Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-84909
KANAKARIS COMMUNICATIONS, INC.
SUPPLEMENT DATED APRIL 20, 2000 TO PROSPECTUS DATED JANUARY 11, 2000
The prospectus of Kanakaris Communications, Inc. dated January 11, 2000
is hereby supplemented as follows:
On February 4, 2000, we issued 10% Convertible Debentures due February
1, 2001 in the aggregate principal amount of $1,000,000, with accompanying
warrants to purchase up to an aggregate of 300,000 shares of our common stock,
$.001 par value per share. The debentures and warrants were issued to three
accredited investors in a private placement transaction not involving a public
offering (the "February Offering").
The sale documents for the February Offering provided that if certain
criteria were met relating to the market price of our common stock, then the
investors would be obligated to purchase an additional $1,000,000 of debentures,
accompanied by warrants to purchase up to 300,000 shares of common stock. Such
criteria were met. However, in lieu of the sale of the additional $1,000,000 of
debentures and accompanying warrants, we negotiated an agreement to sell a
greater amount of debentures and warrants.
Pursuant to such agreement, on April 13, 2000, we issued 10%
Convertible Debentures due May 1, 2001 in the aggregate principal amount of
$3,000,000, with accompanying warrants to purchase up to an aggregate of 900,000
shares of our common stock. The debentures and warrants were issued to four
accredited investors, three of whom were the investors in the February Offering,
in a private placement transaction not involving a public offering (the "April
Offering").
The sale documents for the April Offering provide that if certain
criteria are met with regard to the market price of our common stock at the time
that a registration statement covering the securities sold in the April Offering
becomes effective, the investors will be obligated to purchase an additional
$3,000,000 of debentures, accompanied by warrants to purchase up to an
additional 900,000 shares of common stock, within 45 days following the
effective date of such registration statement.
Three of the four investors in the April Offering are included in the
Principal and Selling Security Holders table at pages 28 - 29 of our prospectus
dated January 11, 2000, based upon such investors' beneficial ownership of
securities acquired in an earlier debenture offering. Those three investors are
no longer selling security holders under our prospectus dated January 11, 2000.
Accordingly, the table has been updated to set forth beneficial ownership
information as of April 14, 2000 and is set forth below.
PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of April 14, 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 remaining selling security holder in the January 11, 2000
prospectus;
o each of our directors and our named executive officers in the
summary compensation table at page 25 of the January 11, 2000
prospectus; and
o all executive officers and directors as group.
The following calculations of the percentages of outstanding shares are
based on 31,090,775 shares of our common stock outstanding as of April 14, 2000
(excluding an aggregate of 9,894,128 shares of common stock issuable into escrow
as security for our performance of certain obligations under the debenture
offering documents for the February Offering and the April Offering).
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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 April 14, 2000, as described in the footnotes below. Percentage of ownership
is calculated pursuant to Securities and Exchange Commission Rule 13d-3(d)(i).
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holder.
<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>
Alex F. Kanakaris.....................Common 5,015,147(3) 14.67% - 5,015,147(3) 14.67%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
Bank Insinger de Beaufort
Herengtecht 551
1017 BW Amsterdam
Netherlands...........................Common 4,728,998(4) 13.26% - 4,728,998(4) 13.26%
David Valenti
519 Idaho Avenue
Santa Monica, CA 90403................Common 2,497,280(5) 7.96% - 2,497,280(5) 7.96%
Branch Lotspeich......................Common 2,474,976(6) 7.66% - 2,477,976(6) 7.66%
AJW Partners, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 1,941,430(7) 5.92% - 1,941,430(7) 5.92%
New Millenium Capital Partners II, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 1,941,430(7) 5.92% - 1,941,430(7) 5.92%
Alliance Equities
12147 Northwest 9th Drive
Coral Springs, FL 33071..............Common 1,066,667 3.43% 866,667 200,000 *
John Robert McKay.....................Common 1,000,000(8) 3.18% - 1,000,000(8) 3.18%
David T. Shomaker.....................Common 90,000(9) * - 90,000(9) *
Dr. Steven A. Newman..................Common - - - - -
Patrick McKenna.... ... ..............Common - - - - -
All directors and executive
officers as a group
(6 persons)(10).......................Common 8,580,123 24.01% - 8,580,123 24.01%
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 Communications, Inc., 3303 Harbor Boulevard, Suite F-3,
Costa Mesa, California 92626. Messrs. Kanakaris, Lotspeich and McKay
are directors and executive officers of our company. Mr. Shomaker is
Acting Chief Financial Officer of our company.
(2) Assumes that all of the shares being offered are sold pursuant to this
prospectus.
(3) Consists of 1,915,147 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 2,100,000 shares of common stock
issuable upon exercise of options.
