Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-39102
KANAKARIS WIRELESS
SUPPLEMENT DATED JANUARY 16, 2001 TO PROSPECTUS DATED JULY 5, 2000
The prospectus of Kanakaris Wireless dated July 5, 2000, as
supplemented August 15, 2000, is hereby further supplemented to include
information from the annual report on Form 10-KSB filed with the Securities and
Exchange Commission by Kanakaris Wireless on January 16, 2001 and to include
other updated information.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider, among other things, the following factors carefully before
deciding to purchase any shares of our common stock.
WE HAVE INCURRED OPERATING LOSSES, EXPECT CONTINUED LOSSES AND MAY NOT ACHIEVE
PROFITABILITY. IF WE CONTINUE TO LOSE MONEY, WE MAY HAVE TO CURTAIL OUR
OPERATIONS.
Our consolidated financial statements have been prepared assuming we
will continue as a going concern. We have not been profitable and we may
continue to lose money for the foreseeable future. Historically, we have
incurred losses and experienced negative cash flow. As of September 30, 2000, we
had an accumulated deficit of $21,340,846. We may continue to incur losses and
may never achieve or sustain profitability. An extended period of losses and
negative cash flow may prevent us from operating and expanding our business,
especially our Internet-based business.
OUR COMMON STOCK IS SUBJECT TO SUBSTANTIAL DILUTION, AND WE MAY NEED AND BE
UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY TERMS, WHICH COULD FURTHER
DILUTE OUR STOCKHOLDERS OR IMPOSE BURDENSOME FINANCIAL RESTRICTIONS ON OUR
BUSINESS
Historically, we have relied upon cash from financing activities and
revenues generated from operations to fund all of the cash requirements of our
company's activities. We have not been able to generate any significant cash
from our operating activities in the past and cannot assure you that we will be
able to do so in the future. As a result, we have issued securities that are
convertible into or exercisable for a substantial number of shares of our common
stock. We may also require additional financing. This may not be available on a
timely basis, in sufficient amounts or on terms acceptable to us. This financing
may also further dilute existing stockholders' equity. Any debt financing or
other financing of securities senior to common stock will likely include
financial and other covenants that will restrict our flexibility. At a minimum,
we expect these covenants to include restrictions on our ability to pay
dividends on our common stock. Any failure to comply with these covenants would
have a material adverse effect on our business, prospects, financial condition
and results of operations.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS
Our strategy envisions a period of rapid growth that may put a strain
on our administrative and operational resources. While we believe that we have
established an infrastructure to support growth, our ability to effectively
manage growth will require us to continue to expand the capabilities of our
operational and management systems and to attract, train, manage and retain
qualified engineers, technicians, salespersons and other personnel. There can be
no assurance that we will be able to do so. If we are unable to successfully
manage our growth, our business, prospects, financial condition and results of
operations could be adversely affected.
<PAGE>
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT IN
LITIGATION AGAINST US
There is currently an extremely limited trading market for our common
stock. Our common stock trades on the OTC Bulletin Board under the symbol
"KKRS." There can be no assurance that any regular trading market for our common
stock will develop or, if developed, will be sustained. The trading prices of
our common stock could be subject to wide fluctuations in response to:
o quarter-to-quarter variations in our operating results;
o material announcements of technological innovations;
o price reductions;
o significant customer orders or establishment of strategic
partnerships by us or our competitors or providers of
alternative products and services;
o general conditions in the Internet, e-commerce and data
control console industries; or
o other events or factors, many of which are beyond our control.
In addition, the stock market as a whole and individual stocks have
experienced extreme price and volume fluctuations, which have often been
unrelated to the performance of the related corporations. Our operating results
in future quarters may be below the expectations of market makers, securities
analysts and investors. In any such event, the price of our common stock will
likely decline, perhaps substantially. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to our
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our business, prospects, financial condition and results of operations. Any
adverse determination in such litigation could also subject us to substantial
liabilities.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.
