<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-31748
KANAKARIS COMMUNICATIONS, INC.
SUPPLEMENT DATED MAY 12, 2000 TO PROSPECTUS DATED MARCH 27, 2000
The prospectus of Kanakaris Communications, Inc. dated March 27, 2000,
as previously supplement by Supplement dated April 18, 2000, is hereby further
supplemented to include information from the quarterly report on Form 10-QSB
filed with the Securities and Exchange Commission by Kanakaris Communications,
Inc. on May 12, 2000:
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.
1
<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.
2
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<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>
3
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<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
============== ==============
4
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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>
5
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<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>
6
<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.
7
<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.
8
<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.
9
<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.
10
<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.
11
<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.
12
<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.
13
<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.
14
<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>
15
<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.
16
<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
============== ==============
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this supplement contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
and we intend that such forward-looking statements be subject to the safe
harbors created thereby.
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.
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.
The information contained in this report is not a complete description
of our business or the risks associated with an investment in our company's
common stock. Before deciding to buy or maintain a position in our common stock,
you should carefully review and consider the various disclosures made by us in
this report and in other materials we have filed with the Securities and
Exchange Commission, including our Form SB-2 dated March 24, 2000 (and, in
particular, in the "Risk Factors" section therein), that discusses our business
in greater detail and that also discloses various risks, uncertainties and other
factors that may affect our business, results of operations or financial
condition.
Assumptions relating to the forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions, all of which are difficult or impossible to predict
accurately, and many of which are beyond our control. In addition, our business
and operations are subject to significant risks which increase the uncertainty
inherent in the forward-looking statements. In light of this, the inclusion of
forward-looking information should not be regarded as a representation or
guarantee by us or any other person that our objectives or plans will be
achieved.
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.
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<PAGE>
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.
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
19
<PAGE>
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.
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.
20
<PAGE>
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.
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.
21
<PAGE>
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.
LEGAL PROCEEDINGS
On August 5, 1999, we filed a complaint in Los Angeles Superior Court
against our former securities attorney, Shawn Hackman, and 20 unnamed
defendants, claiming damages for breach of contract, conversion, fraud and
deceit and negligence. The complaint arose out of the alleged transfer by the
defendants of certain funds without our authorization to an unknown entity. In
January 2000, this suit was settled for $250,000, payable to us in monthly
installments of $5,694 per month over a three-year period.
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.
22
<PAGE>
On October 14, 1999, Institutional Management, Inc., an Illinois
corporation, filed suit against our company and Alpha Tech Stock Transfer &
Trust Company, our stock transfer agent and registrar, in the Circuit Court of
Cook County, Illinois (Case No. 99L 011509). The case was removed to the United
States District Court for the Northern District of Illinois, Eastern Division
(Case No. 99C 7100). In the complaint, Institutional Management sought damages
in excess of $50,000 under breach of contract and various other state law
theories in connection with our unwillingness to permit them to transfer shares
of our company's common stock held by Institutional Management. We believe that
the shares were wrongfully converted by a predecessor to Institutional
Management. We have engaged counsel to vigorously defend us against all of
Institutional Management's claims.
We have also counterclaimed against Institutional Management and
commenced a third-party action against 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, 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.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended March 31, 2000, we made the following
issuances of unregistered securities:
In January 2000, we 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, we issued an aggregate of 1,783,334 shares of common
stock to four accredited investors upon conversion of 10% convertible
debentures.
In January 2000, we granted options to purchase up to an aggregate of
250,000 shares of common stock at an exercise price of $0.25 per share to a
former employee. In addition, we issued 14,000 shares of common stock upon
partial exercise of the option.
In January 2000, we granted options to purchase up to an aggregate of
330,000 shares of common stock at an exercise price of $1.31 per share (the
fair market value on the date of grant) to two individuals.
In February 2000, we 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, we 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, we 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.
23
<PAGE>
In March 2000, we 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.
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.
24