(4) Represents 159,922 shares of common stock issued and outstanding,
3,969,076 shares of common stock issuable upon conversion of debentures
and as payment of interest thereon and 600,000 shares of common stock
issuable upon exercise of warrants. Because the number of shares of
common stock issuable upon conversion of the debentures and as payment
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of interest thereuponis dependent in part upon the market price of the
common stock prior to a conversion and is subject to certain conversion
limitations, the actual number of shares of common stock that will then
be issued in respect of such conversions or interest payments cannot be
determined at this time. The conversion limitations have been
disregarded for purposes of the table.
(5) Consists of 2,197,280 shares of common stock issued and outstanding and
300,000 shares of common stock issuable upon exercise of options.
(6) Consists of 1,274,976 shares of common stock issued and outstanding and
1,200,000 shares of common stock issuable upon exercise of options.
(7) Represents 261,404 shares of common stock issued and outstanding,
1,417,526 shares of common stock issuable upon conversion of debentures
and as payment of interest thereon and 262,500 shares of common stock
issuable upon exercise of warrants. Because the number of shares of
common stock issuable upon conversion of the debentures and as payment
of interest thereupon is dependent in part upon the market price of the
common stock prior to a conversion and is subject to certain conversion
limitations, the actual number of shares of common stock that will then
be issued in respect of such conversions or interest payments cannot be
determined at this time. The conversion limitations have been
disregarded for purposes of the table.
(8) Consists of 655,000 shares of common stock issued and outstanding and
345,000 shares of common stock issuable upon exercise of options.
(9) Includes 60,000 shares held by Haynie & Company, a certified public
accounting corporation that provides our company with certain
accounting services and of which Mr. Shomaker is a minority
shareholder. Mr. Shomaker disclaims beneficial ownership of the 60,000
shares held by Haynie & Company.
(10) Consists of 3,935,123 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 3,645,000 shares of common stock
issuable upon exercise of options.
In March 2000 we appointed two non-employee directors to our board of
directors, Patrick McKenna and Dr. Steven A. Newman.
During the past five years, Patrick McKenna has held various positions
in Seattle, Washington. Mr. McKenna has served as national alliance manager for
ibeam, an Internet broadcast 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.
During the past five years, Dr. Steven A. 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.
In addition to appointing two non-employee directors, the company's
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; and
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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.
We have become the sole beneficiary of a term life insurance policy in
the face amount of $8,000,000 covering Alex Kanakaris, our Chairman of the
Board, President and Chief Executive Officer.
The Stock Option Grants in Last Fiscal Year table and the Stock
Incentive Plan discussion at pages 25 through 26 of the January 11, 2000
prospectus are hereby deleted.
We are working toward the goal of introducing our Movie Partner Program
described in the March 27, 2000 prospectus during the second 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; and
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.
During the quarter ended December 31, 1999, the high and low closing
bid prices of our common stock were $.9375 and $.52, respectively. These
quotations reflect interdealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions. The closing price of our
common stock on April 14, 2000 was $1.20.
CAPITALIZATION
The following table sets forth our cash position and capitalization as
of December 31, 1999. The information set forth below should be read in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this prospectus.
December 31,
1999
-------------
Cash and cash equivalents......................................... $ 141,572
=============
Long-term debt.................................................... 46,526
=============
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares;
Class A Convertible Preferred Stock; issued and
outstanding 1,000,000 shares............................ 10,000
Common stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 27,520,050 shares(1)........ 27,520
Additional paid-in capital................................... 9,003,584
Treasury stock............................................... (201,920)
Stock subscriptions.......................................... (1,260)
Accumulated deficit.......................................... (10,080,424)
-------------
Total stockholders' deficiency............................. (1,242,500)
-------------
Total capitalization.............................................. $ (1,054,402)
=============
- -------------------
(1) Excludes 5,150,000 shares of common stock issuable pursuant to the exercise
of stock options outstanding as of December 31, 1999, at a weighted average
exercise price of $.55 per share, all of which were exercisable on December
31, 1999. Also excludes 1,783,334 shares of common stock issuable pursuant
to the conversion of convertible debentures outstanding as of December 31,
1999, all of which were convertible on December 31, 1999.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, related notes and other
financial information included elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal years ended September 30, 1999 and
1998 and the period from February 25, 1997 (inception) to September 30, 1997,
and the consolidated balance sheets data as of September 30, 1999, 1998 and
1997, are derived from our consolidated financial statements which have been
audited by Weinberg & Company, P.A. and are included in this prospectus. The
selected data presented below for the three month periods ended December 31,
