such prepayment shall be free of any
claim of subordination. The Holders shall have the right to tender, and the
Company shall honor, Conversion Notices delivered prior to the expiration of the
twentieth (20th) Trading Day after receipt by the Holders of an Optional
Prepayment Notice for such Debentures (the 20th Trading Day after receipt by the
Holders of an Optional Prepayment Notice is referred to herein as the "OPTIONAL
PREPAYMENT DATE").
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(b) If any portion of the Optional Prepayment Price shall not
be paid by the Company by the second (2nd) Business Day following the Optional
Prepayment Date, the Optional Prepayment Price shall be increased by 15% per
annum (to accrue daily) until paid (which amount shall be paid as liquidated
damages and not as a penalty). In addition, if any portion of the optional
Prepayment Price remains unpaid through the expiration of the Optional
Prepayment Date, the Holder subject to such prepayment may elect by written
notice to the Company to either (x) demand conversion in accordance with the
formula and the time period therefor set forth in Section 4 of any portion of
the principal amount of Debentures for which the Optional Prepayment Price, plus
accrued liquidated damages thereof, has not been paid in full (the "UNPAID
PREPAYMENT PRINCIPAL AMOUNT"), in which event the applicable Per Share Market
Value shall be the lower of the Per Share Market Value calculated on the
Optional Prepayment Date and the Per Share Market Value as of the Holder's
written demand for conversion, or (y) invalidate AB INITIO such optional
redemption, notwithstanding anything herein contained to the contrary. If the
Holder elects option (x) above, the Company shall within three (3) Trading Days
such election is deemed delivered hereunder to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Prepayment Principal Amount subject
to such conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (y) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
notice of such election, return to the Holder new Debentures for the full Unpaid
Prepayment Principal Amount. If, upon an election under option (x) above, the
Company fails to deliver the shares of Common Stock issuable upon conversion of
the Unpaid Prepayment Principal Amount within the time period set forth in this
Section, the Company shall pay to the Holder in cash, as liquidated damages and
not as a penalty, $2,500 per day until the Company delivers such Common Stock to
the Holder.
SECTION 6. INTENTIONALLY OMITTED
SECTION 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York or the State of California are authorized or required by law
or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 33% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
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Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Common Stock, $.001 par value per
share, of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"INTEREST EFFECTIVENESS DATE" means the earlier to occur of
(x) the Effectiveness Date and (y) the date that an Underlying Shares
Registration Statement is declared effective by the Commission.
"OPTIONAL PREPAYMENT PRICE" for any Debentures shall equal
120% of principal amount of Debentures to be prepaid, plus all accrued and
unpaid interest thereon.
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"PER SHARE MARKET VALUE" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the NASDAQ or on
such Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or a Subsequent Market
(which shall include, without limitation, the OTC Bulletin Board), the closing
bid price for a share of Common Stock in the over-the-counter market, as
reported by the National Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (c) if the Common Stock is not then reported by the
National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the Holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the principal amount
of Debentures then outstanding.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Secured Convertible Debenture
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of Debentures, as amended, modified or supplemented from
time to time in accordance with its terms.
-17-
<PAGE>
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENTS" means the Security Agreement, of even
date herewith between the Company and the original Holder of Debentures, as
amended modified or supplemented from time to time in accordance with its terms.
"TRADING DAY" means (a) a day on which the Common Stock is
traded on the NASDAQ or on such Subsequent Market on which the Common Stock is
then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or
a Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
SECTION 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks PARI PASSU with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.
SECTION 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
-18-
<PAGE>
SECTION 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
SECTION 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company and the Holders hereby irrevocably submit
to the exclusive jurisdiction of the state and federal courts sitting in the
County of Nassau, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or that such suit, action or proceeding is improper. Each of the
Company and the Holder hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
SECTION 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
SECTION 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
SECTION 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
SECTION 15. The payment obligations under this Debenture and
the obligations of the Company to the Holder arising upon the conversion of all
or any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
-------------------------------------
Name: Alex Kanakaris
Title: President
Attest:
By: /s/ Branch Lotspeich
-------------------------------------
Name: Branch Lotspeich
Title: Vice Chairman
No.2
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert the attached Debenture into shares of
Class A Common Stock, $.001 par value per share (the "Common Stock"), of
____________________(the "Company") according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ----------------------------------------------------
Date to Effect Conversion
----------------------------------------------------
Principal Amount of Debentures to be Converted
----------------------------------------------------
Number of shares of Common Stock to be Issued
----------------------------------------------------
Applicable Conversion Price
----------------------------------------------------
Signature
----------------------------------------------------
Name
----------------------------------------------------
Address
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. 2 $500,000
-------------
10% CONVERTIBLE DEBENTURE
DUE FEBRUARY 1, 2001
THIS DEBENTURE is issued by KANAKARIS COMMUNICATIONS, INC. a corporation having
a principal place of business at 3303 Harbor Boulevard, F-3, Costa Mesa, CA
92626 (the "COMPANY"), and is designated as the Company's 10% Convertible
Debentures, due February 1, 2001 (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to BANK INSINGER DE
BEAUFORT, or its registered assigns (the "HOLDER"), the principal sum of FIVE
HUNDRED THOUSAND AND NO/100 ($500,0000) on February 1, 2001 or such earlier date
as the Debentures are required or permitted to be repaid as provided hereunder
(the "MATURITY DATE") and to pay interest to the Holder on such principal sum at
the rate of 10% per annum, payable on a quarterly basis on March 31, June 30,
September 30 and December 31 of each year while such Debentures are outstanding
(each an "INTEREST PAYMENT DATE") and on each Conversion Date (as defined
herein) for such principal amount, commencing on the earlier to occur of a
Conversion Date for such principal amount and March 31, 2000, in cash or shares
of Common Stock (as defined in Section 7). Subject to the terms and conditions
herein, the decision whether to pay interest hereunder in Common Stock or cash
shall be at the discretion of the Company. Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 7) until payment in
full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made.
<PAGE>
Any interest not paid on any Interest Payment Date shall continue to accrue and
shall be due and payable upon conversion of the Debentures. Interest hereunder
will be paid to the Person (as defined in Section 7) in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of Debentures (the "DEBENTURE REGISTER"). All overdue accrued and
unpaid interest shall entail a late fee at the rate of 15% per annum (to accrue
daily, from the date such interest is due hereunder through and including the
date of payment), payable in cash. Not less than ten (10) Trading Days (as
defined in Section 7) prior to Interest Payment Date, the Company shall provide
the Holder notice of its intention to pay interest in cash or shares of Common
Stock (the Company may indicate in such notice that the election contained in
such notice shall continue for later periods until revised). If interest is paid
in shares of Common Stock, the number of shares of Common Stock issuable on
account of such interest shall equal the cash amount of such interest on such
Interest Payment Date divided by the Conversion Price (as defined below) on such
date. Notwithstanding anything to contrary set forth herein, for purposes of
determining the number of shares of Common Stock that are issuable as payment of
interest hereunder, the Conversion Price shall not be subject to any floor.
Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of interest on the principal
amount if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to pay interest hereunder in shares of Common Stock;
(ii) after the Interest Effectiveness Date (as defined in
Section 7) such shares (x) are not registered for resale pursuant to an
effective Underlying Shares Registration Statement (as defined in Section 7) and
(y) may not be sold without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act (as defined in Section 7), as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the applicable
Holder and such transfer agent (if the Company is permitted and elects to pay
interest in shares of Common Stock under this clause (ii) prior to the Interest
Effectiveness Date and thereafter an Underlying Shares Registration Statement
shall be declared effective by the Commission (as defined in Section 7), the
Company shall, within three (3) Trading Days after the date of such declaration
of effectiveness, exchange such shares for shares of Common Stock in accordance
with the terms and conditions contained in the Purchase Agreement (as defined in
Section 7).
(iii) such shares are not listed or quoted on either the
Nasdaq National Market ("NASDAQ") or on the New York Stock Exchange, American
Stock Exchange or the Nasdaq SmallCap Market or OTC Bulletin Board (each, a
"SUBSEQUENT MARKET");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares would result in a violation of
Section 4(a)(ii)(A).
This Debenture is subject to the following additional provisions:
-2-
<PAGE>
SECTION 1. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
SECTION 2. Prior to due presentment to the Company for
transfer of this Debenture, the Company and any agent of the Company may treat
the Person (as defined in Section 7) in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
(a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest
on or liquidated damages in respect of, this Debenture, free of any
claim of subordination except in accordance with a subordination
agreement executed by the Holder, as and when the same shall become due
and payable (whether on the applicable Interest Payment Date, a
Conversion Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of any of, this Debenture, the Purchase Agreement, the
Registration Rights Agreement (as defined in Section 7) or the Security
Agreements (as defined in Section 7), and such failure or breach shall
not have been remedied within 30 days after the date on which notice of
such failure or breach shall have been given;
(iii) the Company or any of its subsidiaries shall commence,
or there shall be commenced against the Company or any such subsidiary
a case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period
of 60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any
subsidiary thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of
-3-
<PAGE>
creditors; or the Company shall fail to pay, or shall state that it is
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company or any subsidiary
thereof for the purpose of effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding fifty thousand dollars ($50,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall be delisted from either the NASDAQ
or a Subsequent Market or shall be suspended from trading on the NASDAQ
without resuming trading and/or being relisted thereon or on a
Subsequent Market or having such suspension lifted, as the case may be,
within two (2) days;
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 7), shall agree to sell or dispose
all or in excess of 50% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction), or shall redeem or repurchase more than a de minimis
number of shares of Common Stock or other equity securities of the
Company (other than redemptions of Underlying Shares (as defined in
Section 7));
(vii) an Underlying Shares Registration Statement shall not
have been declaredeffective by the Commission on or prior to the 120th
day after the date hereof (the "Effectiveness Date").
(viii) if, during the Effectiveness Period, the effectiveness
of the Underlying Shares Registration Statement lapses for any reason
for more than an aggregate of five (5) Trading Days (which need not be
consecutive days), or the Holder shall not be permitted to resell
Registrable Securities under the Underlying Shares Registration
Statement for more than an aggregate of five (5) Trading Days (which
need not be consecutive days);
(ix) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as defined below) relating
thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the
Commission on or prior to the Effectiveness Date, which shall be
covered by Section 3(a)(vii));
-4-
<PAGE>
(xi) the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth (10th) day after a
Conversion Date pursuant to Section 4(b) or the Company shall provide
notice to the Holder, including by way of public announcement, at any
time, of its intention not to comply with requests for conversions of
any Debentures in accordance with the terms hereof;
(xii) the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In within seven (7) days after notice
is deemed delivered hereunder;
(xiii) the Company shall issue any shares of Common Stock or
Common Stock Equivalents (as defined herein) in connection with or to
any present or future lender or creditor of the Company or any
subsidiary thereof other than Common Stock or Common Stock Equivalents
which are restricted and which have no demand or "piggy back"
registration rights;
(xiv) the Company shall agree to pay or settle any litigation
or claim for an amount in stock or cash that exceeds the insurance
coverage for such litigation or claim; or
(xv) the Company shall restructure any material portion of its
present or future debt obligations or payables.
(b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, immediately
due and payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the sum of (i) the Optional Prepayment Price (as defined in
Section 7) plus (ii) the product of (A) the number of Underlying Shares issued
in respect of conversions hereunder or as payment of interest hereunder, in
either case, within thirty (30) days of the date of a declaration of an Event of
Default and then held by the Holder and (B) the Per Share Market Value (as
defined in Section 7) on the date prepayment is due or the date the full
prepayment price is paid, whichever is greater. Interest shall accrue on the
prepayment amount hereunder from the seventh day after such amount is due (being
the date of an Event of Default) through the date of prepayment in full thereof
at the rate of 15% per annum. All Debentures and Underlying Shares for which the
full repayment price hereunder shall have been paid in accordance herewith shall
be promptly surrendered to or as directed by the Company. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
-5-
<PAGE>
SECTION 4. CONVERSION.
(a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall
be convertible into shares of Common Stock at the option of the Holder, in whole
or in part at any time and from time to time, after the Original Issue Date
(subject to the limitations on conversion set forth in Section 4(a)(ii) hereof).
The number of shares of Common Stock issuable upon a conversion hereunder shall
be determined by dividing the outstanding principal amount of this Debenture to
be converted, plus all accrued but unpaid interest thereon, by the Conversion
Price. The Holder shall effect conversions by surrendering the Debentures (or
such portions thereof) to be converted, together with the form of conversion
notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each
Conversion Notice shall specify the principal amount of Debentures to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in
a Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.
(ii) CERTAIN CONVERSION RESTRICTIONS
(A)(1) A Holder may not convert Debentures or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act (as defined in Section 7) and
the rules promulgated thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of interest on, the Debentures held by such Holder after
application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of Debentures are convertible shall be in the sole discretion
of the Holder. The provisions of this Section may be waived by a Holder (but
only as to itself and not to any other Holder) upon not less than 5 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver.
(2) A Holder may not convert Debentures or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, the Debentures held by such Holder after application of this
-6-
<PAGE>
Section. The Holder shall have the sole authority and obligation to determine
whether the restriction contained in this Section applies and to the extent that
the Holder determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 15 days prior notice to the Company. Other
Holders shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading on
the NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the
Shareholder Approval (as defined below), then the Company may not issue in
excess of [ ________ ] shares of Common Stock upon conversions of Debentures or
as payment of interest thereon in shares of Common Stock, which number shall be
subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x)
(such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals
19.999% of the number of shares of Common Stock outstanding immediately prior to
the closing of transactions set forth in the Purchase Agreement. If on any
Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the
Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding Debentures and as payment of interest
thereon in shares of Common Stock, together with any shares of Common Stock
previously issued upon conversion of Debentures and as payment of interest
thereon, would exceed the Issuable Maximum, and (C) the Company shall not have
previously obtained the vote of shareholders (the "SHAREHOLDER APPROVAL"), if
any, as may be required by the applicable rules and regulations of the Nasdaq
Stock Market (or any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum pursuant to the terms
hereof, then the Company shall issue to the Holder so requesting a conversion a
number of shares of Common Stock equal to the Issuable Maximum and, with respect
to the remainder of the principal amount of Debentures then held by such Holder
for which a conversion in accordance with the Conversion Price would result in
an issuance of shares of Common Stock in excess of the Issuable Maximum (the
"EXCESS PRINCIPAL"), the converting Holder shall have the option to require the
Company to either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not later
than the 75th day after such request, or (2) pay cash to the converting Holder
in an amount equal to the OptionalPrepayment Amount for the Excess Principal. If
the Company fails to pay the OptionalPrepayment Amount in full pursuant to this
Section, the Company will pay interest thereon at a rate of 15% per annum to the
converting Holder, accruing daily from the Conversion Date until such amount,
plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any
Conversion Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of trading restrictions representing the number
of shares of Common Stock being acquired upon the conversion of Debentures
(subject to the limitations set forth in Section 4(a)(ii) hereof), (ii)
Debentures in a principal amount equal to the principal amount of Debentures not
converted, (iii) a bank check in the amount of accrued and unpaid interest (if
the Company has elected or is required to pay accrued interest in cash), and
-7-
<PAGE>
(iv) if the Company has elected and is permitted hereunder to pay accrued
interest in shares of Common Stock, certificates, which shall be free of trading
restrictions (other than those required by Section 3.1 (b) of the Purchase
Agreement), representing such shares of Common Stock; PROVIDED, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of the principal amount of Debentures until
Debentures are delivered for conversion to the Company, or the Holder notifies
the Company that such Debentures have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid interest
hereunder, are not delivered to or as directed by the applicable Holder by the
third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled
by written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the
principal amount of Debentures tendered for conversion.
