<PAGE>
As filed with the Securities and Exchange Commission on June 30, 2000
Registration No. 333-39102
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
KANAKARIS WIRELESS
-----------------------------------------------------
(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 Wireless
3303 Harbor Boulevard, Suite F-3
Costa Mesa, CA 92626
(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 (2) Offering Price (2) Fee (3)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $.001 par value 17,391,737 $0.92965 $16,631,581 $4,320.66
====================================================================================================================
</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
an indeterminate number of additional shares in accordance with Rule
416(a) under the Securities Act. Pursuant to Rule 429, includes 866,667
shares being carried forward from the Registrant's Registration Statement
No. 333-84909 and 1,293,204 shares being carried forward from the
Registrant's Registration Statement No. 333-31748. Also includes
15,231,866 shares covered by this Registration Statement that are not
presently covered by any other registration statement.
(2) Estimated solely for the purpose of determining the registration fee for
the 15,231,866 shares covered by this Registration Statement that are not
presently covered by any other registration statement. Calculated pursuant
to Rule 457(c) under the Securities Act, on the basis of the average of
the high and low price per share as reported for such securities by the
NASD's OTC Bulletin Board on June 5, 2000.
(3) A filing fee of $326.21 was previously paid by the Registrant under
Registration Statement No. 333-84909 covering the 1,783,334 shares
originally registered thereunder, $240.93 of which fee relates to the
866,667 shares being carried forward from that registration statement
which had a proposed maximum offering price per share of $0.66. A filing
fee of $996.61 was previously paid by the Registrant under Registration
Statement No. 333-31748 covering the 2,568,046 shares originally
registered thereunder, $341.41 of which fee relates to the 1,293,204
shares being carried forward which had a proposed maximum offering price
per share of $1.47. A filing fee of at least $3,738.92 was paid to cover
the 15,231,886 shares covered by this Registration Statement that are not
presently covered by any other registration statement.
2
<PAGE>
Pursuant to Rule 429, this Registration Statement contains a combined prospectus
that covers 866,667 shares being carried forward from the Registrant's
Registration Statement No. 333-84909 and 1,293,204 shares being carried forward
from the Registrant's Registration Statement No. 333-31748, in addition to the
15,231,886 shares being registered for the first time hereunder.
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.
3
<PAGE>
DEREGISTRATION OF SECURITIES
Pursuant to Rule 429, this Registration Statement contains a combined
prospectus that covers 866,667 shares being carried forward from our company's
Registration Statement No. 333-84909 and 1,293,204 shares being carried forward
from our company's Registration Statement No. 333-31748, in addition to the
15,231,886 shares being registered for the first time hereunder.
When declared effective, Registration Statement Nos. 333-84909 and
333-31748 ("Outstanding Registration Statements") covered 1,783,334 and
2,568,046 shares of our company's common stock, respectively.
In accordance with the undertaking of our company set forth in the
Outstanding Registration Statements, effective as of the date and time this
Registration Statement is declared effective, our company hereby deregisters
such shares of its common stock that were registered on the Outstanding
Registration Statements but were not sold under the Outstanding Registration
Statements and are not being carried forward onto this Registration Statement.
4
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 30, 2000
PROSPECTUS
Kanakaris Wireless
17,391,737 Shares of Common Stock
The 17,391,737 shares of our company's common stock, $.001 par value,
offered hereby are being offered by certain of our security holders identified
herein. Our common stock trades on the NASD's OTC Bulletin Board under the
symbol "KKRS." See "Plan of Distribution" beginning on page 39 for a more
detailed discussion of the intended method of sale.
Our principal executive offices are located at 3303 Harbor Boulevard,
Suite F-3, Costa Mesa, California 92626, and we may be reached at (714)
444-0530.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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
5
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider, among other things, 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 March 31, 2000, we had an accumulated deficit of
$13,802,096. 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.
OUR COMMON STOCK IS SUBJECT TO SUBSTANTIAL DILUTION, AND WE MAY NEED AND BE
UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY TERMS, WHICH COULD FURTHER
DILUTE OUR STOCKHOLDERS 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 significant 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 issued securities that are
convertible into or exercisable for a substantial number of shares of our common
stock, many of which shares of common stock are being offered pursuant to this
prospectus. In addition, we have entered into an agreement with certain of the
selling security holders pursuant to which those selling security holders will
purchase debentures in the aggregate principal amount of $3,000,000 and will
receive warrants to purchase an aggregate of 900,000 shares of common stock
within 45 days following the date of this prospectus if certain conditions
relating to the market price of our common stock are met. We may also 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 further dilute
existing stockholders' 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.
6
<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 and services;
o general conditions in the Internet, e-commerce and data
control console 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.
7
<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. The loss of Mr. Kanakaris 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 $8,000,000 covering Mr. Kanakaris.
We have not entered into any employment agreement with Mr. Kanakaris 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.
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.
8
<PAGE>
IF COMMUNICATIONS TO OUR PRIMARY SERVERS ARE INTERRUPTED, OUR OPERATIONS COULD
BE NEGATIVELY IMPACTED
Our movies and general KKRS.Net web site are hosted on servers owned
and operated by LMKI in Rancho Santa Margarita, California and by iBEAM
Broadcasting Corporation in Sunnyvale, 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.
CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS ALLOW
CONCENTRATION OF VOTING POWER IN ONE INDIVIDUAL, WHICH MAY, AMONG OTHER THINGS,
DELAY OR FRUSTRATE THE REMOVAL OF INCUMBENT DIRECTORS OR A TAKEOVER ATTEMPT,
EVEN IF SUCH EVENTS MAY BE BENEFICIAL TO OUR STOCKHOLDERS
Certain provisions of our Articles of Incorporation and Bylaws may
delay or frustrate the removal of incumbent directors and may prevent or delay a
merger, tender offer or proxy contest involving our company that is not approved
by our board of directors, even if such events may be beneficial to the interest
of our stockholders. For example, Alex Kanakaris, our Chairman of the Board,
President and Chief Executive Officer, is the holder of all of the authorized,
issued and outstanding shares of our Class A Convertible Preferred Stock ("Class
A"). Under our Articles of Incorporation, as amended and restated, each share of
Class A is entitled to, among other things, twenty non-cumulative votes per
share on all matters presented to our stockholders for action. Consequently, Mr.
Kanakaris has sufficient voting power to control the outcome of all corporate
matters submitted to the vote of our stockholders. Those matters could include
the election of directors, changes in the size and composition of the Board of
Directors (and, thereby, the qualification and appointment of officers of our
company), and mergers and other business combinations involving our company. In
addition, through his control of the Board of Directors and voting power, he may
be able to control certain decisions, including decisions with respect to our
company's dividend policy, access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), and the
acquisition or disposition of assets by our company. In addition, the
concentration of voting power in Mr. Kanakaris could have the effect of delaying
or preventing a change in control of our company and may affect the market price
of our common stock.
9
<PAGE>
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 industries, 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.
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, but we will receive
proceeds from the exercise of warrants and options to purchase common stock to
the extent that such common stock is included in the shares being offered
pursuant to this prospectus.
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
Year Ending September 30, 2000:
First Quarter.........................................$ .9375 $ .52
Second Quarter........................................ 5.96875 .6875
The closing price of our common stock on June 19, 2000 was $1.0937.
At June 19, 2000, there were approximately 255 stockholders 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.
10
<PAGE>
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.
CAPITALIZATION
The following table sets forth our cash position and capitalization as
of March 31, 2000. The information set forth below should be read in conjunction
with our consolidated financial statements and the related notes included
elsewhere in this prospectus.
March 31, 2000
--------------
Cash and cash equivalents......................................... $ 221,362
=============
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 30,046,045 shares(1)........ 30,046
Additional paid-in capital................................... 12,977,017
Common shares to be issued................................... 206
Stock subscriptions.......................................... (1,260)
Accumulated deficit.......................................... (13,802,096)
-------------
Total stockholders' deficiency............................. (786,087)
-------------
Total capitalization.............................................. $ (518,199)
=============
-------------------
(1) Excludes 5,818,000 shares of common stock issuable pursuant to the exercise
of stock options outstanding as of March 31, 2000, at a weighted average
exercise price of $0.58 per share, all of which were exercisable on March
31, 2000. Also excludes 2,568,046 shares of common stock that may become
issuable pursuant to the conversion of convertible debentures and related
warrants outstanding as of March 31, 2000, all of which were convertible or
exercisable on March 31, 2000 but were subject to certain conversion
limitations under our debenture offering documents. Also excludes 1,290,000
shares of common stock issuable into escrow as of March 31, 2000 as
security for our performance of certain obligations under our debenture
offering documents.
11
<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 consolidated balance sheets data as of September 30, 1999 and 1998
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 six month periods ended March 31, 1999 and 2000 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>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------- ------------- -----------------------------
1998 1999 1999 2000
------------- ------------- ------------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C> <C> <C>
Net sales................................ $ 919,905 $ 968,758 $ 201,142 $ 356,199
Cost of sales............................ 481,349 661,707 177,911 202,842
------------- ------------- ------------- -------------
Gross profit........................ 438,556 307,051 23,231 153,757
------------- ------------- ------------- -------------
Operating expenses:
Marketing and advertising........... 98,110 822,306 888,762 150,772
Provision for bad debt.............. 300,000 1,000 - -
General and administrative.......... 4,105,320 2,849,944 3,601,339 783,651
------------- ------------- ------------- -------------
Total operating expenses.......... 4,503,430 3,673,250 4,490,101 934,423
------------- ------------- ------------- -------------
Operating loss.................... (4,064,874) (3,366,199) (4,466,870) (781,066)
Other expense (income) net............... 8,475 (175,661) (971,086) (2,092)
------------- ------------- ------------- -------------
Net loss.......................... $ (4,056,399) $ (3,541,860) $ (5,437,956) $ (783,158)
============= ============= ============= =============
Net loss attributable to
common shares................... $ (4,056,399) $ (3,541,860) $ (5,437,956) $ (783,158)
============= ============= ============= =============
Basic and diluted net loss per
common share............................ $ (.2813) $ (.15) $ (.19) $ (.04)
============= ============= ============= =============
Weighted average common
shares used in determining
net loss per share...................... 14,419,873 22,945,540 28,119,019 20,805,333
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, MARCH 31,
---------------------- ------------
1998 1999 2000
---- ---- ----
CONSOLIDATED BALANCE SHEETS DATA:
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 5,415 $ 155,063 $ 221,362
Working capital (deficiency)............................. (411,984) (1,189,834) (1,373,102)
Total assets............................................. 787,970 1,000,303 1,102,469
Long-term debt........................................... 20,753 - -
Total stockholders' equity (deficiency).................. 160,421 (623,616) (786,087)
</TABLE>
12
<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 300 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 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 stockholder of Kanakaris InternetWorks, Inc. Kanakaris
InternetWorks, Inc. is the sole stockholder 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 sales of online, downloaded and print books and other written
materials;
o movie subscription and pay-per-view fees; and
o advertising fees.