WE RELY HEAVILY ON OUR KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Alex Kanakaris. The loss of Mr. Kanakaris could have a
material adverse effect on our company. We are the sole beneficiary of a term
life insurance policy in the face amount of $8,000,000 covering Mr. Kanakaris.
We have not entered into any employment agreement with Mr. Kanakaris or any
other officer of our company.
<PAGE>
ALTHOUGH INTERNET COMMERCE HAS YET TO ATTRACT SIGNIFICANT REGULATION, GOVERNMENT
REGULATION MAY RESULT IN FINES, PENALTIES, TAXES OR OTHER COSTS OR CONSEQUENCES
THAT MAY REDUCE OUR FUTURE EARNINGS
The United States Congress has recently passed or is considering
legislation regulating certain aspects of the Internet, including online
content, copyright infringement, user privacy, taxation, access charges, digital
signatures and liability for third-party activities. The European Union also has
enacted several directives relating to the Internet, including directives that
address the use of personal data, e-commerce activities, security, commercial
piracy, consumer protection and taxation of e-commerce transactions. Various
states have adopted and are considering Internet-related legislation and
regulations. Governmental authorities in the United States and abroad are
considering other legislative and regulatory proposals to further regulate the
Internet. Areas of potential regulation include libel, pricing, quality of
products and services and intellectual property ownership. We cannot predict
what new laws will be enacted, or how courts will interpret existing and new
laws, and therefore are uncertain as to how new laws or the application of
existing laws will affect our business. In addition, our business may be
indirectly affected by legislation that affects the ability of our customers to
engage in e-commerce activities. Increased regulation of the Internet may
decrease the growth in the use of the Internet, which could decrease the demand
for our products and services, increase our cost of doing business or otherwise
harm our business, results of operations and financial condition.
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary technology and
intellectual property rights. We do not hold any patents. However, we believe
that some of our proprietary technologies, including our CinemaWEAR(TM) Encoding
technology, our CinemaWEAR(TM) Wireless Delivery technology and our Embedded
Electronic Commerce(TM) technology, could benefit from patent protection.
Accordingly, we intend to file patent applications for those technologies with
the United States Patent and Trademark Office. There can be no assurance that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop comparable or superior technologies
or obtain unauthorized access to our proprietary technologies.
We own, license or have otherwise obtained the right to use certain
technologies incorporated into our web sites. We may receive infringement claims
from third parties relating to our technologies. In such event, we intend to
investigate the validity of any such claims and, if we believe the claims have
merit, we intend to respond through licensing or other appropriate actions.
Certain of these claims may relate to technology that we have licensed from
third parties for incorporation into our web sites. In such event, we would
forward these claims to the appropriate third party. If we were unable to
license or otherwise provide any necessary technology on a cost-effective basis,
we could be prohibited from using that technology, incur substantial costs in
redesigning our web sites that incorporate that technology, or incur substantial
costs defending any legal action taken against us, all of which could have a
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.
We hold the Internet domain names "KKRS.Net," "WordPop.com,"
"NetBooks.com," "CinemaPop.com" and many others. Under current domain name
registration practices, no one else can obtain an identical domain name, but
someone might obtain a similar name, or the identical name with a different
suffix, such as ".org", or with a country designation. The regulation of domain
names in the United States and in foreign countries is subject to change, and we
could be unable to prevent third-parties from acquiring domain names that
infringe or otherwise decrease the value of our domain names.