(ii) If the Company fails to deliver to the Holder
such certificate or certificates pursuant to Section 4(b)(i), including for
purposes hereof, any shares of Common Stock to be issued on the Conversion Date
on account of accrued but unpaid interest hereunder, by the third (3rd) Trading
Day after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $1,000 for each Trading Day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Debentures or as payment of interest thereon by the third (3rd)
Trading Day after the Conversion Date, the Holder may, by notice to the Company,
require the Company to issue shares of Common Stock pursuant to Section 4(c),
except that for such purpose the Conversion Price applicable thereto shall be
the lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such shares will be subject to the
provision of this Section.
(iii) In addition to any other rights available to
the Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 4(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid interest hereunder, by the third (3rd) Trading Day after the
Conversion Date, and if after such third (3rd) Trading Day the Holder purchases
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(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall
(A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commisions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder anticipated receiving from the conversion at issue multiplied
by (2) the market price of the Common Stock at the time of the sale giving rise
to such purchase obligation and (B) at the option of the Holder, either reissue
Debentures in principal amount equal the principal amount of the attempted
conversion or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of Debentures with respect to which the market price of
the Underlying Shares on the date of conversion was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) (i) The conversion price (the "CONVERSION PRICE")
in effect on any Conversion Date shall be the lesser of (A) Ninety-seven
Hundredths of One Dollar ($.97) the "INITIAL CONVERSION PRICE") and (B) 66.66%
of the average closing bid price during the twenty (20) Trading Days immediately
preceding the applicable Conversion Date, PROVIDED, that such twenty (20)
Trading Day period shall be extended for the number of Trading Days during such
period in which (A) trading in the Common Stock is suspended by the NASDAQ or a
Subsequent Market on which the Common Stock is then listed, or (B) after the
date declared effective by the Commission, the Underlying Shares Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Shares Registration
Statement may not be used by the Holder for the resale of Underlying Shares. If
(a) an Underlying Shares Registration Statement is not filed on or prior to the
Filing Date (as defined under the Registration Rights Agreement) (if the Company
files such Underlying Shares Registration Statement without affording the Holder
the opportunity to review and comment on the same as required by Section 3(a) of
the Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the Commission
a request for acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act, within five (5) days of the date that the Company is notified
(orally or in writing, whichever is earlier) by the Commission that an
Underlying Shares Registration Statement will not be "reviewed," or not subject
to further review, or (c) the Underlying Shares Registration Statement is not
declared effective by the Commission on or prior to the Effectiveness Date, or
(d) such Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities at any time prior to the expiration of the Effectiveness
Period (as defined in the Registration Rights Agreement), without being
succeeded within ten (10) days by an amendment to such Underlying Shares
Registration Statement or by a subsequent Underlying Shares Registration
Statement filed with and declared effective by the Commission, or (e) the Common
Stock shall be delisted or suspended from trading on the NASDAQ or on any
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Subsequent Market for more than three (3) Business Days (which need not be
consecutive days), (f) the conversion rights of the Holders are suspended for
any reason or (g) an amendment to the Underlying Shares Registration Statement
is not filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in order for
the Underlying Shares Registration Statement to be declared effective (any such
failure or breach being referred to as an "EVENT," and for purposes of clauses
(a), (c), (f) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) day period is exceeded, or for purposes of
clauses (d) and (g) the date which such 10 day-period is exceeded, or for
purposes of clause (e) the date on which such three (3) Business Day-period is
exceeded, being referred to as "EVENT DATE"), then, on the Event Date and on
each monthly anniversary thereof until such time as the applicable Event is
cured, the Company shall pay to the Holder 2.5% of the aggregate principal
amount of the Debentures then outstanding in cash, as liquidated damages and not
as penalty. The provisions of this Section are not exclusive and shall in no way
limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares, or (d) issue
by reclassification of shares of the Common Stock any shares of capital stock of
the Company, then the Initial Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any
Debentures are outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the Per Share
Market Value at the record date mentioned below, then the Initial Conversion
Price shall be multiplied by a fraction, of which the denominator shall be the
number of shares of the Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at such Per Share Market
Value. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants. However, upon the expiration of any such right, option or warrant to
purchase shares of the Common Stock the issuance of which resulted in an
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adjustment in the Initial Conversion Price pursuant to this Section, if any such
right, option or warrant shall expire and shall not have been exercised, the
Initial Conversion Price shall immediately upon such expiration be recomputed
and effective immediately upon such expiration be increased to the price which
it would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section after the
issuance of such rights or warrants) had the adjustment of the Initial
Conversion Price made upon the issuance of such rights, options or warrants been
made on the basis of offering for subscription or purchase only that number of
shares of the Common Stock actually purchased upon the exercise of such rights,
options or warrants actually exercised.
(iv) If the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), at any
time while Debentures are outstanding, shall issue shares of Common Stock or
rights, warrants, options or other securities or debt that is convertible into
or exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS")
entitling any Person to acquire shares of Common Stock at a price per share less
than the Conversion Price, then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such shares of Common Stock or
such Common Stock Equivalents plus the number of shares of Common Stock which
the offering price for such shares of Common Stock or Common Stock Equivalents
would purchase at the Conversion Price, and the denominator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
such issuance plus the number of shares of Common Stock so issued or issuable,
PROVIDED, that for purposes hereof, all shares of Common Stock that are issuable
upon conversion, exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued.
(v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by multiplying the Initial Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value determined as of the record date mentioned above, and of
which the numerator shall be such Per Share Market Value on such record date
less the then fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors in good faith;
PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, if the Holders of a majority in interest
of the Debentures dispute such valuation, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
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Company) (an "APPRAISER") selected in good faith by the holders of a majority in
interest of Debentures then outstanding; and PROVIDED, FURTHER, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(vi) In case of any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holders shall have the
right thereafter to, at their option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of the Common Stock following such reclassification or share exchange,
and the Holders of the Debentures shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay the aggregate of its outstanding principal amount of
Debentures, plus all interest and other amounts due and payable thereon, at a
price determined in accordance with Section 3(b). The entire prepayment price
shall be paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.
(vii) All calculations under this Section 4 shall be
made to the nearest 1/100th of a cent or share, as the case may be.
(viii) Whenever the Initial Conversion Price is
adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly
mail to each Holder a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(ix) If (A) the Company shall declare a dividend (or
any other distribution) on the Common Stock; (B) the Company shall declare a
special nonrecurring cash dividend on or a redemption of the Common Stock; (C)
the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the voluntary or
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involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of the Debentures, and shall
cause to be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(x) In case of any (1) merger or consolidation of the
Company with or into another Person that would constitute a Change of Control
Transaction, or (2) sale by the Company of more than one-half of the assets of
the Company (on an as valued basis) in one or a series of related transactions,
or (3) tender or other offer or exchange (whether by the Company or another
Person) pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, stock, cash or property of the
Company or another Person; then a Holder shall have the right to (A) if
permitted under Section 3(b) hereof, exercise its rights of prepayment under
Section 3(b) with respect to such event, (B) convert its aggregate principal
amount of Debentures then outstanding into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled upon such event or series of related events to receive such amount
of securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Debentures could have been converted immediately
prior to such merger, consolidation or sales would have been entitled, (C) in
the case of a merger or consolidation, (x) require the surviving entity to issue
shares of convertible preferred stock or convertible debentures with such
aggregate stated value or in such face amount, as the case may be, equal to the
aggregate principal amount of Debentures then held by such Holder, plus all
accrued and unpaid interest and other amounts owing thereon, which newly issued
shares of preferred stock or debentures shall have terms identical (including
with respect to conversion) to the terms of this Debenture (except, in the case
of preferred stock, as may be required to reflect the differences between equity
and debt) and shall be entitled to all of the rights and privileges of a Holder
of Debentures set forth herein and the agreements pursuant to which the
Debentures were issued (including, without limitation, as such rights relate to
the acquisition, transferability, registration and listing of such shares of
stock other securities issuable upon conversion thereof), and (y) simultaneously
with the issuance of such convertible preferred stock or convertible debentures,
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shall have the right to convert such instrument only into shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger or consolidation, or (D) in the
event of an exchange or tender offer or other transaction contemplated by clause
(3) of this Section, tender or exchange its aggregate principal amount of
Debentures for such securities, stock, cash and other property receivable upon
or deemed to be held by holders of Common Stock that have tendered or exchanged
their shares of Common Stock following such tender or exchange, and such Holder
shall be entitled upon such exchange or tender to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Debentures could have been converted (taking into
account all then accrued and unpaid dividends) immediately prior to such tender
or exchange would have been entitled as would have been issued. In the case of
clause (C), the conversion price applicable for the newly issued shares of
convertible preferred stock or convertible debentures shall be based upon the
amount of securities, cash and property that each share of Common Stock would
receive in such transaction and the Conversion Price in effect immediately prior
to the effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
continue to give the Holders of Debentures the right to receive the securities,
cash and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
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(g) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
3303 Harbor Boulevard, F-3, Costa Mesa, CA 92626 facsimile number (714)
549-8970, attention Chief Executive Officer, with a copy to Larry Cerutti, Esq.,
Rutan & Tucker, LLP, 611 Anton Boulevard, 14th Floor, Costa Mesa, CA 92626,
telephone number (714)641-3450, facsimile number (714)546-9035, or such other
address or facsimile number as the Company may specify for such purposes by
notice to the Holders delivered in accordance with this Section, with a copy to
________________facsimile number (___) _________), attention ___________. Any
and all notices or other communications or deliveries to be provided by the
Company hereunder shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by certified
or registered mail, postage prepaid, addressed to each Holder of the Debentures
at the facsimile telephone number or address of such Holder appearing on the
books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 8:00 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 8:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) four days after deposit in the United States mail, (iv) the
Business Day following the date of mailing, if send by nationally recognized
overnight courier service, or (v) upon actual receipt by the party to whom such
notice is required to be given.
SECTION 5. OPTIONAL PREPAYMENT.
(a) The Company shall have the right, exercisable at any time
upon twenty (20) Trading Days prior written notice to the Holders of the
Debentures to be prepaid and accompanied by any waiver required by holders of
senior indebtedness of the Company for such prepayment (the "OPTIONAL PREPAYMENT
NOTICE"), to prepay, all or any portion of the outstanding principal amount of
the Debentures which have not previously been repaid or for which Conversion
Notices have not previously been delivered. The prepayment price applicable to
such prepayments shall equal the Optional Prepayment Price (as defined in
Section 7) and shall be paid in cash. Any such prepayment shall be free of any
claim of subordination. The Holders shall have the right to tender, and the
Company shall honor, Conversion Notices delivered prior to the expiration of the
twentieth (20th) Trading Day after receipt by the Holders of an Optional
Prepayment Notice for such Debentures (the 20th Trading Day after receipt by the
Holders of an Optional Prepayment Notice is referred to herein as the "OPTIONAL
PREPAYMENT DATE").
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(b) If any portion of the Optional Prepayment Price shall not
be paid by the Company by the second (2nd) Business Day following the Optional
Prepayment Date, the Optional Prepayment Price shall be increased by 15% per
annum (to accrue daily) until paid (which amount shall be paid as liquidated
damages and not as a penalty). In addition, if any portion of the optional
Prepayment Price remains unpaid through the expiration of the Optional
Prepayment Date, the Holder subject to such prepayment may elect by written
notice to the Company to either (x) demand conversion in accordance with the
formula and the time period therefor set forth in Section 4 of any portion of
the principal amount of Debentures for which the Optional Prepayment Price, plus
accrued liquidated damages thereof, has not been paid in full (the "UNPAID
PREPAYMENT PRINCIPAL AMOUNT"), in which event the applicable Per Share Market
Value shall be the lower of the Per Share Market Value calculated on the
Optional Prepayment Date and the Per Share Market Value as of the Holder's
written demand for conversion, or (y) invalidate AB INITIO such optional
redemption, notwithstanding anything herein contained to the contrary. If the
Holder elects option (x) above, the Company shall within three (3) Trading Days
such election is deemed delivered hereunder to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Prepayment Principal Amount subject
to such conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (y) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
notice of such election, return to the Holder new Debentures for the full Unpaid
Prepayment Principal Amount. If, upon an election under option (x) above, the
Company fails to deliver the shares of Common Stock issuable upon conversion of
the Unpaid Prepayment Principal Amount within the time period set forth in this
Section, the Company shall pay to the Holder in cash, as liquidated damages and
not as a penalty, $2,500 per day until the Company delivers such Common Stock to
the Holder.
SECTION 6. INTENTIONALLY OMITTED
SECTION 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York or the State of California are authorized or required by law
or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
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substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 33% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Common Stock, $.001 par value per
share, of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"INTEREST EFFECTIVENESS DATE" means the earlier to occur of
(x) the Effectiveness Date and (y) the date that an Underlying Shares
Registration Statement is declared effective by the Commission.
"OPTIONAL PREPAYMENT PRICE" for any Debentures shall equal
120% of principal amount of Debentures to be prepaid, plus all accrued and
unpaid interest thereon.
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"PER SHARE MARKET VALUE" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the NASDAQ or on
such Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or a Subsequent Market
(which shall include, without limitation, the OTC Bulletin Board), the closing
bid price for a share of Common Stock in the over-the-counter market, as
reported by the National Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (c) if the Common Stock is not then reported by the
National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the Holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the principal amount
of Debentures then outstanding.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Secured Convertible Debenture
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of Debentures, as amended, modified or supplemented from
time to time in accordance with its terms.
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<PAGE>
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENTS" means the Security Agreement, of even
date herewith between the Company and the original Holder of Debentures, as
amended modified or supplemented from time to time in accordance with its terms.
"TRADING DAY" means (a) a day on which the Common Stock is
traded on the NASDAQ or on such Subsequent Market on which the Common Stock is
then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or
a Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
SECTION 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks PARI PASSU with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.