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.
We have incurred significant losses since our inception. As of March
31, 2000, we had an accumulated deficit of $13,802,096. 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.
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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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales decreased $21,390 or 17%, from $128,944 for the
three months ended March 31, 1999 to $107,554 for the three months ended March
31, 2000. The portion of net sales derived from our e-commerce businesses
increased $10,621 or 9,744%, from $109 for the three months ended March 31, 1999
to $10,730 for the three months ended March 31, 2000 due primarily to the
implementation of our merchant service system that enables us to charge and
collect access fees for our CinemaPop.com web site and advertising revenue from
our web sites. The portion of our net sales derived from the sales of our data
control console systems decreased $32,011 or 25%, from $128,835 for the three
months ended March 31, 1999 to $96,824 for the three months ended March 31,
2000. This decrease was primarily due to a decrease in sales of our OPCON
Modular System, which we believe to be a result of normal fluctuations in the
timing of orders for our products. Budget constraints and delayed receipt of
expected funding by some prospective clients have caused hold ups in placement
of orders for our OPCON Modular System. Current pending proposals expected to
become orders are in excess of $500,000. We are in the process of hiring
additional sales representation.
GROSS PROFIT (LOSS). Gross profit decreased $53,617 or 105%, from a
gross profit of $51,090 for the three months ended March 31, 1999 to a gross
loss of $2,527 for the three months ended March 31, 2000. This decrease in gross
profit was due in part to the decrease in total sales noted above, and due also
in part to the increased cost of purchasing intangible movie rights for use on
our web sites.
OPERATING EXPENSES. Total operating expenses increased $1,994,162 or
265%, from $751,576 for the three months ended March 31, 1999 to $2,745,738 for
the three months ended March 31, 2000. This increase in total operating expenses
was due primarily to an increase in consulting fees, marketing and investment
costs, and professional fees. Consulting fees increased $632,615 or 305%, from
$207,640 for the three months ended March 31, 1999 to $840,255 for the three
months ended March 31, 2000, primarily due to strategic expansion. Marketing and
investment costs increased $527,516 or 352%, from $150,071 for the three months
ended March 31, 1999 to $677,587 for the three months ended March 31, 2000,
primarily due to our initial consumer and trade advertising. Professional fees
increased $756,445 or 531%, from $142,500 for the three months ended March 31,
1999 to $898,945 for the three months ended March 31, 2000, primarily due to the
increased scope of our development, including becoming a fully reporting
company, resulting in higher legal and accounting fees. Each of these operating
expenses was paid primarily through the issuance of our common stock to the
service provider.
OTHER EXPENSE. Other expense increased $968,311, from $5,096 for the
three months ended March 31, 1999 to $973,407 for the three months ended March
31, 2000. This increase in other expense was due primarily to the financing cost
of issuing stock through convertible debentures.
NET LOSS. Net loss increased $3,016,090 or 527%, from $705,582 for the
three months ended March 31, 1999 to $3,721,672 for the three months ended March
31, 2000. This increase in net loss is due to a combination of decreased sales,
decreased gross profit, increased operating expenses, and increased other
expense, as discussed above.
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SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales decreased $155,057 or 43%, from $356,199 for the
six months ended March 31, 1999 to $201,142 for the six months ended March 31,
2000. The portion of net sales derived from our e-commerce businesses decreased
$14,207 or 56%, from $25,215 for the six months ended March 31, 1999 to $11,008
for the six months ended March 31, 2000 due primarily to a concentration on web
site development preparing for the availability of subscription, pay-per-view
and partner web programs. The portion of our net sales derived from the sales of
our data control console systems decreased $140,850 or 43%, from $330,984 for
the six months ended March 31, 1999 to $190,134 for the six months ended March
31, 2000. This decrease was primarily due to a decrease in sales of our OPCON
Modular System, which we believe to be a result of normal fluctuations in the
timing of orders for our products. Budget constraints and delayed receipt of
expected funding by some prospective clients have caused hold ups in placement
of orders for our OPCON Modular System. Current pending proposals expected to
become orders are in excess of $500,000. We are in the process of hiring
additional sales representation.
GROSS PROFIT. Gross profit decreased $130,126 or 85%, from $153,357 for
the six months ended March 31, 1999 to $23,231 for the six months ended March
31, 2000. This decrease in gross profit was due in part to the decrease in total
sales noted above, and due also in part to the increased cost of purchasing
movie rights for use on our web sites.
OPERATING EXPENSES. Operating expenses increased $3,555,678 or 480%,
from $934,423 for the six months ended March 31, 1999 to $4,490,101 for the six
months ended March 31, 2000. This increase was due primarily to an increase in
consulting fees, marketing and investment costs, and professional fees.
Consulting fees increased $1,687,095 or 772%, from $218,640 for the six months
ended March 31, 1999 to $1,905,735 for the six months ended March 31, 2000,
primarily due to strategic expansion. Marketing and investment costs increased
$737,990 or 489%, from $150,772 for the six months ended March 31, 1999 to
$888,762 for the six months ended March 31, 2000, primarily due to our initial
consumer and trade advertising. Professional fees increased $948,658 or 568%,
from $167,000 for the six months ended March 31, 1999 to $1,115,658 for the six
months ended March 31, 2000, primarily due to increased scope of our
development, including becoming a fully reporting company, resulting in higher
legal and accounting fees. Each of these operating expenses was paid primarily
through the issuance of our common stock to the service provider.
OTHER EXPENSE. Other expense increased $968,994, from $2,092 for the
six months ended March 31, 1999 to $971,086 for the six months ended March 31,
2000. This increase was due primarily to the financing cost of issuing stock
through convertible debentures.
NET LOSS. Net loss increased $4,654,798 or 694%, from $783,158 for the
six months ended March 31, 1999 to $5,437,956 for the six months ended March 31,
2000. This increase is due to a combination of decreased sales, decreased gross
profit, increased operating expenses, and increased other expense, as discussed
above.
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FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales increased $48,853 or 5.3%, from $919,905 for the year ended
September 30, 1998 to $968,758 for the year ended September 30, 1999. This
slight increase in total sales was primarily due to an increase in sales of our
OPCON Module System. The portion of net sales derived from our e-commerce
businesses decreased $58,621 or 65.3%, from $89,783 for the year ended September
30, 1998 to $31,162 for the year ended September 30, 1999 primarily due to a
shift in our focus from establishing web sites to providing downloadable
content. The portion of net sales derived from the sales of our data control
console systems increased $107,474 or 13.0%, from $830,122 for the year ended
September 30, 1998 to $937,596 for the year ended September 30, 1999.
Gross profit decreased $131,505 or 30.0%, from $438,556 for the year
ended September 30, 1998 to $307,051 for the year ended September 30, 1999. The
decrease in gross profit and corresponding decrease in gross margin from 47.7%
to 31.7% was primarily due to the purchase of intangible movie and book rights
for use on our web sites. 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.
LIQUIDITY AND CAPITAL RESOURCES
From February 25, 1997 through March 31, 2000, we funded our operations
primarily from equity investments through private placements of our securities,
including our convertible debentures, proceeds from our line of credit, and
revenue generated from our operations.
As of March 31, 2000, we had a negative working capital of $1,373,102
and an accumulated deficit of $13,802,096. As of that date, we had $221,362 in
cash and cash equivalents, $82,054 in accounts receivable, and $220,000 in a
judgment receivable. We also had accounts payable of $728,715 and $1,000,000 of
convertible debentures, of which $750,000 of the debentures were converted into
common stock in April 2000.
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Cash used in our operating activities totaled $1,431,559 for the six
months ended March 31, 2000 and $925,480 for the three months ended March 31,
2000. Cash provided by our investing activities totaled $83,859 for the six
months ended March 31, 2000 and $31,771 for the three months ended March 31,
2000.
Cash provided by our financing activities totaled $1,413,499 for the
six months ended March 31, 2000 and $972,999 for the three months ended March
31, 2000. We raised $1,413,499 of the cash provided by financing activities
during the six months ended March 31, 2000 and $972,999 of the cash provided by
financing activities during the three months ended March 31, 2000 from the
issuance of our convertible debentures.
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 February 2000, we issued $1,000,000 of our 10% Convertible
Debentures due February 1, 2001, which were accompanied by warrants to purchase
up to 300,000 shares of common stock. The net proceeds of that offering, after
the payment of finder's fees and before the payment of other related expenses,
were $870,000. In April 2000, $750,000 of the principal amount of these
debentures was converted into shares of common stock.
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In April 2000, we issued $3,000,000 of our 10% Convertible Debentures
due May 1, 2001, which were accompanied by warrants to purchase up to 900,000
shares of common stock. The net proceeds of that offering, after the payment of
finder's fees and before the payment of other related expenses, were $2,610,000.