1998 and 1999 are derived from the unaudited statements of our company included
elsewhere in this prospectus. Historical results are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
FEBRUARY 25, 1997 FISCAL YEAR ENDED THREE MONTHS ENDED
(INCEPTION) TO SEPTEMBER 30, DECEMBER 31,
SEPTEMBER 30, ----------------------------- -----------------------------
1997 1998 1999 1998 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales................................ $ 8,475 $ 919,905 $ 968,758 $ 227,255 $ 93,588
Cost of sales............................ - 481,349 661,707 124,988 67,830
------------- ------------- ------------- ------------- -------------
Gross profit........................ 8,475 438,556 307,051 102,267 25,758
Operating expenses:
Marketing and advertising........... 14,717 98,110 822,306 701 211,175
Provision for bad debt.............. - 300,000 1,000 - -
General and administrative.......... 764,774 4,105,320 2,849,944 182,146 1,533,188
------------- ------------- ------------- ------------- -------------
Total operating expenses.......... 779,491 4,503,430 3,673,250 182,847 1,744,363
------------- ------------- ------------- ------------- -------------
Operating loss.................... (771,016) (4,064,874) (3,366,199) (80,580) (1,718,605)
Other expense (income) net............... (5,135) 8,475 (175,661) 3,004 2,321
------------- ------------- ------------- ------------- -------------
Net loss.......................... $ (765,881) $ (4,056,399) $ (3,541,860) $ (77,576) $ (1,716,284)
============= ============= ============= ============= =============
Net loss attributable to
common shares................... $ (765,881) $ (4,056,399) $ (3,541,860) $ (77,576) $ (1,716,284)
============= ============= ============= ============= =============
Basic and diluted net loss per
common share............................ $ (.2733) $ (.2813) $ (.15) $ (.0040) $ (.0640)
============= ============= ============= ============= =============
Weighted average common
shares used in determining
net loss per share...................... 2,802,154 14,419,873 22,945,540 19,080,612 26,811,483
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, DECEMBER 31,
--------------------------------------------- -------------
1997 1998 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents............................. $ 53,804 $ 5,415 $ 155,063 $ 141,572
Working capital (deficiency).......................... 79,326 (411,984) (1,189,834) (1,696,627)
Total assets.......................................... 309,763 787,970 1,000,303 792,582
Long-term debt........................................ - 20,753 - 46,526
Total stockholders' equity (deficiency)............... 290,990 160,421 (623,616) (1,242,500)
</TABLE>
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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LEGAL PROCEEDINGS
On September 15, 1999, Robert Adams filed a complaint against our
company and our Chairman of the Board, President and Chief Executive Officer,
Alex Kanakaris, individually, in Los Angeles Superior Court (Case No. LC050023)
alleging breach of contract and fraud. Mr. Adams based his fraud claim primarily
on alleged misrepresentations and concealment involving a consulting agreement
between our company and Mr. Adams. Mr. Adams alleged that he is entitled to
certain stock options, of which 75% of the option price allegedly is already
deemed paid in exchange for services allegedly rendered by Mr. Adams to our
company. Mr. Adams is attempting to exercise the options for the purchase of a
certain number of shares to which he claims to be entitled pursuant to the
agreement. The claims against Mr. Kanakaris individually have been dismissed. We
have engaged counsel to analyze the complaint and vigorously defend us against
all of Mr. Adams' claims.
On October 14, 1999, Institutional Management, Inc., an Illinois
corporation, filed suit against our company and Alpha Tech Stock Transfer &
Trust Company, our stock transfer agent and registrar, in the Circuit Court of
Cook County, Illinois (Case No. 99L 011509). The case was removed to the United
States District Court for the Northern District of Illinois, Eastern Division
(Case No. 99C 7100). In the complaint, Institutional Management sought damages
in excess of $50,000 under breach of contract and various other state law
theories in connection with our unwillingness to permit them to transfer shares
of our company's common stock held by Institutional Management. We believe that
the shares were wrongfully converted by a predecessor to Institutional
Management. We have engaged counsel to vigorously defend us against all of
Institutional Management's claims.
We have also counterclaimed against Institutional Management and
commenced a third-party action against certain Institutional Management
affiliates, namely Power Media Group, Pinnacle Management, Inc., and Frank
Custable. In our counterclaim and cross-claims, we seek injunctive relief to
block any further transfer of the converted shares, and damages for, among other
things, breach of a consulting agreement, fraud, conversion and unjust
enrichment. We intend to vigorously pursue all available remedies against the
aforementioned parties. Alpha Tech has also filed an action for interpleader, by
which it is tendering to the court stock certificates that it holds and to which
the parties are laying claim. Institutional Management and our company, as
claimants, are nominal defendants therein.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are an Internet-based provider of online delivery of films and
books. Our Internet web site, www.KKRS.Net, is the portal to all of the
proprietary content and web sites of our company. Our films are accessible by
Internet users at access rates from 56K to broadband. We have over 250 on-demand
movies available with full-screen scalability and television quality. We have
over 300 books online available. The books feature re-sizable type, the ability
to turn pages without scrolling and the ability to search by word or phrase. In
addition, currently we offer other content at www.KKRS.Net, including co-branded
auctions, classified ads and personal ads.