SECTION 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
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<PAGE>
SECTION 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
SECTION 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company and the Holders hereby irrevocably submit
to the exclusive jurisdiction of the state and federal courts sitting in the
County of Nassau, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or that such suit, action or proceeding is improper. Each of the
Company and the Holder hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
SECTION 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
SECTION 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
SECTION 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
SECTION 15. The payment obligations under this Debenture and
the obligations of the Company to the Holder arising upon the conversion of all
or any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
------------------------------
Name: Alex Kanakaris
Title: President
Attest:
By: /s/ Branch Lotspeich
------------------------------
Name: Branch Lotspeich
Title: Vice Chairman
No.3
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert the attached Debenture into shares of
Class A Common Stock, $.001 par value per share (the "Common Stock"), of
____________________(the "Company") according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ----------------------------------------------
Date to Effect Conversion
----------------------------------------------
Principal Amount of Debentures to be Converted
----------------------------------------------
Number of shares of Common Stock to be Issued
----------------------------------------------
Applicable Conversion Price
----------------------------------------------
Signature
----------------------------------------------
Name
----------------------------------------------
Address
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE
AGREEMENT DATED AS OF FEBRUARY 4, 2000, NEITHER THIS WARRANT NOR ANY
OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT,
OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS
NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER
SUCH ACT.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, NEW MILLENNIUM CAPITAL
PARTNERS, LLC, or its registered assigns, is entitled to purchase from KANAKARIS
COMMUNICATIONS, INC., a Nevada corporation (the "Company"), at any time or from
time to time during the period specified in Paragraph 2 hereof, Seventy-five
Thousand (75,000) fully paid and nonassessable shares of the Company's Common
Stock, par value $0.001 per share (the "Common Stock"), at an exercise price
equal to $1.90 (the "Exercise Price"). The term "Trading Price " means any price
at which a sale of the Common Stock is effected on the Over-the-Counter Bulletin
Board (the "OTC BB") as reported by Bloomberg Financial Markets or an
equivalent, reliable reporting service mutually acceptable to and hereafter
designated by holders of a majority in interest of the Debentures and the
Company ("Bloomberg") or, if the OTC BB is not the principal trading market for
such security, the trading price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg. "Trading Day" shall mean any day on which the Common Stock is
traded for any period on the OTC BB, or on the principal securities exchange or
other securities market on which the Common Stock is then being traded. The term
"Warrant Shares," as used herein, refers to the shares of Common Stock
purchasable hereunder. The Warrant Shares and the Exercise Price are subject to
adjustment as provided in Paragraph 4 hereof. The term "Warrants" means this
Warrant and the other warrants issued pursuant to that certain Convertible
Debenture Purchase Agreement, dated as of February 4, 2000, by and among the
Company and the Holders listed on the execution page thereof (the "Securities
Purchase Agreement") pursuant to which the Holders purchased from the Company
$1,000,000 of the Company's Convertible Debentures (the "Debentures").
This Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
<PAGE>
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for such shares as
set forth above. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding three (3)
business days, after this Warrant shall have been so exercised. The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in
no event shall the holder of this Warrant be entitled to exercise a number of
Warrants (or portions thereof) in excess of the number of Warrants (or portions
thereof) upon exercise of which the sum of (i) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised Warrants and the unexercised or unconverted portion of any other
securities of the Company (including the Debentures) subject to a limitation on
conversion or exercise analogous to the limitation contained herein) and (ii)
the number of shares of Common Stock issuable upon exercise of the Warrants (or
portions thereof) with respect to which the determination described herein is
being made, would result in beneficial ownership by the holder and its
affiliates of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided
in clause (i) of the preceding sentence.
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time on or after the date on which this Warrant is issued and delivered
pursuant to the terms of the Securities Purchase Agreement and before 5:00 p.m.,
New York City time on the fifth (5th) anniversary of the date of issuance (the
"Exercise Period").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
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<PAGE>
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, and charges with respect
to the issue thereof.
(b) RESERVATION OF SHARES. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of
the shares of Common Stock issuable upon exercise of the Warrant upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance
upon exercise of this Warrant) and shall maintain, so long as any other shares
of Common Stock shall be so listed, such listing of all shares of Common Stock
from time to time issuable upon the exercise of this Warrant; and the Company
shall so list on each national securities exchange or automated quotation
system, as the case may be, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all the Company's assets.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
to the nearest cent.
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<PAGE>
This Paragraph 4 shall not be applicable to the issuance to the Holders
of the Additional Debentures or Additional Warrants (as such terms are defined
in the Securities Purchase Agreement) in accordance with the terms, conditions
and covenants of the Securities Purchase Agreement.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON
ISSUANCE OF COMMON STOCK. Except as otherwise provided in Paragraphs 4(c) and
4(e) hereof, if and whenever on or after the date of issuance of this Warrant,
the Company issues or sells, or in accordance with Paragraph 4(b) hereof is
deemed to have issued or sold, any shares of Common Stock for no consideration
or for a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection therewith)
less than the Market Price (as hereinafter defined) on the date of issuance (a
"Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise
Price will be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to the Dilutive Issuance by a fraction, (i) the
numerator of which is an amount equal to the sum of (x) the number of shares of
Common Stock actually outstanding immediately prior to the Dilutive Issuance,
plus (y) the quotient of the aggregate consideration, calculated as set forth in
Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance
divided by the Market Price in effect immediately prior to the Dilutive
Issuance, and (ii) the denominator of which is the total number of shares of
Common Stock Deemed Outstanding (as defined below) immediately after the
Dilutive Issuance.
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes
of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in
any manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities convertible into or exchangeable for Common Stock ("Convertible
Securities") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "Options") and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance or grant of such Options,
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options will, as of the date of the issuance or grant of
such Options, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon the exercise of
such Options" is determined by dividing (i) the total amount, if any, received
or receivable by the Company as consideration for the issuance or granting of
all such Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Options, plus, in
the case of Convertible Securities issuable upon the exercise of such Options,
the minimum aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible Securities first
become convertible or exchangeable, by (ii) the maximum total number of shares
of Common Stock issuable upon the exercise of all such Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
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<PAGE>
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Options or upon the conversion or exchange of
Convertible Securities issuable upon exercise of such Options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities, whether or not
immediately convertible (other than where the same are issuable upon the
exercise of Options) and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities will, as of the
date of the issuance of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. For
the purposes of the preceding sentence, the "price per share for which Common
Stock is issuable upon such conversion or exchange" is determined by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment to the Exercise Price will be
made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If
there is a change at any time in (i) the amount of additional consideration
payable to the Company upon the exercise of any Options; (ii) the amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED
CONVERTIBLE SECURITIES. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to convert or exchange such Convertible Securities shall have expired
or terminated, the Exercise Price then in effect will be readjusted to the
Exercise Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of
the actual number of shares of Common Stock issued upon exercise or conversion
thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any
Common Stock, Options or Convertible Securities are issued, granted or sold for
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<PAGE>
cash, the consideration received therefor for purposes of this Warrant will be
the amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors of the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities granted, issued and outstanding on
the date of issuance of this Warrant; (ii) upon the grant or exercise of any
stock or options which may hereafter be granted or exercised under any employee
benefit plan of the Company now existing or to be implemented in the future, so
long as the issuance of such stock or options is approved by a majority of the
independent members of the Board of Directors of the Company or a majority of
the members of a committee of independent directors established for such
purpose; or (iii) upon the exercise of the Warrants.
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any
consolidation of the Company with, or merger of the Company into any other
corporation, or in case of any sale or conveyance of all or substantially all of
the assets of the Company other than in connection with a plan of complete
liquidation of the Company, then as a condition of such consolidation, merger or
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<PAGE>
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Paragraph 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare
or make any distribution of its assets (including cash) to holders of Common
Stock as a partial liquidating dividend, by way of return of capital or
otherwise, then, after the date of record for determining stockholders entitled
to such distribution, but prior to the date of distribution, the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event
which requires any adjustment of the Exercise Price, then, and in each such
case, the Company shall give notice thereof to the holder of this Warrant, which
notice shall state the Exercise Price resulting from such adjustment and the
increase or decrease in the number of Warrant Shares purchasable at such price
upon exercise, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based. Such calculation shall be
certified by the Chief Executive Officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) OTHER NOTICES. In case at any time:
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(i) the Company shall declare any dividend upon the
Common Stock payable in shares of stock of any class or make any other
distribution (including dividends or distributions payable in cash out of
retained earnings) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro
rata to the holders of the Common Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization of
the Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(k) CERTAIN EVENTS. If any event occurs of the type
contemplated by the adjustment provisions of this Paragraph 4 but not expressly
provided for by such provisions, the Company will give notice of such event as
provided in Paragraph 4(g) hereof, and the Company's Board of Directors will
make an appropriate adjustment in the Exercise Price and the number of shares of
Common Stock acquirable upon exercise of this Warrant so that the rights of the
holder shall be neither enhanced nor diminished by such event.
-8-
<PAGE>
(l) CERTAIN DEFINITIONS.
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) pursuant to
Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock
issuable upon the exercise of Options, as of the date of such issuance or grant
of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the
maximum total number of shares of Common Stock issuable upon conversion or
exchange of Convertible Securities, as of the date of issuance of such
Convertible Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the
average of the last reported sale prices for the shares of Common Stock on the
OTC BB for the five (5) trading days immediately preceding such date as reported
by Bloomberg, or (ii) if the OTC BB is not the principal trading market for the
shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported
by Bloomberg, or (iii) if market value cannot be calculated as of such date on
any of the foregoing bases, the Market Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of the
Corporation or, at the option of a majority-in-interest of the holders of the
outstanding Warrants, by (b) an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the corporation. The manner of determining the Market Price of the Common Stock
set forth in the foregoing definition shall apply with respect to any other
security in respect of which a determination as to market value must be made
hereunder.
(iii) "COMMON STOCK," for purposes of this Paragraph
4, includes the Common Stock, par value $0.001 per share, and any additional
class of stock of the Company having no preference as to dividends or
distributions on liquidation, provided that the shares purchasable pursuant to
this Warrant shall include only shares of Common Stock, par value $0.001 per
share, in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Paragraph 4(e) hereof, the stock or other securities or
property provided for in such Paragraph.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
-9-
<PAGE>
7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) RESTRICTION ON TRANSFER. This Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto, at the office or agency of the Company referred to in
Paragraph 7(e) below, provided, however, that any transfer or assignment shall
be subject to the conditions set forth in Paragraph 7(f) hereof and to the
applicable provisions of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Paragraph 8 are assignable only in accordance
with the provisions of that certain Registration Rights Agreement, dated as of
February 4, 2000, by and among the Company and the other signatories thereto
(the "Registration Rights Agreement").
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Paragraph 7(e) below, for new
Warrants of like tenor representing in the aggregate the right to purchase the
number of shares of Common Stock which may be purchased hereunder, each of such
new Warrants to represent the right to purchase such number of shares as shall
be designated by the holder hereof at the time of such surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Paragraph 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
holder or transferees) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Paragraph 7.
(e) REGISTER. The Company shall maintain, at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time
of the surrender of this Warrant in connection with any exercise, transfer, or
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<PAGE>
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
8. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in of the Registration Rights
Agreement.
9. NOTICES. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed, to the office of the Company at 3303 Harbor Boulevard,
F-3, Costa Mesa, California 92626, Attention: Alex Kanakaris, or at such other
address as shall have been furnished to the holder of this Warrant by notice
from the Company. Any such notice, request, or other communication may be sent
by facsimile, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail or by recognized
overnight mail courier as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
receipt thereof by the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 9, or, if mailed by registered or
certified mail or with a recognized overnight mail courier, upon deposit with
the United States Post Office or such overnight mail courier, if postage is
prepaid and the mailing is properly addressed, as the case may be.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
-11-
<PAGE>
11. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may only
be amended by an instrument in writing signed by the Company and the holder
hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the
several paragraphs of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
(c) CASHLESS EXERCISE. Notwithstanding anything to the
contrary contained in this Warrant, if the resale of the Warrant Shares by the
holder is not then registered pursuant to an effective registration statement
under the Securities Act, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the holder shall surrender this Warrant for that number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
--------------------------------
Alex Kanakaris
President
Dated as of February 4, 2000
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<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: , 200
-------- -- -
To: KANAKARIS COMMUNICATIONS, INC.
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_________. Please issue a certificate or certificates for
such shares of Common Stock in the name of and pay any cash for any fractional
share to:
Name:
----------------------------------
Signature:
----------------------------------
Address:
----------------------------------
----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ___________________________ as
agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: , 200
---------- -- -
In the presence of:
- ----------------------------
Name:
----------------------------------
Signature:
----------------------------------
Title of Signing Officer or Agent (if any):
----------------------------------
Address:
----------------------------------
----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE
AGREEMENT DATED AS OF FEBRUARY 4, 2000, NEITHER THIS WARRANT NOR ANY OF
SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT, OR
AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS
NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER
SUCH ACT.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, AJW PARTNERS, LLC, or its
registered assigns, is entitled to purchase from KANAKARIS COMMUNICATIONS, INC.,
a Nevada corporation (the "Company"), at any time or from time to time during
the period specified in Paragraph 2 hereof, Seventy-five Thousand (75,000) fully
paid and nonassessable shares of the Company's Common Stock, par value $0.001
per share (the "Common Stock"), at an exercise price equal to $1.90 (the
"Exercise Price"). The term "Trading Price " means any price at which a sale of
the Common Stock is effected on the Over-the-Counter Bulletin Board (the "OTC
BB") as reported by Bloomberg Financial Markets or an equivalent, reliable
reporting service mutually acceptable to and hereafter designated by holders of
a majority in interest of the Debentures and the Company ("Bloomberg") or, if
the OTC BB is not the principal trading market for such security, the trading
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg. "Trading Day"
shall mean any day on which the Common Stock is traded for any period on the OTC
BB, or on the principal securities exchange or other securities market on which
the Common Stock is then being traded. The term "Warrant Shares," as used
herein, refers to the shares of Common Stock purchasable hereunder. The Warrant
Shares and the Exercise Price are subject to adjustment as provided in Paragraph
4 hereof. The term "Warrants" means this Warrant and the other warrants issued
pursuant to that certain Convertible Debenture Purchase Agreement, dated as of
February 4, 2000, by and among the Company and the Holders listed on the
execution page thereof (the "Securities Purchase Agreement") pursuant to which
the Holders purchased from the Company $1,000,000 of the Company's Convertible
Debentures (the "Debentures").
This Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
<PAGE>
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for such shares as
set forth above. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding three (3)
business days, after this Warrant shall have been so exercised. The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in
no event shall the holder of this Warrant be entitled to exercise a number of
Warrants (or portions thereof) in excess of the number of Warrants (or portions
thereof) upon exercise of which the sum of (i) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised Warrants and the unexercised or unconverted portion of any other
securities of the Company (including the Debentures) subject to a limitation on
conversion or exercise analogous to the limitation contained herein) and (ii)
the number of shares of Common Stock issuable upon exercise of the Warrants (or
portions thereof) with respect to which the determination described herein is
being made, would result in beneficial ownership by the holder and its
affiliates of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided
in clause (i) of the preceding sentence.
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time on or after the date on which this Warrant is issued and delivered
pursuant to the terms of the Securities Purchase Agreement and before 5:00 p.m.,
New York City time on the fifth (5th) anniversary of the date of issuance (the
"Exercise Period").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
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<PAGE>
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, and charges with respect
to the issue thereof.
(b) RESERVATION OF SHARES. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of
the shares of Common Stock issuable upon exercise of the Warrant upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance
upon exercise of this Warrant) and shall maintain, so long as any other shares
of Common Stock shall be so listed, such listing of all shares of Common Stock
from time to time issuable upon the exercise of this Warrant; and the Company
shall so list on each national securities exchange or automated quotation
system, as the case may be, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all the Company's assets.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
to the nearest cent.