The shares of common stock underlying the debentures and warrants are being
registered for resale by the purchasers. The debenture purchase documents
provide that the purchasers will be obligated to purchase, and we will be
obligated to issue, additional debentures in the aggregate principal amount of
$3,000,000, together with warrants to purchase an aggregate of 900,000 shares of
common stock, within 45 days following the date that the registration statement
covering the shares of common stock underlying the debentures and warrants is
declared effective by the Securities and Exchange Commission, if certain
conditions relating to the market price of our common stock are met.
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 unforeseen 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.
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.
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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 stockholder 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. On June 2, 2000, our
company changed its name to Kanakaris Wireless. Consequently, our company is a
Nevada corporation that was incorporated on November 1, 1991 and is the sole
stockholder of Kanakaris InternetWorks, Inc., and Kanakaris InternetWorks, Inc.
is the sole stockholder 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 at www.CinemaPop.com. We
have over 300 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 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 increasing revenues from these
businesses in the near future. In that regard, we anticipate deriving increased
revenues from, among other sources: sales of online, downloaded books and other
written materials; movie subscription and pay-per-view fees; and advertising
fees.
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:
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ONLINE MOVIES
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.
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.
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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 300
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.
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.
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OUR INTERNET PRODUCTS AND SERVICES
ONLINE MOVIES
We operate an online movie site, entitled "CinemaPop.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.
CinemaPop.com is a channel on our KKRS.Net entertainment web portal. More than
300 movies are currently available for online distribution. We offer
pay-per-view movies as well as advertising-supported free movies. We also sell
advertising to our web site. We charge a monthly access fee for those customers
who desire unlimited viewing access to a larger portion of our web site. We have
implemented a merchant service system that enables us to charge and collect
access fees for our CinemaPop.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 are working toward the goal of introducing our Movie Partner Program
during the third 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.
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.
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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 web site:
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.
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.
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. We anticipate that the program will be available to publishers, agents,
packagers or other persons or organizations who have the copyright to book
titles.
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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.
STRATEGIC RELATIONSHIPS
In order to expand our Internet and e-commerce businesses, we have
developed strategic relationships with various Internet, technology and software
companies and others. The following is a brief description of some of our more
important strategic relationships.
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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 CinemaPop.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 CinemaPop.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
is covering the cost of this service for a period of six months, which was
approximately $40,000 in January 2000.
Effective as of March 6, 2000, we entered into an additional Internet
content partner agreement pursuant to which Microsoft Corporation has agreed to
promote certain additional portions of our web content through March 6, 2001 as
part of the Broadband Jumpstart Initiative.
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.
iBEAM BROADCASTING CORPORATION
On March 10, 2000, we entered into a webcast distribution agreement
with iBEAM Broadcasting Corporation. iBEAM Broadcasting Corporation will
distribute and promote certain portions of our content and web sites.
DISTRIBUTION RIGHTS TO "DEAD ANGEL"
On April 20, 2000, we entered into a distribution agreement with John
Clark for the Internet distribution rights to his book "Dead Angel" which
pertains to his relationship with entertainer Jerry Garcia. Pursuant to the
agreement, we will pay $7,000 to support the completion of the book and $6,000
in expenses for promotional interviews with Cliff Garcia and others as well as a
promotional party, both of which are intended to be webcast on our web site and
made into a videotape. Also, pursuant to the agreement, John Clark has agreed to
pay to us 50% of the gross sales of the book on the Internet in perpetuity and
50% of the royalties generated by the book and the interviews and party
videotape for two years.
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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 CinemaPop.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, many movies on our web site
presently can be viewed free of charge and will remain viewable free of charge
for a limited time. This is intended to allow us to expand our customer base and
get customers in the habit of using our services while building brand awareness
and increasing the number of hits to our web site, resulting in increased sales
of our products and services. Also, we anticipate that our exclusive Partner
Program will allow authors and publishers to post books to our web site free of
charge and take advantage of the opportunity to share in revenues generated from
such posts.
As discussed more fully below, to capitalize on our business model, we
intend to initiate a more traditional marketing campaign as funds allow. Such a
campaign is likely to initially include targeted print and radio advertising and
may also include hiring marketing staff that would be primarily responsible for
communications, advertising and public relations for our data control console
business and our Internet and e-commerce businesses.
ADVERTISING AND PROMOTION
There are numerous Internet sites that frequently are 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 have placed 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.
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Alex Kanakaris, our Chairman of the Board, President and Chief
Executive Officer, is the author of a 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 sites.
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 direct-over-the-Internet movies and direct-over-the-Internet 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 sites 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 CinemaPop.com currently offers the largest
number of full-length, mainstream Hollywood movies with
Internet access at multiple access speeds.
o Most of our full-length movies 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 300 full-length films online, which are
viewable in streams from 56K 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
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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," "CinemaPop.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.
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.
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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 June 19, 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
engaged counsel to analyze the complaint and vigorously defend us against all of
Mr. Adams' claims. Although the parties have submitted their dispute for
mediation, Mr. Adams filed a motion for summary judgment in Los Angeles Superior
Court on April 28, 2000. A hearing on the motion is scheduled for July 6, 2000.
We plan to file an opposition to the motion prior to the hearing.
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 the Institutional Management affiliates,
namely Power Media Group, Pinnacle Management, Inc., and Frank Custable. In our
counterclaim and cross-claims, we have sought injunctive relief to block any
further transfer of the converted shares held by any of the aforementioned
parties, and damages for, among other things, breach of a consulting agreement,
for fraud, conversion and for unjust enrichment. We intend to vigorously pursue
all available remedies against the aforementioned parties.
Institutional Management, Pinnacle and Power Media countered by
attempting to assert claims against us in a separate action in Utah. In the Utah
action, the parties were challenging our right to block their transfer of the
stock at issue and attempting to recover for damage they claim to have suffered
in the interim. The Utah action, however, was promptly by that court stayed in
favor of the action currently pending in Illinois.
The stock at issue is in the hands of Alpha Tech and Miller, Johnson &
Kuehn, Inc., a stock brokerage firm that clears the trades of introducing
brokers. Both Alpha Tech and MJ&K filed actions for interpleader, by which they
are tendering to the court the stock certificates to which our company,
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Institutional Management and Pinnacle management are each laying claim. The
United States District Court, therefore, will hold the stock at issue until the
dispute is resolved.
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 stockholders 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.
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
Patrick McKenna................................... 32 Director
Dr. Steven A. Newman.............................. 54 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 stockholders of Kanakaris
InternetWorks, Inc., a subsidiary of our company. On August 9, 1999, a final
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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.
Patrick McKenna has served as a director since March 2000. During the
past five years, Mr. McKenna has held various positions in Seattle, Washington.
Mr. McKenna has served as national alliance manager for iBEAM Broadcasting
Corporation, an Internet broadcasting company, since March 2000. Mr. McKenna
served as a business development manager for Kiket.com, a software company, from
September 1998 to February 1999, and for Microsoft Corporation's Digital Media
Division from February 1999 to March 2000. Prior to that time, Mr. McKenna
served as a communications specialist for SJI, a telecommunications hardware
company, from December 1996 to June 1998, and as president of Global
Communications Network, an Internet telecommunications company, from December
1995 to June 1997. Mr. McKenna has a Bachelor of Arts degree in English from the
University of Washington.
Dr. Steven A. Newman has served as a director since March 2000. During
the past five years, Mr. Newman has held various positions at Xybernaut
Corporation, a computer and information technology company listed on the Nasdaq
SmallCap Market under the symbol "XYBR." Dr. Newman has been a director of
Xybernaut Corporation since January 1995, Vice Chairman of the Board of
Xybernaut Corporation since August 1997, and a consultant to Xybernaut
Corporation since January 1996. Prior to that time, Dr. Newman was the Executive
Vice President and Secretary of Xybernaut Corporation from December 1994 through
October 1995. Currently, Dr. Newman also provides business, management and
administrative and consulting services to various medical and business groups.
Dr. Newman is a graduate of Brooklyn College with a Bachelor of Arts degree and
the University of Rochester with a Doctorate degree in Medicine.
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.
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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.
2000 STOCK OPTION PLAN
Our board of directors and stockholders have approved our 2000 Stock
Option Plan (the "2000 Plan"). The 2000 Plan is designed to enable us to offer
an incentive-based compensation system to employees, officers and directors of
our company and to employees of companies who do business with our company. The
2000 Plan provides for the grant of incentive stock options ("ISOs") and
nonqualified stock options ("NQOs") (ISOs and NQOs are collectively referred to
below as "Options").
A total of 3,000,000 shares of our common stock are authorized for
issuance under the 2000 Plan. As of June 19, 2000, we had a total of 12
employees, officers and directors eligible to receive Options under the 2000
Plan, and Options to purchase up to 2,037,500 shares of our common stock were
outstanding under the 2000 Plan. Any shares of common stock that are subject to
an award but are not used because the terms and conditions of the award are not
met, or any shares which are used by participants to pay all or part of the
purchase price of any Option, may again be used for awards under the 2000 Plan.
The 2000 Plan will be administered by a committee of not less than two
nor more than five persons appointed by the board of directors, each of whom
must be a director of our company. Notwithstanding the foregoing, the board of
directors may act as the committee under the 2000 Plan. It is the intent of the
2000 Plan that it be administered in a manner such that option grants and
exercises would be "exempt" under Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The committee for the 2000 Plan currently
is comprised of Alex Kanakaris, Branch Lotspeich and John McKay.
The committee is empowered to select those eligible persons to whom
Options shall be granted under the 2000 Plan; to determine the time or times at
which each Option shall be granted, whether Options will be ISOs or NQOs, and
the number of shares to be subject to each Option; and to fix the time and
manner in which each such Option may be exercised, including the exercise price
and option period, and other terms and conditions of such Options, all subject
to the terms and conditions of the 2000 Plan. The committee has sole discretion
to interpret and administer the 2000 Plan, and its decisions regarding the 2000
Plan are final.
ISOs granted under the 2000 Plan must have an exercise price of not
less than 100% of the fair market value of the common stock on the date the ISO
is granted and must be exercised, if at all, within ten years from the date of
grant. In the case of an ISO granted to an optionee who owns more than 10% of
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the total voting securities of our company on the date of grant, such exercise
price shall be not less than 110% of fair market value on the date of grant, and
the option period may not exceed five years. NQOs granted under the 2000 Plan
must have an exercise price of not less than 85% of the fair market value of the
common stock on the date the NQO is granted.