In addition to our Internet and e-commerce businesses, we design,
manufacture and install ergonomic data control console systems for high-end
computer command centers used by governmental agencies and Fortune 500 and other
companies. Our customers include NASA, the Federal Bureau of Investigation, the
United States Navy, Bank of America, Mitsubishi and many others.
Our company is a Nevada corporation that was incorporated on November
1, 1991 and is the sole shareholder of Kanakaris InternetWorks, Inc. Kanakaris
InternetWorks, Inc. is the sole shareholder of Desience Corporation. Our common
stock is currently traded on the OTC Bulletin Board under the ticker symbol
"KKRS."
To date, substantially all of our revenues have been derived through
sales of our data control console systems. Our current business strategy
includes expansion of our data control console business and a significant
emphasis upon developing and expanding our Internet and e-commerce businesses.
In that regard, we anticipate deriving revenue from, among other sources:
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o rental and sales of online, downloaded and print books and other
written materials;
o movie subscription and pay-per-view fees;
o classified and personal ad advertising fees;
o fees based on the value of items auctioned through our Internet
Lifestyle Network; and
o sales of downloadable music.
We expect to continue to place significant emphasis upon the further
development and expansion of our Internet and e-commerce businesses. We expect
to increase our sales and marketing expenses in the near term. We intend to
increase our marketing efforts substantially in order to develop awareness and
brand loyalty for our Internet-based products and services and to generate
revenues from those who visit our Internet sites. These marketing efforts will
require a considerable effort on our part.
We also intend to continue to invest in the development of new products
and services, complete the development of our products and services currently
under development and expand our network.
We have incurred significant losses since our inception. As of December
31, 1999, we had an accumulated deficit of $10,080,424. We expect to incur
substantial operating losses for the foreseeable future. Our results of
operations have been and may continue to be subject to significant fluctuations.
The results for a particular period may vary due to a number of factors, many of
which are beyond our control, including:
o the timing and nature of revenues from our Internet and e-commerce
businesses and data control console product sales that are
recognized during any particular quarter;
o the impact of price competition on our average prices for our
products and services;
o market acceptance of new product or service introductions by us or
our competitors;
o the timing of expenditures in anticipation of future sales;
o product returns;
o the financial health of our customers;
o the overall state of the Internet and e-commerce industries and the
data control console industries; and
o economic conditions generally.
Any of these factors could cause operating results to vary
significantly from prior periods and period-to-period. As a result, we believe
that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance. Fluctuations in our operating results could cause the price of our
common stock to fluctuate substantially.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net sales decreased $133,667 or 58.8%, from $227,255 for the three
months ended December 31, 1998 to $93,588 for the three months ended December
31, 1999. This decrease in total sales was primarily due to a decrease in sales
of our OPCON Module System which the Company believes to be a result of normal
fluctuations in the timing of orders for the Company's products. The portion of
net sales derived from our e-commerce businesses decreased $24,828 or 98.9%,
from $25,106 for the three months ended September 30, 1998 to $278 for the three
months ended December 31, 1999 due to a shift in our focus from establishing web
sites to providing downloadable content. The portion of net sales derived from
the sales of our data control console systems decreased $108,839 or 53.8%, from
$202,149 for the three months ended December 31, 1998 to $93,310 for the three
months ended December 31, 1999.
Gross profit decreased $76,509 or 74.8%, from $102,267 for the year
ended December 31, 1998 to $25,758 for the three months ended December 31, 1999.
The decrease in gross profit and corresponding decrease in gross margin from
45.0% to 27.5% was primarily due to the purchase of intangible movie rights for
use on our web sites.
Total operating expenses increased $1,561,516 from $182,847 for the
three months ended December 31, 1998 to $1,744,363 for the three months ended
September 30, 1999. This increase in total operating expenses was primarily due
to a significant increase in our consulting fees from $11,000 for the three
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months ended December 31, 1998 to $1,065,480 for the three months ended December
31, 1999 and an increase in marketing and investment costs and professional fees
from $25,201 for the three months ended December 31, 1998 to $427,888 for the
three months ended December 31, 1999.
FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales increased $48,853 or 5.3%, from $919,905 for the year ended
September 30, 1998 to $968,758 for the year ended September 30, 1999. This
slight increase in total sales was primarily due to an increase in sales of our
OPCON Module System. The portion of net sales derived from our e-commerce
businesses decreased $58,621 or 65.3%, from $89,783 for the year ended September
30, 1998 to $31,162 for the year ended September 30, 1999 primarily due to a
shift in our focus from establishing web sites to providing downloadable
content. The portion of net sales derived from the sales of our data control
console systems increased $107,474 or 13.0%, from $830,122 for the year ended
September 30, 1998 to $937,596 for the year ended September 30, 1999.