This Paragraph 4 shall not be applicable to the issuance to the Holders
of the Additional Debentures or Additional Warrants (as such terms are defined
-3-
<PAGE>
in the Securities Purchase Agreement) in accordance with the terms, conditions
and covenants of the Securities Purchase Agreement.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON
ISSUANCE OF COMMON STOCK. Except as otherwise provided in Paragraphs 4(c) and
4(e) hereof, if and whenever on or after the date of issuance of this Warrant,
the Company issues or sells, or in accordance with Paragraph 4(b) hereof is
deemed to have issued or sold, any shares of Common Stock for no consideration
or for a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection therewith)
less than the Market Price (as hereinafter defined) on the date of issuance (a
"Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise
Price will be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to the Dilutive Issuance by a fraction, (i) the
numerator of which is an amount equal to the sum of (x) the number of shares of
Common Stock actually outstanding immediately prior to the Dilutive Issuance,
plus (y) the quotient of the aggregate consideration, calculated as set forth in
Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance
divided by the Market Price in effect immediately prior to the Dilutive
Issuance, and (ii) the denominator of which is the total number of shares of
Common Stock Deemed Outstanding (as defined below) immediately after the
Dilutive Issuance.
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes
of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in
any manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities convertible into or exchangeable for Common Stock ("Convertible
Securities") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "Options") and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance or grant of such Options,
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options will, as of the date of the issuance or grant of
such Options, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon the exercise of
such Options" is determined by dividing (i) the total amount, if any, received
or receivable by the Company as consideration for the issuance or granting of
all such Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Options, plus, in
the case of Convertible Securities issuable upon the exercise of such Options,
the minimum aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible Securities first
become convertible or exchangeable, by (ii) the maximum total number of shares
of Common Stock issuable upon the exercise of all such Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
-4-
<PAGE>
upon the exercise of such Options or upon the conversion or exchange of
Convertible Securities issuable upon exercise of such Options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities, whether or not
immediately convertible (other than where the same are issuable upon the
exercise of Options) and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities will, as of the
date of the issuance of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. For
the purposes of the preceding sentence, the "price per share for which Common
Stock is issuable upon such conversion or exchange" is determined by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment to the Exercise Price will be
made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If
there is a change at any time in (i) the amount of additional consideration
payable to the Company upon the exercise of any Options; (ii) the amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED
CONVERTIBLE SECURITIES. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to convert or exchange such Convertible Securities shall have expired
or terminated, the Exercise Price then in effect will be readjusted to the
Exercise Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of
the actual number of shares of Common Stock issued upon exercise or conversion
thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any
Common Stock, Options or Convertible Securities are issued, granted or sold for
cash, the consideration received therefor for purposes of this Warrant will be
the amount received by the Company therefor, before deduction of reasonable
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<PAGE>
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors of the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities granted, issued and outstanding on
the date of issuance of this Warrant; (ii) upon the grant or exercise of any
stock or options which may hereafter be granted or exercised under any employee
benefit plan of the Company now existing or to be implemented in the future, so
long as the issuance of such stock or options is approved by a majority of the
independent members of the Board of Directors of the Company or a majority of
the members of a committee of independent directors established for such
purpose; or (iii) upon the exercise of the Warrants.
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any
consolidation of the Company with, or merger of the Company into any other
corporation, or in case of any sale or conveyance of all or substantially all of
the assets of the Company other than in connection with a plan of complete
liquidation of the Company, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
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<PAGE>
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Paragraph 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare
or make any distribution of its assets (including cash) to holders of Common
Stock as a partial liquidating dividend, by way of return of capital or
otherwise, then, after the date of record for determining stockholders entitled
to such distribution, but prior to the date of distribution, the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event
which requires any adjustment of the Exercise Price, then, and in each such
case, the Company shall give notice thereof to the holder of this Warrant, which
notice shall state the Exercise Price resulting from such adjustment and the
increase or decrease in the number of Warrant Shares purchasable at such price
upon exercise, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based. Such calculation shall be
certified by the Chief Executive Officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) OTHER NOTICES. In case at any time:
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<PAGE>
(i) the Company shall declare any dividend upon the
Common Stock payable in shares of stock of any class or make any other
distribution (including dividends or distributions payable in cash out of
retained earnings) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro
rata to the holders of the Common Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization of
the Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(k) CERTAIN EVENTS. If any event occurs of the type
contemplated by the adjustment provisions of this Paragraph 4 but not expressly
provided for by such provisions, the Company will give notice of such event as
provided in Paragraph 4(g) hereof, and the Company's Board of Directors will
make an appropriate adjustment in the Exercise Price and the number of shares of
Common Stock acquirable upon exercise of this Warrant so that the rights of the
holder shall be neither enhanced nor diminished by such event.
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<PAGE>
(l) CERTAIN DEFINITIONS.
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) pursuant to
Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock
issuable upon the exercise of Options, as of the date of such issuance or grant
of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the
maximum total number of shares of Common Stock issuable upon conversion or
exchange of Convertible Securities, as of the date of issuance of such
Convertible Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the
average of the last reported sale prices for the shares of Common Stock on the
OTC BB for the five (5) trading days immediately preceding such date as reported
by Bloomberg, or (ii) if the OTC BB is not the principal trading market for the
shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported
by Bloomberg, or (iii) if market value cannot be calculated as of such date on
any of the foregoing bases, the Market Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of the
Corporation or, at the option of a majority-in-interest of the holders of the
outstanding Warrants, by (b) an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the corporation. The manner of determining the Market Price of the Common Stock
set forth in the foregoing definition shall apply with respect to any other
security in respect of which a determination as to market value must be made
hereunder.
(iii) "COMMON STOCK," for purposes of this Paragraph
4, includes the Common Stock, par value $0.001 per share, and any additional
class of stock of the Company having no preference as to dividends or
distributions on liquidation, provided that the shares purchasable pursuant to
this Warrant shall include only shares of Common Stock, par value $0.001 per
share, in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Paragraph 4(e) hereof, the stock or other securities or
property provided for in such Paragraph.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
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<PAGE>
7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) RESTRICTION ON TRANSFER. This Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto, at the office or agency of the Company referred to in
Paragraph 7(e) below, provided, however, that any transfer or assignment shall
be subject to the conditions set forth in Paragraph 7(f) hereof and to the
applicable provisions of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Paragraph 8 are assignable only in accordance
with the provisions of that certain Registration Rights Agreement, dated as of
February 4, 2000, by and among the Company and the other signatories thereto
(the "Registration Rights Agreement").
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Paragraph 7(e) below, for new
Warrants of like tenor representing in the aggregate the right to purchase the
number of shares of Common Stock which may be purchased hereunder, each of such
new Warrants to represent the right to purchase such number of shares as shall
be designated by the holder hereof at the time of such surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Paragraph 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
holder or transferees) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Paragraph 7.
(e) REGISTER. The Company shall maintain, at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time
of the surrender of this Warrant in connection with any exercise, transfer, or
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<PAGE>
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
8. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in of the Registration Rights
Agreement.
9. NOTICES. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed, to the office of the Company at 3303 Harbor Boulevard,
F-3, Costa Mesa, California 92626, Attention: Alex Kanakaris, or at such other
address as shall have been furnished to the holder of this Warrant by notice
from the Company. Any such notice, request, or other communication may be sent
by facsimile, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail or by recognized
overnight mail courier as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
receipt thereof by the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 9, or, if mailed by registered or
certified mail or with a recognized overnight mail courier, upon deposit with
the United States Post Office or such overnight mail courier, if postage is
prepaid and the mailing is properly addressed, as the case may be.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
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<PAGE>
11. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may only
be amended by an instrument in writing signed by the Company and the holder
hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the
several paragraphs of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
(c) CASHLESS EXERCISE. Notwithstanding anything to the
contrary contained in this Warrant, if the resale of the Warrant Shares by the
holder is not then registered pursuant to an effective registration statement
under the Securities Act, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the holder shall surrender this Warrant for that number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
--------------------------------
Alex Kanakaris
President
Dated as of February 4, 2000
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FORM OF EXERCISE AGREEMENT
Dated: , 200
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To: KANAKARIS COMMUNICATIONS, INC.
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_________. Please issue a certificate or certificates for
such shares of Common Stock in the name of and pay any cash for any fractional
share to:
Name:
----------------------------------
Signature:
----------------------------------
Address:
----------------------------------
----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ___________________________ as
agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: , 200
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In the presence of:
- ----------------------------
Name:
----------------------------------
Signature:
----------------------------------
Title of Signing Officer or Agent (if any):
----------------------------------
Address:
----------------------------------
----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE
AGREEMENT DATED AS OF FEBRUARY 4, 2000, NEITHER THIS WARRANT NOR ANY OF
SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT, OR
AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS
NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER
SUCH ACT.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, BANK INSINGER DE BEAUFORT, or
its registered assigns, is entitled to purchase from KANAKARIS COMMUNICATIONS,
INC., a Nevada corporation (the "Company"), at any time or from time to time
during the period specified in Paragraph 2 hereof, One Hundred Fifty Thousand
(150,000) fully paid and nonassessable shares of the Company's Common Stock, par
value $0.001 per share (the "Common Stock"), at an exercise price equal to $1.90
(the "Exercise Price"). The term "Trading Price " means any price at which a
sale of the Common Stock is effected on the Over-the-Counter Bulletin Board (the
"OTC BB") as reported by Bloomberg Financial Markets or an equivalent, reliable
reporting service mutually acceptable to and hereafter designated by holders of
a majority in interest of the Debentures and the Company ("Bloomberg") or, if
the OTC BB is not the principal trading market for such security, the trading
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg. "Trading Day"
shall mean any day on which the Common Stock is traded for any period on the OTC
BB, or on the principal securities exchange or other securities market on which
the Common Stock is then being traded. The term "Warrant Shares," as used
herein, refers to the shares of Common Stock purchasable hereunder. The Warrant
Shares and the Exercise Price are subject to adjustment as provided in Paragraph
4 hereof. The term "Warrants" means this Warrant and the other warrants issued
pursuant to that certain Convertible Debenture Purchase Agreement, dated as of
February 4, 2000, by and among the Company and the Holders listed on the
execution page thereof (the "Securities Purchase Agreement") pursuant to which
the Holders purchased from the Company $1,000,000 of the Company's Convertible
Debentures (the "Debentures").
This Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
<PAGE>
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for such shares as
set forth above. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding three (3)
business days, after this Warrant shall have been so exercised. The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in
no event shall the holder of this Warrant be entitled to exercise a number of
Warrants (or portions thereof) in excess of the number of Warrants (or portions
thereof) upon exercise of which the sum of (i) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised Warrants and the unexercised or unconverted portion of any other
securities of the Company (including the Debentures) subject to a limitation on
conversion or exercise analogous to the limitation contained herein) and (ii)
the number of shares of Common Stock issuable upon exercise of the Warrants (or
portions thereof) with respect to which the determination described herein is
being made, would result in beneficial ownership by the holder and its
affiliates of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided
in clause (i) of the preceding sentence.
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
time to time on or after the date on which this Warrant is issued and delivered
pursuant to the terms of the Securities Purchase Agreement and before 5:00 p.m.,
New York City time on the fifth (5th) anniversary of the date of issuance (the
"Exercise Period").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
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<PAGE>
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, and charges with respect
to the issue thereof.
(b) RESERVATION OF SHARES. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of
the shares of Common Stock issuable upon exercise of the Warrant upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance
upon exercise of this Warrant) and shall maintain, so long as any other shares
of Common Stock shall be so listed, such listing of all shares of Common Stock
from time to time issuable upon the exercise of this Warrant; and the Company
shall so list on each national securities exchange or automated quotation
system, as the case may be, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all the Company's assets.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
to the nearest cent.
This Paragraph 4 shall not be applicable to the issuance to the Holders
of the Additional Debentures or Additional Warrants (as such terms are defined
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<PAGE>
in the Securities Purchase Agreement) in accordance with the terms, conditions
and covenants of the Securities Purchase Agreement.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON
ISSUANCE OF COMMON STOCK. Except as otherwise provided in Paragraphs 4(c) and
4(e) hereof, if and whenever on or after the date of issuance of this Warrant,
the Company issues or sells, or in accordance with Paragraph 4(b) hereof is
deemed to have issued or sold, any shares of Common Stock for no consideration
or for a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection therewith)
less than the Market Price (as hereinafter defined) on the date of issuance (a
"Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise
Price will be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to the Dilutive Issuance by a fraction, (i) the
numerator of which is an amount equal to the sum of (x) the number of shares of
Common Stock actually outstanding immediately prior to the Dilutive Issuance,
plus (y) the quotient of the aggregate consideration, calculated as set forth in
Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance
divided by the Market Price in effect immediately prior to the Dilutive
Issuance, and (ii) the denominator of which is the total number of shares of
Common Stock Deemed Outstanding (as defined below) immediately after the
Dilutive Issuance.
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes
of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in
any manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities convertible into or exchangeable for Common Stock ("Convertible
Securities") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "Options") and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance or grant of such Options,
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options will, as of the date of the issuance or grant of
such Options, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon the exercise of
such Options" is determined by dividing (i) the total amount, if any, received
or receivable by the Company as consideration for the issuance or granting of
all such Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Options, plus, in
the case of Convertible Securities issuable upon the exercise of such Options,
the minimum aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible Securities first
become convertible or exchangeable, by (ii) the maximum total number of shares
of Common Stock issuable upon the exercise of all such Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Options or upon the conversion or exchange of
Convertible Securities issuable upon exercise of such Options.
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<PAGE>
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities, whether or not
immediately convertible (other than where the same are issuable upon the
exercise of Options) and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities will, as of the
date of the issuance of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. For
the purposes of the preceding sentence, the "price per share for which Common
Stock is issuable upon such conversion or exchange" is determined by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment to the Exercise Price will be
made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If
there is a change at any time in (i) the amount of additional consideration
payable to the Company upon the exercise of any Options; (ii) the amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED
CONVERTIBLE SECURITIES. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to convert or exchange such Convertible Securities shall have expired
or terminated, the Exercise Price then in effect will be readjusted to the
Exercise Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of
the actual number of shares of Common Stock issued upon exercise or conversion
thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any
Common Stock, Options or Convertible Securities are issued, granted or sold for
cash, the consideration received therefor for purposes of this Warrant will be
the amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
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<PAGE>
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors of the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities granted, issued and outstanding on
the date of issuance of this Warrant; (ii) upon the grant or exercise of any
stock or options which may hereafter be granted or exercised under any employee
benefit plan of the Company now existing or to be implemented in the future, so
long as the issuance of such stock or options is approved by a majority of the
independent members of the Board of Directors of the Company or a majority of
the members of a committee of independent directors established for such
purpose; or (iii) upon the exercise of the Warrants.