Options may be exercised during a period of time fixed by the committee
except that no Option may be exercised more than ten years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
shares of stock acquired through the exercise of an Option may be made in cash,
shares of our common stock or a combination of cash and shares of our company's
common stock.
The 2000 Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time and from time to time by the board of
directors. The board of directors may not (i) materially impair any outstanding
Options without the express consent of the optionee or (ii) materially increase
the number of shares subject to the 2000 Plan, materially increase the benefits
to optionees under the 2000 Plan, materially modify the requirements as to
eligibility to participate in the 2000 Plan or alter the method of determining
the Option exercise price without stockholder approval. No Option may be granted
under the 2000 Plan after May 24, 2010.
Although not intended as an anti-takeover measure by the board of
directors, one of the possible effects of the 2000 Plan could be to place
additional shares, and to increase the percentage of the total number of shares
outstanding, in the hands of the directors and officers of our company. Such
persons may be viewed as part of, or friendly to, incumbent management and may,
therefore, under certain circumstances be expected to make investment and voting
decisions in response to a hostile takeover attempt that may serve to discourage
or render more difficult the accomplishment of such attempt.
In addition, Options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of the assets of
our company, or other attempted changes in the control of our company. In the
opinion of the board of directors, such an acceleration provision merely ensures
that optionees under the 2000 Plan will be able to exercise their Options as
intended by the board of directors and stockholders of our company prior to any
such extraordinary corporate transaction that might serve to limit or restrict
such right. The board of directors is, however, presently unaware of any threat
of hostile takeover involving our company.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors appointed an executive committee consisting of
three directors, Alex Kanakaris, Branch Lotspeich and John McKay. Subject to any
actions that may be taken by our full board of directors, the executive
committee has the authority to:
o Appoint officers and agents of our company and determine their
salaries;
o Borrow money, and issue bonds, notes or other obligations and
evidences of indebtedness;
o Authorize the corporate seal to be affixed to documents of our
company;
o Determine questions of general policy with regard to the
business of our company;
o Make recommendations as to declaration of dividends;
o Issue equity securities for cash, property or services
rendered, at prices no less than 40% of the last bid price on
the NASD's OTC Bulletin Board on the day prior to approval of
issuance; and
o Make loans from time to time to officers and employees of our
company and determine the amount, interest rate and due date
for the loans and whether the loans will be collateralized,
provided that no loan may result in an outstanding loan
balance of more than $300,000 at any one time (notwithstanding
any loans made prior to May 17, 2000) and provided further
that no funds received from any debenture agreement entered
into by our company during 1999 and 2000 may be used to fund
any such loans.
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As described above, the 2000 Plan will be administered by a committee
of not less than two nor more than five persons appointed by the Board of
Directors, each of whom must be a director of our company. Notwithstanding the
foregoing, the board of directors may act as the committee under the 2000 Plan.
The committee for the 2000 Plan currently is comprised of Alex Kanakaris, Branch
Lotspeich and John McKay.
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 and Bylaws, as amended and restated,
provide that our company shall, to the fullest extent permitted by Nevada
Revised Statutes section 78.751, indemnify all persons that we have power to
indemnify under that section against all expenses, liabilities or other matters
covered by that section, and that this indemnification is not exclusive of any
other indemnification rights to which those persons may be entitled.
Indemnification under this provision would be both as to action in an official
capacity and in another capacity while holding office. Indemnification would
continue as to a person who has ceased to be a director, officer, employee or
agent and would extend to the benefit of the heirs, executors and administrators
of such a person. Section 78.751 of the Nevada Revised Statutes provides that
the expenses of our officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by us 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 us.
Our Articles of Incorporation, as amended and restated, also provide
that a director of our company shall not be liable to our company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the Nevada Revised Statutes. Any amendment, modification or
repeal of this provision by our stockholders would not adversely affect any
right or protection of a director of our company in respect of any act or
omission occurring prior to the time of such amendment, modification or repeal.
The proposed amended and restated articles incorporation would not, however,
eliminate or limit a director's liability for (i) any act or omission involving
intentional misconduct, fraud or a knowing violation of law, or (ii) the payment
of unlawful distributions to stockholders. Furthermore, it would not limit
liability for claims against a director arising out of his or her role as an
officer or in any other capacity, nor would it affect the director's
responsibilities under the federal securities laws or any other law.
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.
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.
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PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of June 19, 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;
o each of our directors and our named executive officers in the
summary compensation table at page 32; and
o all executive officers and directors as group.
The following calculations of the percentages of outstanding shares are
based on 32,878,962 shares of our common stock outstanding as of June 19, 2000
(excluding an aggregate of 8,604,128 shares of common stock issuable into escrow
as security for our performance of certain obligations under the debenture
offering documents for our April private placement).
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 June 19, 2000, as described in the footnotes below. Except as stated in the
footnotes to the table, percentage of ownership is calculated pursuant to
Securities and Exchange Commission Rule 13d-3(d)(i).
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders, but we will receive
proceeds from the exercise of warrants and options to purchase common stock to
the extent that such common stock is included in the shares being offered
pursuant to this prospectus.
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<TABLE>
<CAPTION>
Shares of Class Shares of
Beneficially Class Being Shares of Class
Name and Address of Title of Owned Prior Offered Pursuant Beneficially Owned
Beneficial Owner(1) Class to this Offering to this Prospectus After this Offering(2)
----------------- ----- ------------------- ------------------ ------------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Bank Insinger de Beaufort
Heregracht 551
1017 BW Amsterdam
Netherlands...........................Common 8,235,134(3)(4) 20.50% 8,235,134(3)(4) - -
Alex F. Kanakaris.....................Common 5,873,480(5) 15.93% - 5,873,480(5) 15.93%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
New Millennium Capital Partners II, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 3,527,456(6)(4) 9.75% 3,527,456(6)(4) - -
AJW Partners, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 3,478,456(7)(4) 9.62% 3,478,456(7)(4) - -
Branch Lotspeich......................Common 2,799,976(8) 8.14% - 2,799,976(8) 8.14%
David Valenti
519 Idaho Avenue
Santa Monica, CA 90403................Common 2,053,280(9) 6.19% - 2,053,280(9) 6.19%
Equilibrium Equity, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 1,284,024(10)(4) 3.76% 1,284,024(10)(4) - -
John Robert McKay.....................Common 1,100,000(11) 3.30% - 1,100,000(11) 3.30%
Alliance Equities
12147 Northwest 9th Drive
Coral Springs, FL 33071..............Common 1,066,667(12) 3.24% 866,667(12) 200,000 *
Patrick McKenna.......................Common 250,000(13) * - 250,000(13) *
David T. Shomaker.....................Common 30,000 * - 30,000 *
Dr. Steven A. Newman..................Common - - - - -
All directors and executive
officers as a group
(6 persons)...........................Common 10,053,456(14) 25.71% - 10,053,456(14) 25.71%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
</TABLE>
---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each person in this table is
c/o Kanakaris Wireless, 3303 Harbor Boulevard, Suite F-3, Costa Mesa,
California 92626. Messrs. Kanakaris, Lotspeich and McKay are directors
and executive officers of our company. Messrs. Newman and McKenna are
directors of our company. Mr. Shomaker is Acting Chief Financial
Officer of our company. Mr. Valenti is a former director and former
employee of our subsidiary, Kanakaris InternetWorks, Inc.
(2) Assumes that all of the shares being offered are sold pursuant to this
prospectus.
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(3) Represents (a) 557,396 shares of common stock issued and outstanding
and 150,000 shares of common stock issuable upon exercise of warrants,
all of which shares are carried forward from Registration No. 333-31748
pursuant to Rule 429, (b) 390,622 shares of common stock issued and
outstanding, 2,835,052 shares of common stock issuable upon conversion
of debentures and as payment of interest thereon and 450,000 shares of
common stock issuable upon exercise of warrants and (c) 3,402,064
shares of common stock issuable upon conversion of debentures and as
payment of interest thereon and 450,000 shares of common stock issuable
upon exercise of warrants, which debentures and warrants we are
obligated to issue and the selling security holder is obligated to
purchase, if the trading price of a share of our common stock is at
least $1.75 for the ten consecutive trading days immediately preceding
the date that the registration statement of which this prospectus is a
part is declared effective.
(4) The number of shares of common stock issuable upon conversion of the
debentures and as payment of interest thereon (the "conversion shares")
is dependent in part upon the market price of the common stock prior to
a conversion and is subject to certain conversion limitations.
Consequently, the number of conversion shares included in the table for
this selling security holder represents a good faith estimate of the
number of shares of common stock issuable upon conversion of the
debentures and as payment of interest thereon and is based upon 200% of
the shares that would be issuable at an assumed conversion price of
$0.97 per share. This number exceeds the number of shares of common
stock that this selling security holder could own beneficially at any
given time through its ownership of the debentures because the
debentures may not be converted into common stock, nor may the selling
security holder receive shares in payment of interest thereon, if the
selling security 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, or if certain other conversion
limitations described below in this prospectus under the heading
"Description of 10% Convertible Debentures Due May 1, 2001" are
exceeded. In addition, conversion shares relating to debentures and
warrants that the selling security holder is obligated to purchase if
the trading price of a share of our common stock is at least $1.75 for
the ten consecutive trading days immediately preceding the date that
the registration statement of which this prospectus is a part is
declared effective have been included as beneficially owned by the
selling security holder. In these respects, beneficial ownership of
this selling security holder set forth in the table is not determined
in accordance with Rule 13d-3 under the Securities Exchange Act of
1934.
(5) Consists of 1,873,480 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 3,000,000 shares of common stock
issuable upon exercise of options.