Gross profit decreased $131,505 or 30.0%, from $438,556 for the year
ended September 30, 1998 to $307,051 for the year ended September 30, 1999. The
decrease in gross profit and corresponding decrease in gross margin from 47.7%
to 31.7% was primarily due to the purchase of intangible movie and book rights
for use on our web sites. During the fourth quarter of the year ended September
30, 1999, we generated net sales of $196,591. Because our cost of sales was
$204,455 during that period, we incurred a negative gross profit of $7,864. This
negative gross profit was primarily due to a significant increase in web hosting
and design costs relating to our NetBooks.com and NetMovieMania.com web sites
without a commensurate increase in our net sales.
Total operating expenses decreased $830,180, or 18.4%, from $4,503,430
for the year ended September 30, 1998 to $3,673,250 for the year ended September
30, 1999. This decrease in total operating expenses was primarily due to a
significant decrease in our consulting fees from $3,241,466 for the year ended
September 30, 1998 to $1,339,287 for the year ended September 30, 1999. This
decrease in consulting fees was primarily due to the use of stock for payment of
these costs at a lower stock value.
Other expense was $175,661 for the year ended September 30, 1999, as
compared with other income of $8,475 for the year ended September 30, 1998. The
resultant other expense was primarily due to an increase in interest and
financing expense from $0 for the year ended September 30, 1998 to $208,641 for
the year ended September 30, 1999.
Total net loss decreased $514,539 or 12.7%, from $4,056,399 for the
year ended September 30, 1998 to $3,541,860 for the year ended September 30,
1999. For the year ended September 30, 1998, our e-commerce businesses
experienced a net loss of $4,004,486 as compared with a net loss of $3,692,570
for the year ended September 30, 1999. For the year ended September 30, 1998,
our data control console business experienced a net loss of $51,913 as compared
with a net profit of $150,710 for the year ended September 30, 1999. During the
fourth quarter of the year ended September 30, 1999, we incurred a net loss of
$1,376,387 primarily due to an increase in marketing costs related to promoting
our company and its products and services, an increase in interest expense
related to our newly issued debentures, an increase in professional fees related
to the preparation of this prospectus and an increase in consulting fees.
YEAR ENDED SEPTEMBER 30, 1998 AND PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO
SEPTEMBER 30, 1997
Net sales were $919,905 and $8,475 for the year ended September 30,
1998 and the period from inception to September 30, 1997, respectively. This
significant increase in net sales was due to the acquisition of Desience
Corporation during fiscal 1998 and the inclusion of Desience Corporation's net
sales in fiscal 1998.
Gross profit increased $430,081 from $8,475 for the period from
inception to September 30, 1997 to $438,556 for the year ended September 30,
1998. This increase was due to the acquisition of Desience Corporation during
fiscal 1998 and the inclusion of Desience Corporation's net sales for fiscal
1998.
Total operating expenses increased $3,723,939 from $779,491 to
$4,503,430 partially due to the acquisition of Desience Corporation during
fiscal 1998 and the inclusion of Desience Corporation's operating expenses for
fiscal 1998. During fiscal 1998, our consulting fees were $3,241,466 as compared
with $453,841 for the period from inception to September 30, 1997. This increase
in consulting fees was due to recording the stock issued for consulting services
8
<PAGE>
as an expense using the fair value of the stock as of the date of issue, which
value was significantly higher in 1998 than in 1997.
LIQUIDITY AND CAPITAL RESOURCES
From February 25, 1997 through December 31, 1999, we funded our
operations primarily from equity investments through private placements of our
securities, including our convertible debentures, proceeds from our line of
credit and revenue generated from our operations.
As of December 31, 1999, we had a negative working capital of
$1,696,627 and an accumulated deficit of $10,080,424. As of that date, we had
$141,572 in cash and cash equivalents and $46,428 in accounts receivable. We
also had obligations under our debentures in the amount of $957,500.
Cash used in our operating activities totaled $506,079 for the three
months ended December 31, 1999 as compared to $40,908 for the three months ended
December 31, 1998. Cash provided by our investing activities totaled $52,088 for
the three months ended December 31, 1999 as compared to no cash provided by our
investing activities for the three months ended December 31, 1998.
Cash provided by our financing activities was $440,500 for the three
months ended December 31, 1999. $337,500 of that amount was raised through the
issuance of our debentures. Cash provided by our financing activities was
$57,125 for the three months ended December 31, 1998.
On February 25, 1999, we obtained a $5,000,000 revolving line of credit
from Alliance Equities. On April 7, 1999, this line of credit was increased to
$7,000,000. The February 25, 1999 agreement memorializing our arrangement with
Alliance Equities provides that a definitive agreement is to be negotiated
within seven days of that date. Prior to December 10, 1999, the parties had not
finalized a definitive agreement and had operated under the February 25, 1999
agreement as amended by the April 7, 1999 amendment. On December 10, 1999, the
parties executed a definitive agreement relating to the revolving line of
credit. The agreement provides that our company may draw up to $500,000 per
month on the line of credit, up to a maximum aggregate borrowing of $7,000,000.