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any
consolidation of the Company with, or merger of the Company into any other
corporation, or in case of any sale or conveyance of all or substantially all of
the assets of the Company other than in connection with a plan of complete
liquidation of the Company, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
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<PAGE>
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Paragraph 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare
or make any distribution of its assets (including cash) to holders of Common
Stock as a partial liquidating dividend, by way of return of capital or
otherwise, then, after the date of record for determining stockholders entitled
to such distribution, but prior to the date of distribution, the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event
which requires any adjustment of the Exercise Price, then, and in each such
case, the Company shall give notice thereof to the holder of this Warrant, which
notice shall state the Exercise Price resulting from such adjustment and the
increase or decrease in the number of Warrant Shares purchasable at such price
upon exercise, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based. Such calculation shall be
certified by the Chief Executive Officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) OTHER NOTICES. In case at any time:
(i) the Company shall declare any dividend upon the
Common Stock payable in shares of stock of any class or make any other
distribution (including dividends or distributions payable in cash out of
retained earnings) to the holders of the Common Stock;
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(ii) the Company shall offer for subscription pro
rata to the holders of the Common Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization of
the Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(k) CERTAIN EVENTS. If any event occurs of the type
contemplated by the adjustment provisions of this Paragraph 4 but not expressly
provided for by such provisions, the Company will give notice of such event as
provided in Paragraph 4(g) hereof, and the Company's Board of Directors will
make an appropriate adjustment in the Exercise Price and the number of shares of
Common Stock acquirable upon exercise of this Warrant so that the rights of the
holder shall be neither enhanced nor diminished by such event.
(l) CERTAIN DEFINITIONS.
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) pursuant to
Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock
issuable upon the exercise of Options, as of the date of such issuance or grant
of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the
maximum total number of shares of Common Stock issuable upon conversion or
exchange of Convertible Securities, as of the date of issuance of such
Convertible Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the
average of the last reported sale prices for the shares of Common Stock on the
OTC BB for the five (5) trading days immediately preceding such date as reported
by Bloomberg, or (ii) if the OTC BB is not the principal trading market for the
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<PAGE>
shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported
by Bloomberg, or (iii) if market value cannot be calculated as of such date on
any of the foregoing bases, the Market Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of the
Corporation or, at the option of a majority-in-interest of the holders of the
outstanding Warrants, by (b) an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the corporation. The manner of determining the Market Price of the Common Stock
set forth in the foregoing definition shall apply with respect to any other
security in respect of which a determination as to market value must be made
hereunder.
(iii) "COMMON STOCK," for purposes of this Paragraph
4, includes the Common Stock, par value $0.001 per share, and any additional
class of stock of the Company having no preference as to dividends or
distributions on liquidation, provided that the shares purchasable pursuant to
this Warrant shall include only shares of Common Stock, par value $0.001 per
share, in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Paragraph 4(e) hereof, the stock or other securities or
property provided for in such Paragraph.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) RESTRICTION ON TRANSFER. This Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto, at the office or agency of the Company referred to in
Paragraph 7(e) below, provided, however, that any transfer or assignment shall
be subject to the conditions set forth in Paragraph 7(f) hereof and to the
applicable provisions of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Paragraph 8 are assignable only in accordance
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with the provisions of that certain Registration Rights Agreement, dated as of
February 4, 2000, by and among the Company and the other signatories thereto
(the "Registration Rights Agreement").
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Paragraph 7(e) below, for new
Warrants of like tenor representing in the aggregate the right to purchase the
number of shares of Common Stock which may be purchased hereunder, each of such
new Warrants to represent the right to purchase such number of shares as shall
be designated by the holder hereof at the time of such surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Paragraph 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
holder or transferees) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Paragraph 7.
(e) REGISTER. The Company shall maintain, at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time
of the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
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<PAGE>
8. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in of the Registration Rights
Agreement.
9. NOTICES. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed, to the office of the Company at 3303 Harbor Boulevard,
F-3, Costa Mesa, California 92626, Attention: Alex Kanakaris, or at such other
address as shall have been furnished to the holder of this Warrant by notice
from the Company. Any such notice, request, or other communication may be sent
by facsimile, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail or by recognized
overnight mail courier as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
receipt thereof by the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 9, or, if mailed by registered or
certified mail or with a recognized overnight mail courier, upon deposit with
the United States Post Office or such overnight mail courier, if postage is
prepaid and the mailing is properly addressed, as the case may be.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
11. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may only
be amended by an instrument in writing signed by the Company and the holder
hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the
several paragraphs of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
(c) CASHLESS EXERCISE. Notwithstanding anything to the
contrary contained in this Warrant, if the resale of the Warrant Shares by the
holder is not then registered pursuant to an effective registration statement
under the Securities Act, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
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cash, the holder shall surrender this Warrant for that number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
--------------------------------
Alex Kanakaris
President
Dated as of February 4, 2000
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FORM OF EXERCISE AGREEMENT
Dated: , 200
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To: KANAKARIS COMMUNICATIONS, INC.
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_________. Please issue a certificate or certificates for
such shares of Common Stock in the name of and pay any cash for any fractional
share to:
Name:
----------------------------------
Signature:
----------------------------------
Address:
----------------------------------
----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
<PAGE>
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ___________________________ as
agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: , 200
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In the presence of:
Name:
----------------------------------
Signature:
----------------------------------
Title of Signing Officer or Agent (if any):
----------------------------------
Address:
----------------------------------
----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
STOCK ESCROW AND SECURITY AGREEMENT
THIS STOCK ESCROW AND SECURITY AGREEMENT (this "Agreement") is dated as
of February 4, 2000, by and between Kanakaris Communications, Inc. (the
"Company"), the parties designated in Attachment "A" exhibited hereto (the
"Holder"), and Owen Naccarato, as Escrow Agent (the "Escrow Agent").
W I T N E S S E T H
WHEREAS, the Holder and the Company have entered into a Convertible
Debenture Purchase Agreement dated as of February 4, 2000 (including all
Exhibits and Addenda thereto, the "Purchase Agreement"), pursuant to which the
Holder has agreed to purchase from the Company, in accordance with the terms
hereof and of the Purchase Agreement, one or more convertible Debentures
("Debentures") as stated in the Purchase Agreement, which Debentures are
convertible in accordance with their terms into shares of common stock ("Common
Stock") of the Company (capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement); and
WHEREAS, the Holder and the Company have entered into a Registration
Rights Agreement dated as of February 4, 2000 (the "Registration Rights
Agreement") in connection with the registration of shares of Common Stock
issuable upon conversion of the Debentures; and
WHEREAS, the Holder has requested certain additional security as
partial consideration for Holder's undertakings as described in the Purchase
Agreement; and
WHEREAS, it is a condition of the Holder's and the Company's respective
obligations to execute the Purchase Agreement, that this Agreement be executed
and delivered by all of the parties named above, and that the undertakings
described herein be performed; and
WHEREAS, the Escrow Agent is willing to act hereunder on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth below, the parties hereto hereby agree as follows:
1. ESCROW ACCOUNT.
1.1 ACCOUNT DEPOSIT. The transaction(s) described in the Purchase
Agreement shall be entered into and commenced at a closing (the "Closing"). On
or before the date of the Closing, the Company shall place 1,290,000 shares of
restricted Common Stock (the "Shares"), subject to adjustment for stock split,
stock dividends and similar events, in escrow (the "Escrow" or the "Escrow
Account") with the Escrow Agent. The certificate(s) representing the Shares
shall be issued in the name of, and shall be delivered to the Escrow Agent at
the office address for the Escrow Agent shown on the signature page to this
Agreement. The parties acknowledge that the Escrow Agent shall hold the Shares
in trust, for the purposes set forth herein, and shall in no event be (or be
deemed to be) the beneficial owner of the Shares.
<PAGE>
2. DISBURSEMENT OF SHARES.
2.1 DISBURSEMENT. None of the Shares shall be disbursed other than in
accordance with the terms hereof, or in accordance with the written instructions
of at least two of the three parties hereto (i.e., any one of the Holder, the
Company and the Escrow Agent) delivered to the Escrow Agent. Except as herein
stated, in no event shall the Escrow Agent release or transfer any Shares to any
party other than to the Company in accordance with this Agreement. The Shares
(or such portion as may be applicable) shall be disbursed by the Escrow Agent on
the parties' behalf under the following circumstances.
(a) The Company is bound under the terms of the Purchase Agreement and
the Registration Rights Agreement to register the Common Stock underlying the
Debentures. Both the Debentures and the Purchase Agreement require that, upon
conversion of all or a portion of the Debentures into Common Stock in accordance
with the terms of the Debentures, the Company shall deliver to the Holder the
Common Stock deliverable upon such conversion (the "Conversion Shares") within
certain specified time limits. If the Company at the time of any conversion does
not deliver the Conversion Shares in accordance with the terms of the Purchase
Agreement, the Registration Rights Agreement and the Debentures, irrespective of
whether or not the Company has registered the Conversion Shares in accordance
with the Registration Rights Agreement, then the Holder may instruct the Escrow
Agent to deliver the Shares to the Holder, who shall have the right, subject to
the 1933 Act and applicable state securities laws, to sell such number of Shares
as would equal the number of Conversion Shares to have been delivered by the
Company less such number of Conversion Shares actually delivered by the Company.
If the Escrow Agent delivers to the Holder a certificate representing more
Shares than are necessary to satisfy the Company's obligations pursuant to the
terms of the Purchase Agreement and the Debentures, the Holder shall return any
Shares to the Escrow Agent.
(b) Once the Debentures have been converted or redeemed by the Company
or otherwise repaid to the Holder in full, the Escrow Agent shall be notified of
such fact by the Holder, and the Escrow Agent shall release the remaining Shares
to or at the direction of the Company. The Company shall give written notice
providing instructions with respect to the return of all remaining Shares held
in the Escrow Account (if any) to the Company.
2.2 CONTROVERSIES. If any controversy arises between two or more of the
parties hereto, or between any of the parties hereto and any person not a party
hereto, as to whether or not or whom the Escrow Agent shall deliver the Shares
or any portion thereof or as to any other matter arising out of or relating to
this Escrow Agreement, the Escrow Agent shall not be required to determine the
same and need not make any delivery of the Escrow concerned or any portion
thereof but may retain the same until the rights of the parties to the dispute
shall have been finally determined by agreement or by final judgment of a court
2
<PAGE>
of competent jurisdiction after all appeals have been finally determined (or the
time for further appeals has expired without an appeal having been made)
(notwithstanding the above, the provisions of the paragraph next above this one
shall apply in all events without exception). The Escrow Agent shall deliver
that portion of the Escrow covered by such agreement or final order, if any is
then held by the Escrow Agent, within five (5) days after the Escrow Agent
receives a copy thereof. The Escrow Agent shall assume that no such controversy
has arisen unless and until it receives written notice from the Holder and/or
the Company that such controversy has arisen, which refers specifically to this
Agreement and identifies the adverse claimants to the controversy.
2.3 NO OTHER DISBURSEMENTS. No portion of the Shares shall be disbursed
or otherwise transferred except in accordance with this Section 2, Section 4 or
Section 5.1 (b).
2.4 TITLE AND OWNERSHIP OF THE SHARES. The parties hereto acknowledge
and agree that ownership of and legal title to the Escrow Account and the
contents thereof shall be in the Company, until and unless delivery of Shares is
called for under this Agreement, in which case the terms of the Purchase
Agreement, the Debentures and this Agreement with respect thereto shall control.
3. ESCROW AGENT. The acceptance by the Escrow Agent of his duties
hereunder is subject to the following terms and conditions, which the parties to
this Agreement hereby agree shall govern and control with respect to the rights,
duties, liabilities and immunities of the Escrow Agent:
3.1 The Escrow Agent shall not be responsible or liable in any manner
whatever for the sufficiency, correctness, genuineness or validity of any cash,
Shares, certificates, investments or other amounts deposited with or held by it.
3.2 The Escrow Agent shall be protected in acting upon any written
notice, certificate, instruction, request or other paper or document believed by
it to be genuine and to have been signed or presented by the proper party or
parties.
3.3 The Escrow Agent shall not be liable for any act done hereunder
except in the case of its reckless or willful misconduct or actions taken in bad
faith.
3.4 The Escrow Agent shall not be obligated or permitted to investigate
the correctness or accuracy of any document or to determine whether or not the
signatures contained in said documents are genuine or to require documentation
or evidence substantiating any such document or signature.
3.5 The Escrow Agent shall have no duties as Escrow Agent except those
which are expressly set forth herein, and in any modification or amendment
hereof; provided, however, that no such modification or amendment hereof shall
affect its duties unless it shall have given its written consent thereto. The
Escrow Agent shall not be prohibited from owning an equity interest in the
Company, the Holder, another Holder, any of their respective subsidiaries or any
third party that is in any way affiliated with or conducts business with either
the Company, the Holder or another Holder.
3
<PAGE>
3.6 The Company and the Holder specifically acknowledge that the Escrow
Agent is a practicing attorney, and may have worked with the Company, the
Holder, or affiliates of either of them on other unrelated transactions, and
that they and each of them has specifically requested that the Escrow Agent
draft some or all of the documents for the said transactions and act as Escrow
Agent with respect to the said transactions. Each party represents that it has
retained legal and other counsel of its choosing with respect to the
transactions contemplated herein and in the Purchase Agreement, and is satisfied
in its sole discretion with the form and content of the documentation drafted by
the Escrow Agent. The Escrow Agent may purchase an equity interest in the
Company and/or may become an equity owner of the Holder or another Holder, and
may increase or sell any such interest, so long as in accordance with any and
all applicable law. The said parties hereby waive any objection to the Escrow
Agent so acting based upon conflict of interest or lack of impartiality. The
Escrow Agent agrees to act impartially and in accordance with the terms of this
Agreement and with the parties' respective instructions, so long as they are not
in conflict with the terms of this Agreement.
4. TERMINATION. This Agreement shall terminate upon the earlier of (a)
the receipt by the Holder of the Conversion Shares upon the conversion of the
entire outstanding principal balance and accrued interest of the Debenture or
(b) the Company's payment of the entire outstanding principal balance and
accrued interest of the Debenture. Upon termination of the Escrow Agreement, the
Shares then held in Escrow shall be returned to the Company.
5. MISCELLANEOUS.
5.1 INDEMNIFICATION OF ESCROW AGENT.
(a) The Company and Holder each agree, jointly and severally, to
indemnify the Escrow Agent for, and to hold him harmless against, any loss
incurred without willful misconduct or bad faith on the Escrow Agent's part,
arising out of or in connection with the administration of this Agreement,
including the costs and expenses of defending himself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder. This indemnification shall not apply to a party with respect
to a direct claim against the Escrow Agent by such party alleging in good faith
a willful breach of this Agreement or act of bad faith by the Escrow Agent,
which claim results in a final non-appealable judgment against the Escrow Agent
with respect to such claim.
(b)In the event of any dispute as to the nature of the rights or
obligations of the Holder, the Company or the Escrow Agent hereunder, the Escrow
Agent may at any time or from time to time interplead, deposit and/or pay all or
any part of the Shares with or to a court of competent jurisdiction sitting in
California or in any appropriate federal court, in accordance with the
procedural rules thereof. The Escrow Agent shall give notice of such action to
the Company and the Holder. Upon such interpleader, deposit or payment, the
Escrow Agent shall immediately and automatically be relieved and discharged from
all further obligations and responsibilities hereunder, including the decision
to interplead, deposit or pay such funds.
4
<PAGE>
5.2 AMENDMENTS. This Agreement may be modified or amended only by a
written instrument executed by each of the parties hereto.
5.3 NOTICES. All communications required or permitted to be given under
this Agreement to any party hereto shall be sent by first class mail or
facsimile to such party at the address of such party set forth on the signature
page of this Agreement.
5.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Escrow Agent shall not assign it's duties under this
Agreement.