(6) Represents (a) 242,404 shares of common stock issued and outstanding
and 75,000 shares of common stock issuable upon exercise of warrants,
all of which shares are carried forward from Registration No. 333-31748
pursuant to Rule 429, (b) 1,417,526 shares of common stock issuable
upon conversion of debentures and as payment of interest thereon and
187,500 shares of common stock issuable upon exercise of warrants and
(c) 1,417,526 shares of common stock issuable upon conversion of
debentures and as payment of interest thereon and 187,500 shares of
common stock issuable upon exercise of warrants, which debentures and
warrants we are obligated to issue and the selling security holder is
obligated to purchase, if the trading price of a share of our common
stock is at least $1.75 for the ten consecutive trading days
immediately preceding the date that the registration statement of which
this prospectus is a part is declared effective.
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<PAGE>
(7) Represents (a) 193,404 shares of common stock issued and outstanding
and 75,000 shares of common stock issuable upon exercise of warrants,
all of which shares are carried forward from Registration No. 333-31748
pursuant to Rule 429, (b) 1,417,526 shares of common stock issuable
upon conversion of debentures and as payment of interest thereon and
187,500 shares of common stock issuable upon exercise of warrants and
(c) 1,417,526 shares of common stock issuable upon conversion of
debentures and as payment of interest thereon and 187,500 shares of
common stock issuable upon exercise of warrants, which debentures and
warrants we are obligated to issue and the selling security holder is
obligated to purchase, if the trading price of a share of our common
stock is at least $1.75 for the ten consecutive trading days
immediately preceding the date that the registration statement of which
this prospectus is a part is declared effective.
(8) Consists of 1,274,976 shares of common stock issued and outstanding and
1,525,000 shares of common stock issuable upon exercise of options.
(9) Consists of 1,753,280 shares of common stock issued and outstanding and
300,000 shares of common stock issuable upon exercise of options.
(10) Represents (a) 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 and (b) 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, which debentures and warrants we are obligated to
issue and the selling security holder is obligated to purchase, if the
trading price of a share of our common stock is at least $1.75 for the
ten consecutive trading days immediately preceding the date that the
registration statement of which this prospectus is a part is declared
effective.
(11) Consists of 655,000 shares of common stock issued and outstanding and
445,000 shares of common stock issuable upon exercise of options.
(12) Includes 866,667 shares of common stock issued and outstanding that are
carried forward from Registration No. 333-84909 pursuant to Rule 429.
(13) Represents shares of common stock issuable upon exercise of options.
(14) Consists of 3,843,456 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 5,220,000 shares of common stock
issuable upon exercise of options.
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.
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<PAGE>
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other 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, which may include block
transactions, 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 or transactions to cover 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; or
o any other method permitted by applicable law
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to such prevailing market price;
o at negotiated prices; or
o such other price as the selling security holder determines
from time to time.
The shares may also be sold pursuant to Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling security
holders shall have the sole and absolute discretion not to accept any purchase
offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
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.
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<PAGE>
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.
The selling security holders, alternatively, may sell all or any part
of the shares offered in this prospectus through an underwriter. To our
company's knowledge, no selling security holder has entered into any agreement
with a prospective underwriter, and there is no assurance that any such
agreement will be entered into. If a selling security holder enters into such an
agreement or agreements, the relevant details will be set forth in a supplement
or revisions to this prospectus.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered pursuant to this prospectus will be
subject to applicable provisions of the Securities Exchange Act of 1934 and the
rules and regulations under such act, including, without limitation, Regulation
M. These provisions may restrict certain activities of, and limit the timing of
purchases and sales of any of the shares by, the selling security holders or any
other such person. Furthermore, under Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and certain other activities with respect to such securities for a
specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to
certain of the selling security holders. We have agreed to indemnify certain of
the selling security holders against specified losses, claims, damages and
liabilities, including liabilities under the Securities Act.
DESCRIPTION OF 10% CONVERTIBLE DEBENTURES DUE MAY 1, 2001
The securities being offered by certain of the selling security holders
include 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 April 2000. The debentures sold in that offering were in the
original aggregate principal amount of $3,000,000. The debentures bear an
interest rate of 10% per annum. In that transaction, we also issued five-year
warrants to purchase an aggregate of 900,000 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.
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<PAGE>
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 stockholder 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
8,604,128 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.
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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition by Kanakaris InternetWorks, Inc. of
Desience Corporation in October 1997, Mr. Lotspeich, our Vice Chairman of the
Board and Secretary, became entitled to receive 2.5% of the gross sales of
Desience Corporation. Effective as of January 1, 2000, Mr. Lotspeich voluntarily
relinquished his rights to receive a percentage of gross sales for periods after
December 31, 1999. As of March 31, 2000, $46,526 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
March 31, 2000, 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 March 31, 2000, 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 March 31, 2000, the outstanding principal
balance of this note was $10,200.
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
March 31, 1999, the outstanding principal balance of this note was $5,760.
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 March 31, 2000, the outstanding principal balance of this note was
$76,500, and the note was prepaid through May 31, 2000.
42
<PAGE>
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 March 31, 2000, the outstanding principal
balance of this note was $7,200.
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 March 31, 2000, 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 March 31, 2000, 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 March 31, 2000, 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 March 31, 2000, the
outstanding principal balance of this note was $17,500.
On December 31, 1999, we granted options to purchase up to 2,100,000
shares of common stock to Alex Kanakaris, options to purchase up to 1,200,000
shares of common stock to Branch Lotspeich and options to purchase up to 345,000
shares of common stock to John McKay, each with an exercise price of $0.52 per
share, which was the fair market value of a share of common stock on the date of
grant.
43
<PAGE>
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 was due on or before May 10, 2000. This note has been repaid in full.
On January 13, 2000, we granted options to purchase up to 300,000
shares of common stock to David Valenti with an exercise price of $1.31 per
share, which was the fair market value of a share of common stock on the date of
grant.
In April 2000, our company issued an aggregate of $3,000,000 of 10%
convertible debentures and accompanying warrants to purchase up to 900,000
shares of common stock in a private offering to four accredited investors. Each
of three of the investors, if certain conversion limitations are disregarded,
were beneficial owners of 5% or more of our outstanding shares of common stock.
The net offering proceeds were approximately $2,600,000 in cash. The debentures
are convertible into shares of common stock at the lesser of $.97 per share or
66.66% of the average closing bid price of a share of common stock during the 20
trading days immediately preceding conversion, and the warrants are exercisable
into shares of common stock at an initial exercise price of $1.90 per share. If
the trading price of a share of our common stock is at least $1.75 for the ten
consecutive trading days immediately preceding the date that the registration
statement of which this prospectus is a part is declared effective, we are
obligated to issue, and the investors are obligated to purchase, an aggregate of
$3,000,000 of additional 10% convertible debentures and accompanying warrants to
purchase up to 900,000 shares of common stock. In June 2000, we issued an
aggregate of 788,096 shares of common stock to Bank Insinger de Beaufort upon
conversion of $250,000 in principal amount plus interest on the debenture
purchased by the Bank in the April offering and $250,000 in principal amount
plus interest on a debenture purchased by the Bank in our February offering.
On May 17, 2000, Alex Kanakaris executed a promissory note in favor of
our company in the principal amount of $160,000, with interest on the unpaid
principal balance at an annual rate of 7.0%. Principal and all accrued interest
are due on or before May 16, 2001. The note is collateralized by 142,223 shares
of common stock of our company owned by Mr. Kanakaris.
On May 25, 2000, we granted non-qualified stock options to purchase
shares of common stock at $.705 per share, which was the fair market value of a
share of common stock on that date, pursuant to our 2000 Stock Option Plan to
certain officers and directors as follows: Alex Kanakaris received an option to
purchase 900,000 shares, Branch Lotspeich received an option to purchase up to
325,000 shares, John McKay received an option to purchase up to 100,000 shares,
and Patrick McKenna received an option to purchase up to 250,000 shares.
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 June 19,
2000, there were 32,878,962 shares of common stock outstanding held by
approximately 255 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.
44
<PAGE>
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 stockholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. No shares
of preferred stock presently are outstanding other than the shares of our Class
A Convertible Preferred Stock and we have no present plans to issue any
additional preferred shares. The issuance of shares of preferred stock could
adversely affect the voting power of the holders of common stock and could have
the effect of making it more difficult for a third party to acquire, or could
discourage or delay a third party from acquiring, a majority of our outstanding
stock.
CLASS A CONVERTIBLE PREFERRED STOCK
Shares of our Class A Convertible Preferred Stock rank senior to our
common stock as to dividends and distributions. The holders of outstanding
shares of Class A Preferred are entitled to receive dividends out of assets
legally available therefor at times and in amounts as the board of directors may
from time to time determine, before any dividend is paid on common stock.
Holders of Class A Preferred are entitled to twenty non-cumulative
votes per share on all matters presented to our stockholders for action, which
right 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. In addition, 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:
o amend, alter or repeal any of the preferences or rights of the
Class A Preferred;
o authorize any reclassification of the Class A Preferred;
o increase the authorized number of shares of the Class A
Preferred; or
o 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.
45
<PAGE>
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.
EXPERTS
The consolidated financial statements of Kanakaris Communications, Inc.
and subsidiaries for the years ended September 30, 1999 and 1998 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.
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.
46
<PAGE>
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 room maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the Commission at 1-800-SEC-0330. 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. Our main web site is http://www.KKRS.Net.