Interest accrues at the rate of 10% per annum, with unpaid principal and accrued
interest due at maturity on December 10, 2001, unless the line of credit is
terminated earlier by mutual agreement of the parties upon 30 days' prior
written notice, is prepaid by us or is converted into shares of our common stock
by us, by the lender or automatically upon the happening of certain events.
At any time or times prior to maturity, our company may convert any
portion of the unpaid principal balance into shares of our common stock, or the
lender may convert up to 50% of the unpaid principal balance, at a conversion
price equal to the average market price for our common stock for the 30 days
prior to the conversion. The unpaid principal balance of the line of credit is
automatically convertible into shares of our common stock if we fail to pay the
unpaid principal and interest due at maturity, at a conversion price equal to
the average market price for our common stock for the 30 days prior to the
conversion. Alternatively, the unpaid principal balance of the line of credit is
automatically convertible into shares of our common stock if we close a
financing in which the aggregate gross proceeds received by us equal or exceed
$7,000,000, in which case a total of 50% of the entire original line of credit
amount (which is the aggregate of amounts previously converted at that time plus
non-converted amounts equaling a maximum of 50% of the entire original line of
credit amount) will be converted at a conversion price equal to the average
market price of our common stock as exists thirty days prior to such automatic
conversion.
In January 2000, our convertible debentures that were outstanding as of
December 31, 1999 were converted into an aggregate of 1,783,334 shares of our
common stock. In addition, during February 2000 we issued $1,000,000 of our 10%
Convertible Subordinated Debentures due February 1, 2001. The net proceeds of
that offering, after the payment of finder's fees and before the payment of
other related expenses, was $870,000.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our revolving line of credit with Alliance Equities, will be adequate
to meet our anticipated working capital and capital expenditure requirements for
at least the next 12 months. If, however, our capital requirements or cash flow
vary materially from our current projections or if 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.
9
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheet at December 31, 1999 (unaudited).................F-1
Consolidated Statements of Operations for the Three Months Ended
December 31, 1999 and 1998 (unaudited).................................F-3
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 (unaudited).................................F-4
Consolidated Statement of Changes in Stockholders' Equity for the
Three Months Ended December 31, 1999 (unaudited).......................F-6
Notes to Consolidated Financial Statements December 31, 1999 (unaudited)....F-7
10
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 141,572
Accounts receivable 46,428
Inventories 250
Advances to suppliers 700
Current maturities of notes receivable -
shareholders and related parties 61,695
Interest receivable 4,807
Prepaid expenses 36,477
-------------
TOTAL CURRENT ASSETS 291,929
-------------
Property and equipment, net of accumulated
depreciation and amortization 37,144
-------------
Other assets:
Notes receivable - shareholders and
related parties - noncurrent 123,644
Organization costs - net 1,300
Security deposits 700
Goodwill - net of amortization 337,865
-------------
TOTAL OTHER ASSETS 463,509
-------------
TOTAL ASSETS $ 792,582
=============
F-1
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 908,778
Convertible debentures 957,500
Notes payable 35,000
Due to former shareholder of subsidiary 74,441
Other accrued liabilities 12,837
-------------
TOTAL CURRENT LIABILITIES 1,988,556
Long-term liabilities:
Royalties payable 46,526
-------------
TOTAL LIABILITIES 2,035,082
-------------
Stockholders' (deficiency) equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; 1,000,000 Class A Convertible issued
and outstanding 10,000
Common stock, $0.001 par value; 100,000,000
shares authorized; 27,520,050 issued and
outstanding 27,520
Additional paid-in capital 9,003,584
Accumulated deficit (10,080,424)
Less subscription receivable
(1,260,000 shares, common) (1,260)
Less cost of treasury stock
(99,024 shares, common) (201,920)
-------------
TOTAL STOCKHOLDERS' (DEFICIENCY) EQUITY (1,242,500)
-------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIENCY) EQUITY $ 792,582
=============
F-2
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 93,588 $ 227,255
Cost of sales 67,830 124,988
------------- -------------
GROSS PROFIT 25,758 102,267
------------- -------------
Operating expenses:
Executive compensation 98,112 26,905
Salaries 42,325 53,595
Employee benefits 1,622 -
Payroll taxes 11,148 3,011
Consulting fees 1,065,480 11,000
Royalties 2,333 12,943
Travel and entertainment 35,249 1,791
Telephone and utilities 12,652 6,914
Marketing and investment costs 211,175 701
Professional fees 216,713 24,500
Rent 7,899 8,565
Office and other expenses 17,607 14,806
Equipment rental and expense 953 1,315
Insurance 7,539 8,407
Depreciation and amortization 10,495 7,731
Taxes - other 2,400 -
Bank charges 661 663
------------- -------------
TOTAL OPERATING EXPENSES 1,744,363 182,847