5.5 GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of California.
5.6 COUNTERPARTS. This Agreement may be executed in three or more
counterparts, each of which shall be an original, and all of which together
shall constitute one and the same agreement.
5.7 FACSIMILE. This Agreement may be accepted via facsimile, and a
facsimile transmission of the executed signature page hereof shall make this
Agreement legally binding upon the party so executing and faxing such signature
page to the Escrow Agent.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
KANAKARIS COMMUNICATIONS, INC. HOLDER
By: /S/ Alex Kanakaris [See Attachment "A"]
---------------------------- -----------------------
Alex Kanakaris, President
_________________________________
By: /s/ Owen Naccarato
------------------------------
Owen Naccarato, Escrow Agent
5
<PAGE>
ATTACHMENT "A"
HOLDERS:
AJW PARTNERS, LLC
By: /S/ Corey S. Ribotsky
-------------------------
Corey S. Ribotsky
Manager
Address:
155 First Street, Suite B
Mineola, NY 11501
NEW MILLENIUM CAPITAL PARTNERS II, LLC
By: /S/ Glenn A. Arbeitman
---------------------------
Glenn A. Arbeitman
Authorized Signatory
Address:
155 First Street, Suite B
Mineola, NY 11501
BANK INSINGER DE BEAUFORT
By: /s/ Frans Kee / R. Mooij
-------------------------------
Its: Directors
------------------------------
Authorized Signatory
Address:
c/o Diana Derycz, Esq.
11777 San Vicente Boulevard
Brentwood, CA 90049
6
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "AGREEMENT") is made
and entered into as of February 4, 2000, among Kanakaris Communications, a
Nevada corporation (the "COMPANY"), and the investors signatory hereto (each
such investor is a "PURCHASER" and all such investors are, collectively, the
"PURCHASERS ").
This Agreement is made pursuant to the Convertible Debenture
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "PURCHASE AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS
-----------
Capitalized terms used and not otherwise defined herein that
are defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"ADVICE" shall have meaning set forth in Section 3(r).
"AFFILIATE" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "CONTROL," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have
meanings correlative to the foregoing.
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"CLOSING DATE" means February 4, 2000.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's Common Stock, $.001 par
value.
"DEBENTURES" means the Company's 10% Convertible Debentures
due February 1, 2001, issued to the Purchasers pursuant to the Purchase
Agreement.
<PAGE>
"EFFECTIVENESS DATE" means the 90th day following the Closing
Date.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in
Section 2(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FILING DATE" means the 20th day following the Closing Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in
Section 5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"PERSON" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"REGISTRABLE SECURITIES" means the shares of Common Stock
issuable (i) upon conversion in full of the Debentures, (ii) as payment of
interest in respect of the Debentures, and (iii) upon exercise of the Warrants.
"REGISTRATION STATEMENT" means the registration statement and
any additional registration statements contemplated by Section 2(a), including
(in each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
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<PAGE>
"RULE 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SPECIAL COUNSEL" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"WARRANTS" means the Common Stock purchase warrants issued to
the Purchasers pursuant to the Purchase Agreement.
2. SHELF REGISTRATION
------------------
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<PAGE>
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering the
number of Registrable Securities contemplated by Section 2(b) for an offering to
be made on a continuous basis pursuant to Rule 415. The Registration Statement
shall be on Form S-1 or Form SB-2 (or on another appropriate form as mutually
agreed to by the Company and the Holders). The Company shall, within ten (10)
days of the date on which the Company becomes eligible to register the resale by
selling security holders of its securities under Form S-3 promulgated by the
Commission, convert the Registration Statement from the originally filed form to
Form S-3. The Company shall use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, but in any event prior to the Effectiveness
Date, and shall use its best efforts to keep such Registration Statement
continuously effective under the Securities Act until the date which is three
years after the date that such Registration Statement is declared effective by
the Commission or such earlier date when all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the Company
pursuant to a written opinion letter to such effect, addressed and acceptable to
the Company's transfer agent (the "EFFECTIVENESS PERIOD"), PROVIDED, HOWEVER,
that the Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell the Registrable Securities covered by such Registration Statement during
the Effectiveness Period, unless such action is required under applicable law or
the Company has filed a post-effective amendment to the Registration Statement
and the Commission has not declared it effective.
(b) In order to account for the fact that the number of shares
of Common Stock issuable upon conversion of the Debentures (and as payment of
interest thereon) is determined in part upon the bid price of the Common Stock
prior to the time of conversion, the initial Registration Statement required to
be filed hereunder shall include (but not be limited to) a number of shares of
Common Stock equal to no less than the sum of (I) 200% of the number of shares
of Common Stock into which the Debentures, together with the payment of interest
thereon (assuming all interest is paid in shares of Common Stock and that the
Debentures remain outstanding for one year), are convertible, assuming such
conversion occurred on the Closing Date, the Filing Date or the date the Company
files an acceleration request with the Commission relating to the Registration
Statement, whichever yields the lowest Conversion Price (as defined in the
Debentures) and (ii) the number of shares of Common Stock issuable upon exercise
in full of the Warrants.
(c) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and, if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro-rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
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<PAGE>
(d) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. REGISTRATION PROCEDURES
-----------------------
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement on the form contemplated by Section 2(a)
which Registration Statement shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" substantially in the form attached hereto as
ANNEX A, and cause the Registration Statement to become effective and remain
effective as provided herein; PROVIDED, HOWEVER, that not less than three (3)
Business Days prior to the filing of the Registration Statement or any related
Prospectus or any amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by reference), the
Company shall, (i) furnish to the Holders, their Special Counsel and any
managing underwriters, copies of all such documents proposed to be filed, which
documents (other than those incorporated or deemed to be incorporated by
reference) will be subject to the review of such Holders, their Special Counsel
and such managing underwriters, and (ii) cause its officers and directors,
counsel and independent certified public accountants to respond to such
inquiries as shall be necessary, in the reasonable opinion of respective counsel
to such Holders and such underwriters, to conduct a reasonable investigation
within the meaning of the Securities Act. The Company shall, within ten (10)
days of the date on which the Company becomes eligible to register the resale by
selling security holders of its securities under Form S-3 promulgated by the
Commission, convert the Registration Statement from the originally filed form to
Form S-3. The Company shall not file the Registration Statement or any such
Prospectus or any amendments or supplements thereto to which the Holders of a
majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as reasonably possible to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as reasonably possible provide the Holders true and complete
-5-
<PAGE>
copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) File additional Registration Statements if the number of
Registrable Securities at any time exceeds the number of shares of Common Stock
then registered in a Registration Statement. The Company shall have 30 days to
file such additional Registration Statements after its receipt of notice of the
requirement thereof which the Holders may give at any time when the Registrable
Securities exceeds 85% of the number of shares of Common Stock then registered
in a Registration Statement hereunder. In such event, the Registration Statement
required to be filed by the Company shall include a number of shares of Common
Stock equal to no less than 200% of the number of shares of Common Stock into
which all then outstanding principal amount of Debentures are convertible
(assuming such conversion occurred on the Filing Date for such Registration
Statement or the date of the filing of the final acceleration request therefor,
whichever date yields a lower Conversion Price) less the shares covered by the
prior Registration Statement and any other Registrable Securities not then
registered in a Registration Statement.
(d) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five (5) days prior to
such filing) and (if requested by any such Person) confirm such notice in
writing no later than one (1) Business Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (B) when the Commission notifies
the Company whether there will be a "review" of such Registration Statement and
whenever the Commission comments in writing on such Registration Statement (the
Company shall provide true and complete copies thereof and all written responses
thereto to each of the Holders, which the Holders shall keep confidential); and
(C) with respect to the Registration Statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or supplements to
the Registration Statement or Prospectus or for additional information; (iii) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement covering any or all of the Registrable Securities or
the initiation of any Proceedings for that purpose; (iv) if at any time any of
the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
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<PAGE>
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(e) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) If requested by any managing underwriter or the Holders of
a majority in interest of the Registrable Securities to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as such managing underwriters and such Holders reasonably agree
should be included therein, and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated in
such Prospectus supplement or post-effective amendment; PROVIDED, HOWEVER, that
the Company shall not be required to take any action pursuant to this Section
3(f) that would, in the opinion of counsel for the Company, violate applicable
law or be materially detrimental to the business prospects of the Company.
(g) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including, if requested,
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(h) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(i) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.
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<PAGE>
(j) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request.
(k) Upon the occurrence of any event contemplated by Section
3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(l) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq National
Market ("NASDAQ") or on any other stock market or trading facility on which the
shares of Common Stock are traded, listed or quoted, including, without
limitation, the OTC Bulletin Board (each a "SUBSEQUENT MARKET") as and when
required pursuant to the Purchase Agreement.
(m) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in Underwritten
Offerings) and take all such other actions in connection therewith (including
those reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and whether or not an
underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings (subject to the
scheduling of appropriate exceptions to insure such representations and
warranties are accurate), and confirm the same if and when requested; (ii) in
the case of an Underwritten Offering obtain and deliver copies thereof to each
Holder and the managing underwriters, if any, of opinions of counsel to the
Company and updates thereof addressed to each Holder and each such underwriter,
in form, scope and substance reasonably satisfactory to any such managing
underwriters and Special Counsel to the selling Holders covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the Registration
Statement, and, in the case of an Underwritten Offering, at the time of delivery
of any Registrable Securities sold pursuant thereto, use its best reasonable
efforts to obtain and deliver copies to the Holders and the managing
underwriters, if any, of "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to the Company in form and substance as are customary in
connection with Underwritten Offerings; (iv) if an underwriting agreement is
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<PAGE>
entered into, the same shall contain indemnification provisions and procedures
no less favorable to the selling Holders and the underwriters, if any, than
those set forth in Section 5 (or such other provisions and procedures acceptable
to the managing underwriters, if any, and holders of a majority of Registrable
Securities participating in such Underwritten Offering); and (v) deliver such
documents and certificates as may be reasonably requested by the Holders of a
majority of the Registrable Securities being sold, their Special Counsel and any
managing underwriters to evidence the continued validity of the representations
and warranties made pursuant to Section 3(m)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(n) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; PROVIDED, HOWEVER, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(o) Comply with all applicable rules and regulations of the
Commission.
(p) The Company may require each selling Holder to furnish to
the Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
(q) If the Registration Statement refers to any Holder by name
or otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (if such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar Federal statute
then in force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
(r) Each Holder covenants and agrees that (i) it will not sell
any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(h) and notice from the Company that such Registration
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Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(d) and (ii) it and its officers, directors or
Affiliates, if any, will comply with the prospectus delivery requirements of the
Securities Act as applicable to it in connection with sales of Registrable
Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Sections 3(d)(ii), 3(d)(iii), 3(d)(iv),
3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(k), or until it is advised in writing (the
"ADVICE") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph.
4. REGISTRATION EXPENSES
---------------------
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses
(A) with respect to filings required to be made with the NASDAQ and any
Subsequent Market on which the Common Stock is then listed for trading, and (B)
in compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the Holders in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as the managing underwriters, if any, or
the Holders of a majority of Registrable Securities may designate)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if the
printing of prospectuses is requested by the managing underwriters, if any, or
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant
to the terms hereof, the Company shall be responsible for all costs, fees and
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expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and reasonable attorneys' fees) and expenses (collectively, "LOSSES"), as
incurred, arising out of or relating to any untrue or alleged untrue statement
of a material fact contained in the Registration Statement, any Prospectus or
any form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 3(r). The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
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<PAGE>
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus, or in any amendment or supplement thereto. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
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<PAGE>
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; PROVIDED, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms. The parties hereto agree that it would
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not be just and equitable if contribution pursuant to this Section 5(d) were
determined by PRO RATA allocation or by any other method of allocation that does
not take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this Section
5(d), no Holder shall be required to contribute, in the aggregate, any amount in
excess of the amount by which the proceeds actually received by such Holder from
the sale of the Registrable Securities subject to the Proceeding exceeds the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of
its subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as and to the extent specified in SCHEDULE 6(B) hereto, neither the
Company nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specified in SCHEDULE 6(b) hereto and in Section 3.10 of the Purchase Agreement,
neither the Company nor any of its security holders (other than the Holders in
such capacity pursuant hereto) may include securities of the Company in the
Registration Statement other than the Registrable Securities. Additionally, for
a period beginning on the date hereof and continuing to and including that date
which shall occur 90 Trading Days after the date that the Underlying Shares
Registration Statement is declared effective by the Commission, the Company
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<PAGE>
shall not, without the prior written consent of the Purchasers, enter into any
agreement providing any such right to any of its security holders (other than
the Holders).
(d) PIGGY-BACK REGISTRATIONS. If at any time when there is not
an effective Registration Statement covering all of the Registrable Securities
and the Underlying Shares, the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; PROVIDED, HOWEVER,
that the Company shall not be required to register any Registrable Securities
pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.
(e) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(f) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 6:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
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If to the Company: Kanakaris Communications, Inc.
3303 Harbor Boulevard, F-3
Costa Mesa, CA 92626
Facsimile No.: (714) 549-8970
Attn: Alex Kanakaris
Copy to: Larry Cerutti, Esq.
Rutan & Tucker, LLP
611 Anton Boulevard, 14th Floor
Costa Mesa, CA 92626
Facsimile No. (764) 546-9035
If to a Purchaser: To the address set forth under such Purchaser's
name on the signature pages hereto.
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the
stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.
(h) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(i) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
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address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(j) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(k) SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(l) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(m) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this
Secured Convertible Debenture Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.
KANAKARIS COMMUNICATIONS, INC.
By: /s/ Alex Kanakaris
-----------------------------------------
Name: Alex Kanakaris
Title: President
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: FIRST STREET MANAGER II, LLC
By: /s/ Glenn A. Arbeitman
-----------------------------------------
Name: Glenn A. Arbeitman
Title: Manager
155 First Street, Suite B
Mineola, New York 11501
Facsimile No.: 516-739-7115
Debentures Purchase Price: $250,000
AJW PARTNERS, LLC
By: SMS GROUP, LLC
By: /s/ Corey S. Ribotsky
-----------------------------------------
Name: Corey S. Ribotsky
Title: Manager
155 First Street, Suite B
Mineola, New York 11501
Facsimile No.: 516-739-7115
Debentures Purchase Price: $250,000
BANK INSINGER DE BEAUFORT
By: /s/ Frans Kee / R. Mooij
-----------------------------------------
Name: Frans Kee / R. Mooij
Title: Directors
-----------------------------------------
-----------------------------------------
Facsimile No.:[ ]
Attn:[ ]
Debentures Purchase Price: $500,000
<PAGE>
ANNEX A
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PLAN OF DISTRIBUTION
--------------------
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
- - ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- - block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- - purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- - an exchange distribution in accordance with the rules of the applicable
exchange;
- - privately negotiated transactions;
- - short sales;
- - broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
- - a combination of any such methods of sale; and
- - any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the
box, puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
<PAGE>
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
PROMISSORY NOTE
January 7, 2000
Costa Mesa, California
FOR VALUE RECEIVED, Desience ("Maker") promises to pay to Alex
Kanakaris, an Individual, in lawful money of the United States of America, the
sum of Ten Thousand Dollars ($ 10,000.00), together with interest on the unpaid
principal balance at the rate of five percent (5%) per annum.