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
47
<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
Consolidated Balance Sheet at March 31, 2000 (unaudited)....................F-30
Consolidated Statements of Operations for the Six Months and Three Months
Ended March 31, 2000 and 1999 (unaudited)..............................F-32
Consolidated Statements of Cash Flows for the Six Months and Three Months
Ended March 31, 2000 and 1999 (unaudited)..............................F-33
Consolidated Statement of Changes in Stockholders' Equity for the
Six Months Ended March 31, 2000 (unaudited)............................F-34
Notes to Condensed Consolidated Financial Statements March 31, 2000
(unaudited).................................................................F-35
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>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 2000
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 221,362
Accounts receivable 82,054
Inventories 3,532
Advances to suppliers 700
Current maturities of notes receivable -
shareholders and related parties 61,695
Judgement receivable - current portion 83,333
Interest receivable 6,610
Prepaid expenses 9,642
--------------
TOTAL CURRENT ASSETS 468,928
--------------
Property and equipment, net of accumulated
depreciation and amortization 37,483
Other assets:
Notes receivable - shareholders and
related parties - noncurrent 123,644
Judgement receivable - noncurrent 136,667
Security deposits 700
Goodwill - net of amortization 335,047
--------------
TOTAL OTHER ASSETS 596,058
TOTAL ASSETS $ 1,102,469
==============
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 2000
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 728,715
Convertible debentures 1,000,000
Notes payable, stockholders 35,000
Due to former shareholder of subsidiary 78,315
--------------
TOTAL CURRENT LIABILITIES 1,842,030
Long-term liabilities:
Royalties payable 46,526
--------------
TOTAL LIABILITIES 1,888,556
--------------
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
Common stock, $0.001 par value; 1,000,000,000
shares authorized; 30,046,045 issued and
outstanding; 30,046
Common shares to be issued 206
Additional paid-in capital 12,977,017
Accumulated deficit (13,802,096)
Less subscription receivable
(1,260,000 shares, common) (1,260)
--------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (786,087)
--------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 1,102,469
==============
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 107,554 $ 128,944 $ 201,142 $ 356,199
Cost of sales 110,081 77,854 177,911 202,842
-------------- -------------- -------------- --------------
GROSS PROFIT (2,527) 51,090 23,231 153,357
-------------- -------------- -------------- --------------
Operating expenses:
Executive compensation 98,000 184,407 196,112 211,312
Salaries 68,515 (5,141) 112,462 48,454
Payroll taxes 15,059 3,987 26,207 6,998
Consulting fees 840,255 207,640 1,905,735 218,640
Royalties - (4,668) 2,333 8,275
Travel and entertainment 49,683 10,095 84,932 11,886
Telephone and utilities 12,801 13,270 25,453 20,184
Marketing and investment costs 677,587 150,071 888,762 150,772
Professional fees 898,945 142,500 1,115,658 167,000
Rent 3,880 5,631 11,779 14,196
Office and other expenses 1,014 9,720 18,621 24,526
Equipment rental and expense 1,266 953 2,219 2,268
Insurance 12,618 (6,394) 20,157 2,013
Depreciation and amortization 11,895 7,730 22,390 15,461
Taxes - other 3,653 214 6,053 214
Bank charges 623 665 1,284 1,328
Miscellaneous 49,944 30,896 49,944 30,896
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 2,745,738 751,576 4,490,101 934,423
-------------- -------------- -------------- --------------
Loss before interest and other income
(expense) (2,748,265) (700,486) (4,466,870) (781,066)
Financing and other income (expense), net (973,407) (5,096) (971,086) (2,092)
-------------- -------------- -------------- --------------
Net loss $ (3,721,672) $ (705,582) (5,437,956) $ (783,158)
============== ============== ============== ==============
Net loss per common share -
basic and diluted $ (.14) $ (.01) $ (.19) $ (.04)
============== ============== ============== ==============
Weighted average common shares
outstanding - basic and diluted 26,811,483 19,080,612 28,119,019 20,805,333
============== ============== ============== ==============
See accompanying notes to condensed consolidated
financial statements.
</TABLE>
F-32
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 2000 and 1999
(Unaudited)
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,437,956) $ (783,158)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of goodwill 13,256 12,117
Depreciation and amortization 9,135 3,344
Income from judgement (250,000) -
Compensation, consulting, marketing and
professional services, incurred in exchange
for common stock and treasury stock 2,857,486 365,500
Convertible debt - marketing cost 201,500 -
Convertible debt-financing costs 1,217,500 -
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable 72,056 (4,264)
Inventory (3,532) 4,629
Prepaid expenses 51,171 (6,623)
Advances to suppliers (700) (7,579)
Interest receivable (4,206) (5,408)
Increase (decrease) in:
Accounts payable and accrued expenses (204,495) 33,408
Due to former shareholder of subsidiary - 13,239
Royalties payable 46,526 -
Customer deposits 700 61,778
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (1,431,559) (313,017)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,835) (406)
Decrease in notes receivable -
shareholders and related parties 61,694 2,288
Proceeds from judgement receivable 30,000 -
-------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 83,859 1,882
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable - (2,526)
Proceeds from notes payable - stockholders 54,500 -
Payments on notes payable - stockholders (19,500) -
Proceeds from convertible debt 1,248,500 -
Proceeds from sale of common stock 180 3,369
Proceeds from sale of common stock to be issued 206 -
Proceeds from additional paid in capital 130,113 407,672
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,413,499 408,515
-------------- --------------
Net increase in cash and cash equivalents 66,299 97,380
Cash and cash equivalents, beginning of period 155,063 5,415
-------------- --------------
Cash and cash equivalents, end of period $ 221,362 $ 102,795
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 2000, the Company issued 2,124,661 shares
of common stock for consulting, marketing and professional services having a
fair value of $2,825,486.
The Company distributed 99,024 of shares of treasury stock for compensation of
$32,000.
The Company recorded a judgement receivable in the amount of $250,000 which
represented a legal settlement (see legal actions section of commitments and
contingencies notes).
See accompanying notes to condensed consolidated
financial statements.
</TABLE>
F-33
<PAGE>
<TABLE>
KANAKARIS COMMUNICATIONS, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
For the Six Months Ended March 31, 2000
(Unaudited)
<CAPTION>
Common Stock
Common Stock Issued to be issued Preferred Stock
------------------------------ ------------------------------ ------------------------------
Shares Amount Shares Amount Shares Amount
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances
September 30, 1999 25,958,050 $ 25,958 - $ - 1,000,000 $ 10,000
Stock issued for cash: 180,000 180 206,000 206 - -
Stock issued for:
Compensation - - - - - -
Consulting fees 1,741,000 1,741 - - - -
Marketing services 158,661 159 - - - -
Professional services 225,000 225 - - - -
Converted debentures 1,783,334 1,783 - - - -
Convertible debt -
financing costs - - - - - -
Net (loss) - - - - - -
-------------- -------------- -------------- -------------- -------------- --------------
BALANCES
MARCH 31, 2000 30,046,045 $ 30,046 206,000 $ 206 1,000,000 $ 10,000
============== ============== ============== ============== ============== ==============
(CONTINUED)
Accumulated Treasury Stock
APIC Deficit Stock Subscriptions Total
-------------- -------------- -------------- -------------- --------------
Balances
September 30, 1999 $ 7,907,746 $ (8,364,140) $ (201,920) $ (1,260) $ (623,616)
Stock issued for cash: 130,113 - - - 130,499
Stock issued for:
Compensation (169,920) - 201,920 - 32,000
Consulting fees 1,818,659 - - - 1,820,400
Marketing services 236,177 - - - 236,336
Professional services 768,525 - - - 768,750
Converted debentures 1,068,217 - - - 1,070,000
Convertible debt -
financing costs 1,217,500 - - - 1,217,500
Net (loss) - (5,437,956) - - (5,437,956)
-------------- -------------- -------------- -------------- --------------
BALANCES
MARCH 31, 2000 $ 12,977,017 $ (13,802,096) $ - $ (1,260) $ (786,087)
============== ============== ============== ============== ==============
See accompanying notes to condensed consolidated
financial statements.
</TABLE>
F-34
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Basis of presentation
---------------------
The condensed consolidated 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 and six months ended March 31, 2000 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
----------------------------------
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.
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. 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-35
<PAGE>
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 subsidiaries Kanakaris Internetworks, Inc. and
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".
NOTES PAYABLE
-------------
As of March 31, 2000, the Company had $35,000 of notes payable to two
stockholders. Interest accrues at 5% annually. Principal and accrued interest is
due prior to January 2001.
COMMITMENTS AND CONTINGENCIES
-----------------------------
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 increased to $1,579
a month until August 20, 2000.
F-36
<PAGE>
Legal Actions
-------------
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 to an unknown entity by named and possible
unnamed Defendants. In January of 2000, this complaint was settled for $250,000,
receivable over a 3 year period, at $5,694 per month.
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. The
case has been submitted for mediation, and a hearing is scheduled for July 6,
2000. The claim against the Company executive has been dismissed.
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 and vigorously defend the Company
against all claims. The Company has counterclaimed and commenced a third-party
action against affiliates of the Illinois Corporation. A separate action was
filed in Utah, but the Utah court stayed in favor of the action currently
pending in Illinois. The United States District Court is currently holding the
stock at issue until the dispute is resolved.
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.
F-37
<PAGE>
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 to the Company all Spanish
language, Spanish dubbed and Spanish sub-titled films for which it has internet
distribution rights. 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.
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. 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 at any time
between June 1, 1999 and December 31, 2005 and 175,000 shares at $.01, until
March 31, 2001.
F-38
<PAGE>
Service Agreements
------------------
The Company signed an agreement with ValueClick in January of 2000 whereby
ValueClick will drive advertisers to the Kanakaris web site. The Company
receives $.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 entered into an agreement with Wave Systems Corp.,
which provides the transactional capability to enable Kanakaris Communications
to implement the subscription and pay-per-view revenue collection portion of its
Internet based business plan.
On March 1, 2000, the Company entered into a one-year agreement with Sonar
Network, (a business unit of DoubleClick, Inc. "Doubleclick") to sell media
space on the Company's various web sites for the display of advertising. The
Company will receive fifty percent (50%) of the net revenues generated from the
sale of Advertisement.
Internet Data Center Services Agreements
----------------------------------------
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 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.
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.
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 infrastructure.
On March 6, 2000, the Company entered into a one year Jumpstart Program
Agreement with Microsoft whereby Microsoft will assist the Company with the
development of an audio/video enhanced Web site which delivers timely and
relevant audio/visual content. No expense or income has been recorded by the
Company 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.