------------- -------------
Loss before interest and other income (1,718,605) (80,580)
Interest and other income 2,321 3,004
------------- -------------
Net loss $ (1,716,284) $ (77,576)
============= =============
Net loss per common share -
basic and diluted $ (.06) $ (.01)
============= =============
Weighted average common shares
outstanding - basic and diluted 26,811,483 19,080,612
============= =============
</TABLE>
F-3
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,716,284) $ (77,576)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of goodwill 6,563 6,059
Depreciation and amortization 3,932 1,672
Consulting, incurred in exchange for common stock 1,029,400 -
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable 107,832 7,582
Inventory (250) (2,084)
Prepaid expenses 24,336 (1,390)
Advances to suppliers (700) 7,139
Interest receivable (2,403) (3,004)
Increase (decrease) in:
Accounts payable and accrued expenses (24,432) 13,708
Royalties payable 53,240 15,785
Customer deposits - (5,983)
Other current liabilities 12,837 26
------------- -------------
Net cash used in operating activities (506,079) (40,908)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,306) -
Decrease in notes receivable -
shareholders and related parties 61,694 -
Decrease in security deposits 700 -
------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 52,088 -
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) notes payable 35,000 (2,275)
Proceeds from convertible debt 337,500 59,400
Proceeds from sale of common stock 136 -
Proceeds from additional paid in capital 67,864 -
------------- -------------
TOTAL FROM FINANCING ACTIVITIES 440,500 57,125
------------- -------------
</TABLE>
F-4
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Net (decrease) increase in cash
and cash equivalents $ (13,491) $ 16,217
Cash and cash equivalents, beginning of period 155,063 5,415
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 141,572 $ 21,632
============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended December 31, 1999, the Company issued 1,426,000
shares of common stock for consulting services having a fair value of
$1,029,400.
F-5
<PAGE>
<TABLE>
<CAPTION>
KANAKARIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
Common Stock Preferred Stock Additional
-------------------- ------------------- Paid-In Accumulated Treasury Stock
Shares Amount Shares Amount Capital Deficit Stock Subscriptions Total
---------- -------- --------- -------- ----------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
September 30, 1999 25,958,050 $ 25,958 1,000,000 $ 10,000 $ 7,907,746 $ (8,364,140) $ (201,920) $ (1,260) $ (623,616)
Stock issued for
cash: 136,000 136 - - 67,864 - - - 68,000
Stock issued for:
Consulting fees 1,401,000 1,401 - - 1,009,249 - - - 1,010,650
Professional
services 25,000 25 - - 18,725 - - - 18,750
Net (loss) for the
three months ended
December 31, 1999 - - - - - (1,716,284) - - (1,716,284)
---------- -------- --------- -------- ----------- ------------- ----------- ------------- -------------
BALANCES
DECEMBER 31, 1999 27,520,050 $ 27,520 1,000,000 $ 10,000 $ 9,003,584 $(10,080,424) $ (201,920) $ (1,260) $ (1,242,500)
========== ======== ========= ======== =========== ============= =========== ============ =============
F-6
</TABLE>
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Basis of presentation
- ---------------------
The condensed financial statements included herein have been prepared by
Kanakaris Communications, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes that the disclosures are adequate to make the information presented not
misleading when read in conjunction with the Company's financial statements for
the year ended September 30, 1999. The financial information presented reflects
all adjustments, which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The results of
operations for the three months ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full year ending September 30,
2000, or any other period.
Business Organization and Activity
- ----------------------------------
The Company was incorporated in the State of Nevada on November 1, 1991. The
Company develops and supplies internet products, for electronic commerce, and
operates a subsidiary which designs and installs modular consoles.
Business Combinations
- ---------------------
On October 10, 1997 (the "Acquisition Date"), Kanakaris InternetWorks, Inc.
("KIW") consummated a Stock Purchase Agreement with the shareholder (the
"Seller") of Desience Corporation ("Desience") to purchase 10,000 common shares
representing 100% of its issued and outstanding common stock in exchange for a
4% royalty on the gross sales (after collection) of Desience subsequent to the
acquisition date, to be paid monthly for as long as Desience remains in business
or its products are sold. Pursuant to APB 16, since the seller has no continuing
affiliation with the Company, the 4% royalty is accounted for as an increase to
goodwill at the date the amount is determinable. In addition, the Seller shall
receive five percent of funds which are to be allocated to Desience arising from
KIW's next securities offering as a non-refundable advance on the royalty. KIW
will hold harmless the Seller from any claims, causes of action, costs,
expenses, liabilities and prior shareholder advances. Immediately following the
exchange, Desience became a wholly-owned subsidiary of KIW.