Payment of principal due under this Note, as well as any and all
accrued interest due and owing, shall be made to Payee on or before May 10th,
2000. No payment of principal or interest shall be due prior to such date.
All payments, when received, shall be credited, first, to accrued
interest, with the balance applied to the reduction of the principal sum.
Maker's obligations under this Note shall be paid and performed without
any defenses, claims, impairments or terminations which Maker may now or
hereafter have or could claim against Payee, and Maker hereby waives all of the
same.
Unless an Event of Default (below defined) shall have occurred and
remain uncured, Maker shall have the right to prepay the principal of this Note
from time to time, in whole or in part, without the payment of any premium or
penalty.
The occurrence of any of the following will constitute an event of
default ("Event of Default") under this Note:
(a) Maker's failure to pay any installment of principal and/or interest
within ten (10) days of its due date.
(b) The default by Maker in the performance of any other term, covenant
or agreement contained in this Note, which default is by its nature curable
within thirty (30) days, and such default shall not have been remedied to the
reasonable satisfaction of Payee or waived in writing by Payee within ten (10)
days after written notice of such default has been given to Maker. Any such
term, covenant or agreement which is performable by the payment of money shall
be deemed curable within ten (10) days.
(e) Maker (i) makes an assignment for the benefit of creditors or
admits in writing Maker's inability to pay its debts generally as they become
due, or (ii) applies to any tribunal for the appointment of a trustee or
receiver of any substantial part of Maker's assets, or (iii) commences any
voluntary proceedings under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or other liquidation law of any
jurisdiction, or (iv) becomes the subject of any such involuntary proceedings
and Maker indicates Maker's approval, consent or acquiescence, or (v) becomes
the subject of an order appointing a trustee or receiver, adjudicating it
bankrupt or insolvent, or approving a petition in any such involuntary
proceeding, and such order remains in effect for sixty (60) days.
<PAGE>
Upon the occurrence of any Event of Default hereunder, the entire
unpaid balance of the principal debt evidenced hereby, together with any other
sums due hereunder, with interest theretofore accrued, shall, at the option of
Payee, become immediately due and payable.
One or more executions may forthwith issue on any judgment or judgments
obtained hereunder and any security herefor may forthwith be enforced without
exhaustion of remedies under this Note. Any right or remedy herein is intended
to be cumulative, and not exclusive, of any other right or remedy so provided or
provided by law, equity, statute or otherwise. All or any of such rights or
remedies may be exercised concurrently or in such other manner as Payee shall
decide. No failure on the part of Payee to exercise any of such rights or
remedies shall be deemed a waiver thereof or of any default hereunder.
Maker hereby waives the benefit of all laws now or hereafter enacted
affording any right to any appraisement, any stay of execution or extension of
time for payment, or exempting any property of Maker from levy and sale upon
execution of any judgment obtained under this Note by Payee.
Except as set forth herein, demand, notice of demand, presentation for
payment, notice of non-payment or dishonor, protest and notice of protest are
hereby waived by Maker.
The granting, without notice of any extension or extensions of time for
payment of any sums or sums due hereunder, or for the performance of any
covenant, condition or agreement contained herein, or the granting of any other
indulgences to Maker, for the release of the collateral or any part thereof, or
the taking or releasing of other or additional security for the indebtedness
evidenced hereby, or any other modification or amendment of this Note shall in
no way release or discharge the liability of Maker, or of any endorser,
guarantor or other person secondarily liable for this Note. Maker and any other
persons presently liable hereon agree that additional makers, endorsers,
guarantors or sureties may become parties hereto or liable hereon without notice
to them and without affecting their liability hereunder.
This Note shall bind Maker, and Maker's successors and assigns, and the
benefits hereof shall inure to Payee and Payee's successors and assigns.
This Note shall be governed by the laws of the State of California. If
any term or provision of this Note or the application thereof is held to be
invalid or unenforceable, the remainder of this Note, shall not be affected
thereby.
<PAGE>
Maker shall pay on demand any and all reasonable costs and expenses,
including but not limited to, attorneys' fees, incurred by Payee in connection
with any default under this Note, whether or not suit be instituted to enforce
the terms hereof.
Maker and Payee hereby consent, in any action or proceeding which may
be brought under or in connection with this Note, to the jurisdiction of the
courts of California with venue in the County of Orange.
MAKER:
/s/ Branch Lotspeich
-----------------------------------
Branch Lotspeich, Vice Chairman
Kanakaris Communications
PROMISSORY NOTE
December 27, 1999
Costa Mesa, California
FOR VALUE RECEIVED, Kanakaris Communications ("Maker") promises to pay
to Branch Lotspeich, an Individual, in lawful money of the United States of
America, the sum of Thirty Five Thousand Dollars ($ 35,000.00), together with
interest on the unpaid principal balance at the rate of five percent (5%) per
annum.
Payment of principal due under this Note, as well as any and all
accrued interest due and owing, shall be made to Payee on or before January
10th, 2002. Maker will commence monthly payments of at least 5% of outstanding
balance beginning February 2000.
All payments, when received, shall be credited, first, to accrued
interest, with the balance applied to the reduction of the principal sum.
Maker's obligations under this Note shall be paid and performed without
any defenses, claims, impairments or terminations which Maker may now or
hereafter have or could claim against Payee, and Maker hereby waives all of the
same.
Unless an Event of Default (below defined) shall have occurred and
remain uncured, Maker shall have the right to prepay the principal of this Note
from time to time, in whole or in part, without the payment of any premium or
penalty.
The occurrence of any of the following will constitute an event of
default ("Event of Default") under this Note:
(a) Maker's failure to pay any installment of principal and/or interest
within ten (10) days of its due date.
(b) The default by Maker in the performance of any other term, covenant
or agreement contained in this Note, which default is by its nature curable
within thirty (30) days, and such default shall not have been remedied to the
reasonable satisfaction of Payee or waived in writing by Payee within ten (10)
days after written notice of such default has been given to Maker. Any such
term, covenant or agreement which is performable by the payment of money shall
be deemed curable within ten (10) days.
(e) Maker (i) makes an assignment for the benefit of creditors or
admits in writing Maker's inability to pay its debts generally as they become
due, or (ii) applies to any tribunal for the appointment of a trustee or
receiver of any substantial part of Maker's assets, or (iii) commences any
voluntary proceedings under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or other liquidation law of any
jurisdiction, or (iv) becomes the subject of any such involuntary proceedings
and Maker indicates Maker's approval, consent or acquiescence, or (v) becomes
the subject of an order appointing a trustee or receiver, adjudicating it
bankrupt or insolvent, or approving a petition in any such involuntary
proceeding, and such order remains in effect for sixty (60) days.
<PAGE>
Upon the occurrence of any Event of Default hereunder, the entire
unpaid balance of the principal debt evidenced hereby, together with any other
sums due hereunder, with interest theretofore accrued, shall, at the option of
Payee, become immediately due and payable.
One or more executions may forthwith issue on any judgment or judgments
obtained hereunder and any security herefor may forthwith be enforced without
exhaustion of remedies under this Note. Any right or remedy herein is intended
to be cumulative, and not exclusive, of any other right or remedy so provided or
provided by law, equity, statute or otherwise. All or any of such rights or
remedies may be exercised concurrently or in such other manner as Payee shall
decide. No failure on the part of Payee to exercise any of such rights or
remedies shall be deemed a waiver thereof or of any default hereunder.
Maker hereby waives the benefit of all laws now or hereafter enacted
affording any right to any appraisement, any stay of execution or extension of
time for payment, or exempting any property of Maker from levy and sale upon
execution of any judgment obtained under this Note by Payee.
Except as set forth herein, demand, notice of demand, presentation for
payment, notice of non-payment or dishonor, protest and notice of protest are
hereby waived by Maker.
The granting, without notice of any extension or extensions of time for
payment of any sums or sums due hereunder, or for the performance of any
covenant, condition or agreement contained herein, or the granting of any other
indulgences to Maker, for the release of the collateral or any part thereof, or
the taking or releasing of other or additional security for the indebtedness
evidenced hereby, or any other modification or amendment of this Note shall in
no way release or discharge the liability of Maker, or of any endorser,
guarantor or other person secondarily liable for this Note. Maker and any other
persons presently liable hereon agree that additional makers, endorsers,
guarantors or sureties may become parties hereto or liable hereon without notice
to them and without affecting their liability hereunder.
This Note shall bind Maker, and Maker's successors and assigns, and the
benefits hereof shall inure to Payee and Payee's successors and assigns.
This Note shall be governed by the laws of the State of California. If
any term or provision of this Note or the application thereof is held to be
invalid or unenforceable, the remainder of this Note, shall not be affected
thereby.
<PAGE>
Maker shall pay on demand any and all reasonable costs and expenses,
including but not limited to, attorneys' fees, incurred by Payee in connection
with any default under this Note, whether or not suit be instituted to enforce
the terms hereof.
Maker and Payee hereby consent, in any action or proceeding which may
be brought under or in connection with this Note, to the jurisdiction of the
courts of California with venue in the County of Orange.
MAKER:
/s/ Alex Kanakaris
----------------------------
Alex Kanakaris, CEO
Kanakaris Communications
KANAKARIS COMMUNICATIONS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement is made this 31st day of December, 1999,
between Kanakaris Communications, Inc. (the "Company"), and Alex Kanakaris (the
"Option Holder").
R E C I T A L S
A. The Board of Directors has determined that it is to the advantage
and best interest of the Company and its shareholders to grant an option to the
Option Holder covering shares of the Company's Common Stock as an inducement to
remain in the service of the Company and as an incentive for increased effort
during such service, and on December 31, 1999 (the "Effective Date") approved
the execution of this Stock Option Agreement between the Company and the Option
Holder.
B. The option granted hereby is not intended to qualify as an
"incentive stock option," pursuant to Section 422A of the Internal Revenue Code
of 1954, as amended.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company grants to the Option Holder the right and option to
purchase on the terms and conditions hereinafter set forth, all or any part of
an aggregate of 2,100,000 shares of the Common Stock of the Company at the
purchase price of $.52 per share, and exercisable from time to time in
accordance with the provisions of this Agreement during a period expiring on the
tenth anniversary from the Effective Date of this Agreement (the "Expiration
Date"). The Fair Market Value of the Company's common stock on December 31, 1999
was approximately $.52 per share.
2. The Option Holder may purchase any or all shares by exercise of this
Option between the Effective Date of this Agreement and the Expiration Date. The
number of shares which may be purchased shall be calculated to the nearest full
share and shall not be for fewer than 100 shares. The foregoing limitations
shall similarly apply to the transferees of the Option Holder by will or by the
laws of descent or distribution, so that said transferees shall be entitled
(provided they act within twelve (12) months after the death of the Option
Holder but in no event later than the Expiration Date) to purchase by exercise
of this Option all or any portion of the shares subject to this Option which the
Option Holder could have purchased by the exercise of the option at the time of
the Option Holder's death but with respect to which this Option was not
previously exercised, and no more. This Option may be exercised during the
lifetime of the Option Holder only by the Option Holder, or within twelve (12)
months after his death by his transferees by will or the laws of the descent or
distribution, and not otherwise, regardless of any community property interest
therein of the spouse of the Option Holder, or such spouse's successors in
interest. If the spouse of the Option Holder shall have acquired a community
property interest in this Option, the Option Holder, or Option Holder's
permitted successors in interest, may exercise the option on behalf of the
spouse of the Option Holder or such spouse's successors in interest.
<PAGE>
3. Each exercise of this Option shall be by means of a written notice
of exercise delivered to the Secretary of the Company, specifying the number of
shares to be purchased and accompanied by payment to the Company of the full
purchase price of the shares to be purchased. The purchase price of the shares
upon exercise of an option shall be paid (i) in cash or by certified or
cashier's check payable to the order of the Company, (ii) by delivery of shares
of Common Stock of the Company already owned by and in the possession of the
option holder, or (iii) by a promissory note made by option holder in favor of
the Company, upon the terms and conditions determined by the Board of Directors
and secured by the shares issuable upon exercise complying with applicable law
(including, without limitation, state, corporate and federal margin
requirements), or any combination thereof. Shares of Common Stock used to
satisfy the exercise price of this Option shall be valued at their fair market
value determined as of the close of the business day immediately preceding the
date of exercise.
4. The fair market value of a share of Common Stock shall be determined
for purposes of this Agreement by reference to the most recent sale price of the
Company's Common Stock and such other factors as the Board of Directors may deem
appropriate to reflect the then fair market thereof, unless such shares are
publicly traded on a stock exchange or otherwise, in which case such value shall
be determined by reference to the closing price of such share on the principal
stock exchange on which such shares are traded, or, if such shares are not then
traded on a principal stock exchange, the mean between the bid and asked price
of a share as supplied by the National Association of Securities Dealers through
NASDAQ (or its successor in function), in each case as reported by The Wall
Street Journal, for the business day immediately preceding the date on which the
option is exercised.
5. No shares issuable upon the exercise of this Option shall be issued
and delivered unless and until there shall have been full compliance with all
applicable registration requirements of the Securities Act of 1933, as amended,
all applicable listing requirements of any national securities exchange on which
shares of the same class are then listed and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and delivery.
Without limiting the foregoing, the undersigned hereby agrees that
unless and until the shares of stock covered by this Option have been registered
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, he will purchase all shares of stock to be issued upon exercise of this
Option for investment and not for resale or for distribution and that upon each
exercise of any portion of this Option the person entitled to exercise the same
shall, upon the request of the Company, furnish evidence satisfactory to the
Company (including a written and signed representation) to that effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act of 1933 by such
person. Furthermore, the Company may, if it deems appropriate, affix a legend to
certificates representing shares of stock upon exercise of options indicating
that such shares have not been registered with the Securities and Exchange
Commission and may so notify its Transfer Agent, and may take such other action
as it deems necessary or advisable to comply with any other regulatory or
governmental requirements.
-2-
<PAGE>
6. If Option Holder or Option Holder's permitted successors in interest
dispose of shares of Common Stock acquired pursuant to the exercise of this
Option, the Company shall have the right to require Option Holder or Option
Holder's permitted successor in interest to pay the Company the amount of any
taxes, which the Company may be required to withhold with respect to such
shares.
7. This Option and the rights and privileges granted hereby shall not
be transferred, assigned, pledged or hypothecated in any way, whether by
operation of the law or otherwise, except by will or the laws of descent and
distribution. Upon any attempt so to transfer, assign, pledge, hypothecate or
otherwise dispose of this option or any right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.
8. If the outstanding shares of the Common Stock of the Company are
increased, decreased, changed into, or exchanged for a different number or kind
of shares or securities of the Company through reorganization, recapitalization,
reclassification, stock dividend, stock split or reverse stock split, an
appropriate and proportionate adjustment (to be conclusively determined by the
Board of Directors of the Company) shall be made in the number and kind of
securities receivable upon the exercise of this Option, without change in the
total price applicable to the unexercised portion of this Option but with a
corresponding adjustment in the price for each unit of any security covered by
this Option.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of substantially all the property or more than 80% of the then
outstanding stock of the Company to another corporation, this Option shall be
terminated, unless express written provision be made in connection with such
transaction for (i) the immediate exercisability of this Option, (ii) the
assumption of this Option or the substitution therefore of a new option covering
the stock of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to number and kind of shares and prices, such
adjustments to be conclusively determined by the Board of Directors of the
Company. Adjustments under this paragraph 8 shall be made by the Board of
Directors, whose determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding and conclusive. No fractional shares
shall be issued under any such adjustment.