F-39
<PAGE>
On March 10, 2000 the Company entered into a Webcast Distribution agreement with
iBeam Broadcasting Corporation (iBeam). iBeam will distribute and promote
certain portions of Kanakaris content and Internet web sites.
On April 20, 2000 the Company entered into a distribution agreement with John
Clark for the Internet distribution rights to his book "Dead Angel" which
pertain to Clark's relationship to Jerry Garcia. Kanakaris will pay $7,000 to
support completion of the book and $6,000 in expenses for promotional interviews
with Cliff Garcia and others as well as a promotional party to be webcast on the
Kanakaris web site and made into a videotape.
In consideration of this Clark agrees to pay to the Company in perpetuity a 50%
royalty of the gross sales of the book on the Internet and for two years to pay
to the Company 50% of all royalties generated by the book, and the interview and
party video, as well as all other ancillary rights.
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, and Buy Sell Bid On-Line Personals
co-branded services as revenue- generating and traffic-building content within
the Company's web site 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.
Letter of Intent - Financial Services
-------------------------------------
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.
F-40
<PAGE>
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 has made 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.
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
required shareholder approval. The Plan was never presented for shareholder
approval and the Plan was cancelled by a Board of Directors resolution on
December 31, 1999.
NON-QUALIFIED STOCK OPTIONS
---------------------------
On December 31, 1999 the Company granted 4,220,000 non-qualified options at a
price of $.52 which will expire on December 31, 2009. 3,645,000 options were
granted to officers and 575,000 options were granted to certain shareholders.
The option price of a share of stock was the fair market value on the day of
grant.
On January 13, 2000 the Company granted 330,000 non-qualified options to two
shareholders of the Company at a price of $1.31 which will expire on January 13,
2010. The option price of a share of stock was the fair market value on the day
of grant.
CONVERTIBLE DEBT
----------------
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 acquired $520,000 of the Company's 10%
Convertible Subordinated Debentures, due August 4, 2000.
F-41
<PAGE>
The debentures contained a contingency provision whereby, if the Company issued
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 would 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 $130,000. There is no amortization period
for these financing costs since the debentures were convertible immediately upon
issuance.
On January 5, 2000 the Company filed an amended registration statement on Form
SB-2 whereby 866,667 shares were registered for resale by Alliance Equities.
This registration statement was declared effective by the Securities and
Exchange Commission on January 11, 2000. Subsequently, these convertible
debentures were converted into common stock.
NIR GROUP - INVESTORS
---------------------
In order to provide working capital and financing for the Company's expansion,
on September 27, 1999 the Company entered into an agreement with investors
introduced by the NIR Group (the Purchaser) whereby the Purchaser acquired
$550,000 of the Company's 10% Convertible Subordinated Debentures, due September
29, 2000.
The debentures contained a contingency provision whereby, if the Company issued
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 would 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 $357,500. There is no amortization period
for these financing costs since the debentures were convertible immediately upon
issuance.
On January 5, 2000 the Company filed an amended registration statement on Form
SB-2 whereby 916,667 shares were registered for resale by the Purchaser. This
registration statement was declared effective by the Securities and Exchange
Commission on January 11, 2000. Subsequently, these convertible debentures were
converted into common stock.
In order to provide working capital and financing for the Company's expansion,
on February 4, 2000 the Company entered into an agreement with investors
introduced by the NIR Group (the Purchaser) whereby the Purchaser acquired
$1,000,000 of the Company's 10% Convertible Subordinated Debentures, due
February 1, 2001. The Purchaser also acquired warrants to purchase an aggregate
of 300,000 shares of common stock at an initial exercise price of $1.90 per
share.
F-42
<PAGE>
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. The debentures
contain 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 debentures issuance date over the conversion price, which amounted
to $925,000. There is no amortization period for these financing costs since the
debentures were convertible immediately upon issuance.
On March 3, 2000 the Company filed a registration statement on Form SB-2 whereby
2,568,046 shares were being registered for resale by the Purchaser. This
registration statement was declared effective by the Securities and Exchange
Commission on March 27, 2000. Subsequent to March 31, 2000, $750,000 of these
debentures have been converted into common stock.
SEGMENT INFORMATION
-------------------
<TABLE>
<CAPTION>
Internet Modular
Commerce Consoles Total
-------------- -------------- --------------
<S> <C> <C> <C>
For the six months ended March 31:
1999
----
Revenues $ 25,215 $ 330,984 $ 356,199
Segment profit (loss) (780,518) (2,640) (783,158)
Total assets 651,597 214,901 866,498
Additions to long-lived assets 406 - 406
Depreciation and amortization 2,244 1,100 3,344
2000
----
Revenues $ 11,008 $ 190,134 $ 201,142
Segment profit (loss) (5,393,808) (44,148) (5,437,956)
Total assets 1,030,650 71,819 1,102,469
Additions to long-lived assets 7,835 - 7,835
Depreciation and amortization 7,606 1,529 9,135
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
For the three months ended March 31:
<S> <C> <C> <C>
1999
----
Revenues $ 109 $ 128,835 $ 128,944
Segment profit (loss) (726,115) 20,533 (705,582)
Total assets 651,597 214,901 866,498
Additions to long-lived assets 309 - 309
Depreciation and amortization 2,244 550 2,794
2000
----
Revenues $ 10,730 $ 96,824 $ 107,554
Segment profit (loss) (3,697,005) (24,667) (3,721,672)
Total assets 1,030,650 71,819 1,102,469
Additions to long-lived assets 7,526 - 7,526
Depreciation and amortization 5,392 765 6,157
</TABLE>
SUBSEQUENT EVENTS
-----------------
In order to provide working capital and financing for the Company's expansion,
in April 2000 the Company entered into an agreement with investors introduced by
the NIR Group (the Purchaser) whereby the Purchaser acquired $3,000,000 of the
Company's 10% Convertible Subordinated Debentures, due May 1, 2001. The
Purchaser also acquired warrants to purchase an aggregate of 900,000 shares of
common stock at an initial exercise price of $1.90 per share. The Company is in
the process of filing a registration statement on Form SB-2 whereby the shares
of common stock underlying the debentures and warrants will be registered for
resale by the Purchaser.
On April 20, 2000 the Company entered into an agreement with Sitrick and
Company, Inc. to provide advice and public relations services to promote and
elevate the Company's profile. Under the terms of the agreement, the Company
will pay a retainer of $25,000 and 16,667 shares of common stock and two
warrants for stock, each for 16,667 shares, exercisable at $1.72 and $1.95 per
share, respectively.
Subject to shareholder approval, the Board of Directors has approved a stock
option plan (the 2000 Plan). The 2000 Plan is designed to offer an
incentive-based compensation system to employees, officers and directors of the
Company, and to employees of companies which do business with Company. The 2000
Plan provides for the grant of incentive stock options and non-qualified stock
options. A total of 3,000,000 shares of common stock are authorized for issuance
under the Plan.
F-44
<PAGE>
YEAR 2000 COMPLIANCE
--------------------
The Company is aware of the issues associated with the programming code in
existing computer systems caused by the arrival of the millennium (Year 2000).
Year 2000 issues may affect 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. 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 throughout the Year 2000.
PRO FORMA CAPITALIZATION
------------------------
The following table sets forth the capitalization of the Company as currently
specified on the Company's balance sheet as of March 31, 2000 and the pro forma
capitalization of the Company as adjusted after giving effect to the issuance of
common stock after conversion of the $3,000,000 of convertible debentures
received in April 2000 as discussed in the note for subsequent events, and after
conversion of the $1,000,000 of convertible debentures existing at March 31,
2000. In addition, the effect of the beneficial conversion feature relating to
financing costs (which affects additional paid-in capital and accumulated
deficit) has been reflected.
STOCKHOLDERS' EQUITY (DEFICIENCY) ACTUAL PRO FORMA
-------------- --------------
Preferred stock $ 10,000 $ 10,000
Common stock 30,046 34,046
Common shares to be issued 206 206
Additional paid-in capital 12,977,017 18,573,017
Accumulated deficit (13,802,096) (15,402,096)
Subscription receivable (1,260) (1,260)
-------------- --------------
Total stockholders' equity (deficiency) $ (786,087) $ 3,213,913
============== ==============
F-45
<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...............................................................6
Forward-Looking Statements.................................................10
Use of Proceeds............................................................10
Price Range of Our Common Stock............................................10
Dividend Policy............................................................11
Capitalization.............................................................11
Selected Consolidated Financial Data.......................................12
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................12
Business...................................................................19
Management.................................................................30
Principal and Selling Security Holders.....................................35
Plan of Distribution.......................................................39
Description of 10% Convertible Debentures Due May 1, 2001..................40
Certain Relationships and Related Transactions.............................42
Description of Capital Stock...............................................44
Transfer Agent and Registrar...............................................46
Legal Matters..............................................................46
Experts....................................................................46
Change in Independent Accountants..........................................46
Where You Can Find More Information........................................47
Index to Financial Statements..............................................F-1
------------------------
17,391,737 Shares
KANAKARIS WIRELESS
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 2000
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation and Bylaws, as amended and restated,
provide that our company shall, to the fullest extent permitted by Nevada
Revised Statutes section 78.751, indemnify all persons that we have power to
indemnify under that section against all expenses, liabilities or other matters
covered by that section, and that this indemnification is not exclusive of any
other indemnification rights to which those persons may be entitled.
Indemnification under this provision is both as to action in an official
capacity and in another capacity while holding office. Indemnification continues
as to a person who has ceased to be a director, officer, employee or agent and
extends to the benefit of the heirs, executors and administrators of such a
person. Section 78.751 of the Nevada Revised Statutes provides that the expenses
of our officers and directors incurred in defending a civil or criminal action,
suit or proceeding must be paid by us 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 us.
Our Articles of Incorporation, as amended and restated, also provide
that a director of our company shall not be liable to our company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the Nevada Revised Statutes. Any amendment, modification or
repeal of this provision by our stockholders would not adversely affect any
right or protection of a director of our company in respect of any act or
omission occurring prior to the time of such amendment, modification or repeal.