F-7
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
On November 25, 1997, KIW and its stockholders (the ("Stockholders") consummated
an acquisition agreement with Big Tex Enterprises, Inc. ("Big Tex"), an inactive
public shell with no recent operations at that time, whereby the shareholders
sold all of their preferred and common stock, which represented 100% of KIW's
issued and outstanding capital stock, to Big Tex in exchange for 7,000,000
shares (6,000,000 common, 1,000,000 preferred) of Big Tex's restricted stock,
representing 66.67% of the issued and outstanding common stock and 100% of the
issued and outstanding preferred stock of Big Tex, aggregating 75% of the total
voting rights (the "Exchange"). Big Tex was founded in 1991 for the purpose of
lawful business or enterprise, but had been inactive since 1991. Immediately
following the exchange, the Company changed its name to Kanakaris
Communications, Inc.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiary Kanakaris InternetWorks, Inc., and
Kanakaris InternetWorks, Inc.'s wholly-owned subsidiary, Desience Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Earnings Per Share
- ------------------
Earnings per share are computed using the weighted average of common shares
outstanding as defined by Financial Accounting Standards No. 128, "Earnings Per
Share".
Note Payable
- ------------
As of December 31, 1999, the Company had a $35,000 note payable to an officer.
Interest accrues at 5% annually. Principal and accrued interest due January
2002.
Letters of Intent
- -----------------
On November 1, 1999 the Company signed a Memorandum of Understanding with
SyCoNet.Com, Inc. ("SyCoNet"). SyCoNet will make available all properties which
it has internet online distribution rights to, both now and in the future, for
direct over-the internet delivery by the Company. The Company will incur
encoding and bandwidth charges for those properties which it exercises its
option to deliver over the internet, and will pay SyCoNet 70% of the online
access gross fees and 25% of the product specific gross advertising fees
pertaining to this product.
On November 9, 1999, the Company signed a Memorandum of Understanding with Lain
International ("Lain"). Lain will make available all Spanish language, Spanish
dubbed and Spanish sub-titled films for which it has internet distribution
rights to the Company. The Company will create a KKRS web channel devoted
exclusively to these titles. The Company will maintain web visit status,
accounting, and will pay Lain its royalties on at least a quarterly basis, an
amount of 50% of the gross share of advertising, subscription and pay-per-view
fees for the channel devoted to Lain films, minus 50% of encoding, bandwidth and
advertising charges.
F-8
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Internet Data Center Services Agreements
- ----------------------------------------
On November 17, 1999, and effective December 7, 1999, the Company entered into
an agreement with Microsoft Corporation ("Microsoft"). Microsoft will assist the
Company with the development of an audio/video enhanced Website which delivers
timely and relevant audiovisual content using Windows Media Technologies in a
broadband network intrastructure.
On October 21, 1999, the Company entered into an agreement with eConnect to
enter into a joint venture and strategic alliance to be called Internet Cash
Programming (ICP). ICP will provide the consumer with the ability to purchase
programming by Same-as-Cash, or by Enhanced Credit Card payments. ICP will be
formed as a Nevada Corporation and will authorize 1,000,000 shares of stock of
which the Company will receive 400,000 shares and eConnect will receive 400,000
shares. It is anticipated that the Company will have managing control of ICP.
Subsequent Events
- -----------------
In 1999, the Company filed a complaint in the Los Angeles Superior Court against
its former securities attorney. In January of 2000, the complaint was settled
for $250,000 receivable over a 3 year period of which $30,000 has been received.
All amounts due on this matter were reserved as uncollectable as of September
30, 1999.
In January 2000, holders of all of the Company's then outstanding 10%
Convertible Subordinated Debentures converted their debentures into an aggregate
of 1,783,334 shares of the Company's common stock.
The Company signed an agreement with ValueClick in January of 2000 whereby
ValueClick will drive advertisers to the Kanakaris web site. The Company will
receive $.20 each time a customer clicks on a ValueClick-served ad. The Company
will also receive $.03 per click whenever a customer clicks on a KKRS-referred
web site.
In February 2000, the Company issued $1,000,000 of its 10% Convertible
Subordinated Debentures due February 1, 2001 to three accredited investors. Net
proceeds to the Company after the payment of finders' fees and prior to the
payment of any other related offering expenses was $870,000.
In February 2000, the Company entered into an agreement with Wave Systems Corp.,
which provides the transactional capability to enable the Company to implement
the subscription and pay-per-view revenue collection portion of its
Internet-based business plan.
F-9
<PAGE>
KANAKARIS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
Segment Information
- -------------------
For The Three Months Ended December 31
Internet Modular
Commerce Consoles Total
------------ ------------ -------------
1999
Revenues $ 278 $ 93,310 $ 93,588
Segment Profit (Loss) (1,696,803) (19,481) (1,716,284)
Total Assets 666,243 126,339 792,582
Additions To Long-
Lived Assets 9,724 582 10,306
Depreciation And 9,730 765 10,495
Amortization
1998
Revenues $ 25,106 $ 202,149 $ 227,255
Segment Profit (Loss) (54,403) (23,173) (77,576)
Total Assets 638,946 155,326 794,272
Additions To Long- - - -
Lived Assets
Depreciation And 7,181 550 7,731
Amortization
F-10