9. Neither the Option Holder nor any other person legally entitled to
exercise this option shall be entitled to any of the rights or privileges of a
shareholder of the Company in respect of any shares issuable upon any exercise
of this Option unless and until a certificate or certificates representing such
shares shall have been actually issued and delivered to him.
-3-
<PAGE>
10. This Option has been executed and delivered the day and year first
above-written at Costa Mesa, California, and the interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California.
KANAKARIS COMMUNICATIONS, INC.
By: /S/ Branch Lotspeich
----------------------------
Branch Lotspeich
Secretary
By: /S/ Alex Kanakaris
----------------------------
Alex Kanakaris
Option Holder
-4-
KANAKARIS COMMUNICATIONS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement is made this 31st day of December, 1999,
between Kanakaris Communications, Inc. (the "Company"), and Branch Lotspeich
(the "Option Holder").
R E C I T A L S
A. The Board of Directors has determined that it is to the advantage
and best interest of the Company and its shareholders to grant an option to the
Option Holder covering shares of the Company's Common Stock as an inducement to
remain in the service of the Company and as an incentive for increased effort
during such service, and on December 31, 1999 (the "Effective Date") approved
the execution of this Stock Option Agreement between the Company and the Option
Holder.
B. The option granted hereby is not intended to qualify as an
"incentive stock option," pursuant to Section 422A of the Internal Revenue Code
of 1954, as amended.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company grants to the Option Holder the right and option to
purchase on the terms and conditions hereinafter set forth, all or any part of
an aggregate of 1,200,000 shares of the Common Stock of the Company at the
purchase price of $.52 per share, and exercisable from time to time in
accordance with the provisions of this Agreement during a period expiring on the
tenth anniversary from the Effective Date of this Agreement (the "Expiration
Date"). The Fair Market Value of the Company's common stock on December 31, 1999
was approximately $.52 per share.
2. The Option Holder may purchase any or all shares by exercise of this
Option between the Effective Date of this Agreement and the Expiration Date. The
number of shares which may be purchased shall be calculated to the nearest full
share and shall not be for fewer than 100 shares. The foregoing limitations
shall similarly apply to the transferees of the Option Holder by will or by the
laws of descent or distribution, so that said transferees shall be entitled
(provided they act within twelve (12) months after the death of the Option
Holder but in no event later than the Expiration Date) to purchase by exercise
of this Option all or any portion of the shares subject to this Option which the
Option Holder could have purchased by the exercise of the option at the time of
the Option Holder's death but with respect to which this Option was not
previously exercised, and no more. This Option may be exercised during the
lifetime of the Option Holder only by the Option Holder, or within twelve (12)
months after his death by his transferees by will or the laws of the descent or
distribution, and not otherwise, regardless of any community property interest
therein of the spouse of the Option Holder, or such spouse's successors in
interest. If the spouse of the Option Holder shall have acquired a community
property interest in this Option, the Option Holder, or Option Holder's
permitted successors in interest, may exercise the option on behalf of the
spouse of the Option Holder or such spouse's successors in interest.
<PAGE>
3. Each exercise of this Option shall be by means of a written notice
of exercise delivered to the Secretary of the Company, specifying the number of
shares to be purchased and accompanied by payment to the Company of the full
purchase price of the shares to be purchased. The purchase price of the shares
upon exercise of an option shall be paid (i) in cash or by certified or
cashier's check payable to the order of the Company, (ii) by delivery of shares
of Common Stock of the Company already owned by and in the possession of the
option holder, or (iii) by a promissory note made by option holder in favor of
the Company, upon the terms and conditions determined by the Board of Directors
and secured by the shares issuable upon exercise complying with applicable law
(including, without limitation, state, corporate and federal margin
requirements), or any combination thereof. Shares of Common Stock used to
satisfy the exercise price of this Option shall be valued at their fair market
value determined as of the close of the business day immediately preceding the
date of exercise.
4. The fair market value of a share of Common Stock shall be determined
for purposes of this Agreement by reference to the most recent sale price of the
Company's Common Stock and such other factors as the Board of Directors may deem
appropriate to reflect the then fair market thereof, unless such shares are
publicly traded on a stock exchange or otherwise, in which case such value shall
be determined by reference to the closing price of such share on the principal
stock exchange on which such shares are traded, or, if such shares are not then
traded on a principal stock exchange, the mean between the bid and asked price
of a share as supplied by the National Association of Securities Dealers through
NASDAQ (or its successor in function), in each case as reported by The Wall
Street Journal, for the business day immediately preceding the date on which the
option is exercised.
5. No shares issuable upon the exercise of this Option shall be issued
and delivered unless and until there shall have been full compliance with all
applicable registration requirements of the Securities Act of 1933, as amended,
all applicable listing requirements of any national securities exchange on which
shares of the same class are then listed and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and delivery.
Without limiting the foregoing, the undersigned hereby agrees that
unless and until the shares of stock covered by this Option have been registered
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, he will purchase all shares of stock to be issued upon exercise of this
Option for investment and not for resale or for distribution and that upon each
exercise of any portion of this Option the person entitled to exercise the same
shall, upon the request of the Company, furnish evidence satisfactory to the
Company (including a written and signed representation) to that effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act of 1933 by such
person. Furthermore, the Company may, if it deems appropriate, affix a legend to
certificates representing shares of stock upon exercise of options indicating
that such shares have not been registered with the Securities and Exchange
Commission and may so notify its Transfer Agent, and may take such other action
as it deems necessary or advisable to comply with any other regulatory or
governmental requirements.
-2-
<PAGE>
6. If Option Holder or Option Holder's permitted successors in interest
dispose of shares of Common Stock acquired pursuant to the exercise of this
Option, the Company shall have the right to require Option Holder or Option
Holder's permitted successor in interest to pay the Company the amount of any
taxes, which the Company may be required to withhold with respect to such
shares.
7. This Option and the rights and privileges granted hereby shall not
be transferred, assigned, pledged or hypothecated in any way, whether by
operation of the law or otherwise, except by will or the laws of descent and
distribution. Upon any attempt so to transfer, assign, pledge, hypothecate or
otherwise dispose of this option or any right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.
8. If the outstanding shares of the Common Stock of the Company are
increased, decreased, changed into, or exchanged for a different number or kind
of shares or securities of the Company through reorganization, recapitalization,
reclassification, stock dividend, stock split or reverse stock split, an
appropriate and proportionate adjustment (to be conclusively determined by the
Board of Directors of the Company) shall be made in the number and kind of
securities receivable upon the exercise of this Option, without change in the
total price applicable to the unexercised portion of this Option but with a
corresponding adjustment in the price for each unit of any security covered by
this Option.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of substantially all the property or more than 80% of the then
outstanding stock of the Company to another corporation, this Option shall be
terminated, unless express written provision be made in connection with such
transaction for (i) the immediate exercisability of this Option, (ii) the
assumption of this Option or the substitution therefore of a new option covering
the stock of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to number and kind of shares and prices, such
adjustments to be conclusively determined by the Board of Directors of the
Company. Adjustments under this paragraph 8 shall be made by the Board of
Directors, whose determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding and conclusive. No fractional shares
shall be issued under any such adjustment.
9. Neither the Option Holder nor any other person legally entitled to
exercise this option shall be entitled to any of the rights or privileges of a
shareholder of the Company in respect of any shares issuable upon any exercise
of this Option unless and until a certificate or certificates representing such
shares shall have been actually issued and delivered to him.
-3-
<PAGE>
10. This Option has been executed and delivered the day and year first
above-written at Costa Mesa, California, and the interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California.
KANAKARIS COMMUNICATIONS, INC.
By: /S/ Alex Kanakaris
----------------------------
Alex Kanakaris
President
By: /S/ Branch Lotspeich
----------------------------
Branch Lotspeich
Option Holder
-4-
KANAKARIS COMMUNICATIONS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement is made this 31st day of December, 1999,
between Kanakaris Communications, Inc. (the "Company"), and John R. McKay (the
"Option Holder").
R E C I T A L S
A. The Board of Directors has determined that it is to the advantage
and best interest of the Company and its shareholders to grant an option to the
Option Holder covering shares of the Company's Common Stock as an inducement to
remain in the service of the Company and as an incentive for increased effort
during such service, and on December 31, 1999 (the "Effective Date") approved
the execution of this Stock Option Agreement between the Company and the Option
Holder.
B. The option granted hereby is not intended to qualify as an
"incentive stock option," pursuant to Section 422A of the Internal Revenue Code
of 1954, as amended.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company grants to the Option Holder the right and option to
purchase on the terms and conditions hereinafter set forth, all or any part of
an aggregate of 345,000 shares of the Common Stock of the Company at the
purchase price of $.52 per share, and exercisable from time to time in
accordance with the provisions of this Agreement during a period expiring on the
tenth anniversary from the Effective Date of this Agreement (the "Expiration
Date"). The Fair Market Value of the Company's common stock on December 31, 1999
was approximately $.52 per share.
2. The Option Holder may purchase any or all shares by exercise of this
Option between the Effective Date of this Agreement and the Expiration Date. The
number of shares which may be purchased shall be calculated to the nearest full
share and shall not be for fewer than 100 shares. The foregoing limitations
shall similarly apply to the transferees of the Option Holder by will or by the
laws of descent or distribution, so that said transferees shall be entitled
(provided they act within twelve (12) months after the death of the Option
Holder but in no event later than the Expiration Date) to purchase by exercise
of this Option all or any portion of the shares subject to this Option which the
Option Holder could have purchased by the exercise of the option at the time of
the Option Holder's death but with respect to which this Option was not
previously exercised, and no more. This Option may be exercised during the
lifetime of the Option Holder only by the Option Holder, or within twelve (12)
months after his death by his transferees by will or the laws of the descent or
distribution, and not otherwise, regardless of any community property interest
therein of the spouse of the Option Holder, or such spouse's successors in
interest. If the spouse of the Option Holder shall have acquired a community
property interest in this Option, the Option Holder, or Option Holder's
permitted successors in interest, may exercise the option on behalf of the
spouse of the Option Holder or such spouse's successors in interest.
<PAGE>
3. Each exercise of this Option shall be by means of a written notice
of exercise delivered to the Secretary of the Company, specifying the number of
shares to be purchased and accompanied by payment to the Company of the full
purchase price of the shares to be purchased. The purchase price of the shares
upon exercise of an option shall be paid (i) in cash or by certified or
cashier's check payable to the order of the Company, (ii) by delivery of shares
of Common Stock of the Company already owned by and in the possession of the
option holder, or (iii) by a promissory note made by option holder in favor of
the Company, upon the terms and conditions determined by the Board of Directors
and secured by the shares issuable upon exercise complying with applicable law
(including, without limitation, state, corporate and federal margin
requirements), or any combination thereof. Shares of Common Stock used to
satisfy the exercise price of this Option shall be valued at their fair market
value determined as of the close of the business day immediately preceding the
date of exercise.
4. The fair market value of a share of Common Stock shall be determined
for purposes of this Agreement by reference to the most recent sale price of the
Company's Common Stock and such other factors as the Board of Directors may deem
appropriate to reflect the then fair market thereof, unless such shares are
publicly traded on a stock exchange or otherwise, in which case such value shall
be determined by reference to the closing price of such share on the principal
stock exchange on which such shares are traded, or, if such shares are not then
traded on a principal stock exchange, the mean between the bid and asked price
of a share as supplied by the National Association of Securities Dealers through
NASDAQ (or its successor in function), in each case as reported by The Wall
Street Journal, for the business day immediately preceding the date on which the
option is exercised.
5. No shares issuable upon the exercise of this Option shall be issued
and delivered unless and until there shall have been full compliance with all
applicable registration requirements of the Securities Act of 1933, as amended,
all applicable listing requirements of any national securities exchange on which
shares of the same class are then listed and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and delivery.
Without limiting the foregoing, the undersigned hereby agrees that
unless and until the shares of stock covered by this Option have been registered
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, he will purchase all shares of stock to be issued upon exercise of this
Option for investment and not for resale or for distribution and that upon each
exercise of any portion of this Option the person entitled to exercise the same
shall, upon the request of the Company, furnish evidence satisfactory to the
Company (including a written and signed representation) to that effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act of 1933 by such
person. Furthermore, the Company may, if it deems appropriate, affix a legend to
certificates representing shares of stock upon exercise of options indicating
that such shares have not been registered with the Securities and Exchange
Commission and may so notify its Transfer Agent, and may take such other action
as it deems necessary or advisable to comply with any other regulatory or
governmental requirements.
-2-
<PAGE>
6. If Option Holder or Option Holder's permitted successors in interest
dispose of shares of Common Stock acquired pursuant to the exercise of this
Option, the Company shall have the right to require Option Holder or Option
Holder's permitted successor in interest to pay the Company the amount of any
taxes, which the Company may be required to withhold with respect to such
shares.
7. This Option and the rights and privileges granted hereby shall not
be transferred, assigned, pledged or hypothecated in any way, whether by
operation of the law or otherwise, except by will or the laws of descent and
distribution. Upon any attempt so to transfer, assign, pledge, hypothecate or
otherwise dispose of this option or any right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.
8. If the outstanding shares of the Common Stock of the Company are
increased, decreased, changed into, or exchanged for a different number or kind
of shares or securities of the Company through reorganization, recapitalization,
reclassification, stock dividend, stock split or reverse stock split, an
appropriate and proportionate adjustment (to be conclusively determined by the
Board of Directors of the Company) shall be made in the number and kind of
securities receivable upon the exercise of this Option, without change in the
total price applicable to the unexercised portion of this Option but with a
corresponding adjustment in the price for each unit of any security covered by
this Option.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of substantially all the property or more than 80% of the then
outstanding stock of the Company to another corporation, this Option shall be
terminated, unless express written provision be made in connection with such
transaction for (i) the immediate exercisability of this Option, (ii) the
assumption of this Option or the substitution therefore of a new option covering
the stock of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to number and kind of shares and prices, such
adjustments to be conclusively determined by the Board of Directors of the
Company. Adjustments under this paragraph 8 shall be made by the Board of
Directors, whose determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding and conclusive. No fractional shares
shall be issued under any such adjustment.
9. Neither the Option Holder nor any other person legally entitled to
exercise this option shall be entitled to any of the rights or privileges of a
shareholder of the Company in respect of any shares issuable upon any exercise
of this Option unless and until a certificate or certificates representing such
shares shall have been actually issued and delivered to him.
-3-
<PAGE>
10. This Option has been executed and delivered the day and year first
above-written at Costa Mesa, California, and the interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California.
KANAKARIS COMMUNICATIONS, INC.
By: /S/ Alex Kanakaris
------------------------
Alex Kanakaris
President
By: /S/ John R. McKay
------------------------
John R. McKay
Option Holder
-4-
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form SB-2 Registration Statement of
Kanakaris Communications, Inc. 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
February 25, 2000
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form SB-2 Registration Statement of
Kanakaris Communications, Inc. 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
February 25, 2000
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 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
February 25, 2000