Our Articles of Incorporation do not, however, eliminate or limit a director's
liability for any act or omission involving intentional misconduct, fraud or a
knowing violation of law, or for the payment of unlawful distributions to
stockholders. Furthermore, they do not limit liability for claims against a
director arising out of his or her role as an officer or in any other capacity,
nor do they affect the director's responsibilities under the federal securities
laws or any other law.
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.
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 ............................. $ 4,505
NASD filing fee................................... 0
Printing and engraving expenses................... 200
Legal fees and expenses........................... 35,000
Blue Sky fees and expenses........................ 1,600
Accounting fees and expenses...................... 5,000
Miscellaneous..................................... 5,000
----------
Total....................................... $ 51,305
==========
All of the above expenses will be paid by the Registrant.
II-2
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1998, the Registrant issued an aggregate of 27,000 shares of
common stock to two accredited investors in a private offering in exchange for
$20,000 in cash.
In June 1998, the Registrant issued 1,200 shares of common stock to one
individual in a private offering in exchange for shares of Kanakaris
InternetWorks, Inc.
In June 1998, the Registrant issued 98,800 shares of common stock to
one consultant in a private offering in exchange for consulting services
rendered.
In July 1998, the Registrant issued an 75,000 shares of common stock to
one accredited investor in a private offering in exchange for cash.
In July 1998, the Registrant issued 400,000 shares of common stock to
one consultant in a private offering in exchange for consulting services
rendered.
In July 1998, the Registrant issued an aggregate of 13,313 shares of
common stock to eleven individuals in private offerings in exchange for shares
of Kanakaris InternetWorks, Inc.
In August 1998, the Registrant issued 450,000 shares of common stock to
three accredited investors in private offerings in exchange for cash.
In August 1998, the Registrant issued 40,000 shares of common stock to
one individual in a private offering in exchange for shares of Kanakaris
InternetWorks, Inc.
In December 1998, the Registrant issued an aggregate of 525,000 shares
of common stock to one accredited investor in a private offering in exchange for
$31,500 in cash.
In January 1999, the Registrant issued an aggregate of 1,711,667 shares
of common stock to two accredited investors in private offerings in exchange for
$102,700 in cash.
In January 1999, the Registrant issued 200,000 shares of common stock
to one consultant in a private offering in exchange for consulting services
rendered with an estimated value of $84,000.
In February 1999, the Registrant issued 1,130,669 shares of common
stock to one accredited investor in a private offering in exchange for $67,840
in cash.
In February 1999, the Registrant issued 100,000 shares of common stock
to one entity as consideration for the purchase of the domain name Netbook.com
with an estimated value of $106,000.
In February 1999, the Registrant issued an option to purchase up to
100,000 shares of common stock at an exercise price of $0.30 per share to one
consultant in exchange for consulting services.
II-3
<PAGE>
In March 1999, the Registrant issued an option to purchase up to
175,000 shares of common stock at an exercise price of $0.01 per share to one
consultant in exchange for consulting services.
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.
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 December 1999, the Registrant granted options to purchase up to an
aggregate of 4,220,000 shares of common stock at an exercise price of $0.52 per
share (the fair market value on the date of grant) to six individuals, including
two executive officers/directors, one director, one employee and two
consultants.
II-4
<PAGE>
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 shares 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 shares 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.
In March 2000, the Registrant issued an aggregate of 165,000 shares of
common stock to four consultants in private offerings in exchange for consulting
services with an estimated value of $990,000.
In April 2000, the Registrant issued 206,000 shares of common stock
upon partial exercise by a former employee of an option with an exercise price
of $0.25 per share.
In April 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 $112,000.
In April 2000, the Registrant issued an aggregate of $3,000,000 of 10%
convertible debentures and accompanying warrants to purchase up to 900,000
shares of common stock to four accredited investors in a private offering. The
net offering proceeds were approximately $2,600,000 in cash.
In April 2000, the Registrant issued an aggregate of 14,667 shares of
common stock, warrants to purchase up to 14,667 shares of common stock at an
initial exercise price of $1.725 and warrants to purchase up to 14,667 shares of
common stock at an initial exercise price of $1.95 to one consultant in a
private offering in exchange for consulting services.
In April 2000, the Registrant issued an aggregate of 788,730 shares of
common stock to three accredited investors upon conversion of $750,000 in
principal amount of 10% convertible debentures and interest payable on those
debentures.
In May 2000, the Registrant issued an option to purchase up to 87,500
shares of common stock at an exercise price of $1.295 per share pursuant to the
Registrant's 2000 Stock Option Plan to one consultant in connection with an
amendment to an existing consulting agreement.
II-5
<PAGE>
In May 2000, the Registrant issued to eleven employees and executives
and one non-employee director options to purchase up to an aggregate of
1,950,000 shares of common stock at an exercise price of $.705 pursuant to the
Registrant's 2000 Stock Option Plan.
In May 2000, the Registrant issued to seven individuals and four entities
an aggregate of 809,396 shares of common stock in exchange for consulting
services rendered with a value of approximately $850,964.
In June 2000, the Registrant issued an aggregate of 788,096 shares of
common stock to one accredited investor upon conversion of $500,000 in principal
amount of two 10% convertible debentures and interest payable on those
debentures.
In June 2000, the Registrant issued an aggregate of 163,120 shares to one
individual and one entity in exchange for consulting services rendered with a
value of approximately $129,680.
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-6
<PAGE>
<TABLE>
<CAPTION>
ITEM 27. EXHIBITS.
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1................................ Amended and Restated Articles of Incorporation of the
Registrant*****
3.2................................ Amended and Restated Bylaws 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 Millennium 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 Millennium 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****
4.11............................... Convertible Debenture Purchase Agreement dated as of
April 13, 2000 between the investors named therein
and the Registrant*****
4.12............................... 10% Convertible Debenture due May 1, 2001 made
by the Registrant in favor of New Millennium Capital
Partners II, LLC*****
4.13............................... 10% Convertible Debenture due May 1, 2001 made
by the Registrant in favor of AJW Partners, LLC*****
4.14............................... 10% Convertible Debenture due May 1, 2001 made
by the Registrant in favor of Bank Insinger de
Beaufort*****
II-7
<PAGE>
4.15............................... 10% Convertible Debenture due May 1, 2001 made
by the Registrant in favor of Equilibrium Equity, LLC*****
4.16............................... Stock Purchase Warrant dated as of April 13, 2000
issued by the Registrant to New Millennium Capital
Partners II, LLC*****
4.17............................... Stock Purchase Warrant dated as of April 13, 2000
issued by the Registrant to AJW Partners, LLC*****
4.18............................... Stock Purchase Warrant dated as of April 13, 2000
issued by the Registrant to Bank Insinger de
Beaufort*****
4.19............................... Stock Purchase Warrant dated as of April 13, 2000
issued by the Registrant to Equilibrium Equity, LLC*****
4.20............................... Registration Rights Agreement dated as of April 13, 2000
by and between the Registrant and the investors named
therein*****
4.21............................... Stock Escrow and Security Agreement dated as of April 13,
2000 between the Registrant, Owen Naccarato and the investors
named therein*****
4.26............................... Debenture Purchase Agreement dated as of August 5, 1999
between the Registrant and Alliance Equities*
4.27............................... Kanakaris Communications, Inc. 10% Convertible Subordinated
Debenture due August 4, 2000 made by the Registrant in
favor of Alliance Equities*
4.28............................... Registration Rights Agreement dated as of August 5, 1999
between the Registrant and Alliance Equities*
5.1................................ Opinion of Rutan & Tucker, LLP
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*
II-8
<PAGE>
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.*
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***
II-9
<PAGE>
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****
10.31.............................. Second Amendment to License Agreement dated as of May 4,
2000 by and between the Registrant and ION Systems, Inc.*****
10.32.............................. Windows Media (TM) ICP Broadband Jumpstart Program Agreement
dated as of March 6, 2000 between the Registrant and
Microsoft Corporation*****
10.33.............................. Promissory Note dated May 17, 2000 made by Alex Kanakaris
in favor of the Registrant*****
10.34.............................. Agreement for Payment of Royalties dated as of April 20, 2000
between the Registrant and John Clark*****
10.35.............................. Kanakaris Communications, Inc. 2000 Stock Option Plan*****
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 Rutan & Tucker, LLP (contained in the
opinion included as Exhibit 5.1)
24.1............................... Power of Attorney (contained on the signature page to
the initial filing of this registration statement)*****
</TABLE>
---------------
* 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.
**** Filed as an exhibit to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on March 3, 2000 (Registration No.
333-31748) and incorporated herein by reference.
***** Filed as an exhibit to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on June 12, 2000 (Registration No.
333-39102) and incorporated herein by reference.
II-10
<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-11
<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 June 29,
2000.
KANAKARIS WIRELESS
By: /S/ BRANCH LOTSPEICH
--------------------------------------
Branch Lotspeich, Vice Chairman of the
Board and Secretary
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/ * Chairman of the Board, June 29, 2000
---------------------------- President, Chief Executive
Alex F. Kanakaris Officer, and Director
(Principal Executive
Officer)
/S/ BRANCH LOTSPEICH Vice Chairman of the Board, June 29, 2000
---------------------------- Secretary and Director
Branch Lotspeich
/S/ * Acting Chief Financial June 29, 2000
---------------------------- Officer (Principal Financial
David T. Shomaker Officer)
/S/ * Director June 29, 2000
----------------------------
John Robert McKay
Director June 29, 2000
----------------------------
Dr. Steven A. Newman
Director June 29, 2000
----------------------------
Patrick McKenna
*By: /s/ Branch Lotspeich
---------------------
Branch Lotspeich
Attorney-in-Fact
</TABLE>
II-12
<PAGE>
<TABLE>
EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
5.1................................ Opinion of Rutan & Tucker, LLP
23.1............................... Consent of Weinberg & Company, P.A., independent
certified public accountants
23.2............................... Consent of Rutan & Tucker, LLP (contained in the opinion
included as Exhibit 5.1)
</TABLE>
II-13