<PAGE>
IF COMMUNICATIONS TO OUR PRIMARY SERVERS ARE INTERRUPTED, OUR OPERATIONS COULD
BE NEGATIVELY IMPACTED
Our movies and general KKRS.Net web site are hosted on servers owned
and operated by LMKI in Rancho Santa Margarita, California and by iBEAM
Broadcasting Corporation in Sunnyvale, California. Our WordPop.com web site
presently is hosted on a server owned and operated by Earthlink but may in the
future be hosted on the third-party server in Rancho Santa Margarita,
California. Although offsite backup servers are maintained by our hosts, all of
our primary servers are vulnerable to interruption by damage from fire, flood,
power loss, telecommunications failure, break-ins and other events beyond our
control. We have, from time to time, experienced periodic systems interruptions
and anticipate that these interruptions will occur in the future. If we
experience significant system disruptions, our business, results of operations
and financial condition would be materially adversely affected. We do not
maintain business interruption insurance.
OUR COMPUTER INFRASTRUCTURE MAY SUFFER SECURITY BREACHES. ANY SUCH BREACHES
COULD JEOPARDIZE CONFIDENTIAL INFORMATION TRANSMITTED OVER THE INTERNET, CAUSE
INTERRUPTIONS IN OUR OPERATIONS OR CAUSE US TO HAVE LIABILITY TO THIRD PARTIES
We rely on technology that is designed to facilitate the secure
transmission of confidential information. Our computer infrastructure is
potentially vulnerable to physical or electronic computer break-ins, viruses and
similar disruptive problems. A party who is able to circumvent our security
measures could misappropriate proprietary information, jeopardize the
confidential nature of information transmitted over the Internet or cause
interruptions in our operations. Concerns over the security of Internet
transactions and the privacy of users could also inhibit the growth of the
Internet in general, particularly as a means of conducting commercial
transactions. To the extent that our activities involve the storage and
transmission of proprietary information, including personal financial
information, security breaches could expose us to a risk of financial loss,
litigation and other liabilities. Our insurance does not currently protect us
against these losses. Any security breach would have a material adverse effect
on our business, results of operations and financial condition.
CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS ALLOW
CONCENTRATION OF VOTING POWER IN ONE INDIVIDUAL, WHICH MAY, AMONG OTHER THINGS,
DELAY OR FRUSTRATE THE REMOVAL OF INCUMBENT DIRECTORS OR A TAKEOVER ATTEMPT,
EVEN IF SUCH EVENTS MAY BE BENEFICIAL TO OUR STOCKHOLDERS
Certain provisions of our Articles of Incorporation and Bylaws may
delay or frustrate the removal of incumbent directors and may prevent or delay a
merger, tender offer or proxy contest involving our company that is not approved
by our board of directors, even if such events may be beneficial to the interest
of our stockholders. For example, Alex Kanakaris, our Chairman of the Board,
President and Chief Executive Officer, is the holder of all of the authorized,
issued and outstanding shares of our Class A Convertible Preferred Stock. Under
our Articles of Incorporation, as amended and restated, each share of Class A
Preferred Stock is entitled to, among other things, twenty non-cumulative votes
per share on all matters presented to our stockholders for action. Consequently,
Mr. Kanakaris may have sufficient voting power to control the outcome of all
corporate matters submitted to the vote of our stockholders. Those matters could
include the election of directors, changes in the size and composition of the
board of directors (and, thereby, the qualification and appointment of officers
of our company), and mergers and other business combinations involving our
company. In addition, through his control of the board of directors and voting
power, he may be able to control certain decisions, including decisions with
respect to our company's dividend policy, access to capital (including borrowing
from third-party lenders and the issuance of additional equity securities), and
the acquisition or disposition of assets by our company. In addition, the
concentration of voting power in the hands of Mr. Kanakaris could have the
effect of delaying or preventing a change in control of our company and may
affect the market price of our common stock.
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information contained in this prospectus contains
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industries, plans, objectives,
expectations, intentions and assumptions and other statements contained in the
prospectus that are not historical facts. When used in this prospectus, the
words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements.
PRICE RANGE OF OUR COMMON STOCK
Our common stock commenced trading on the OTC Bulletin Board under the
symbol "KANA" on November 26, 1997. On August 2, 1999 we changed our symbol to
"KKRS."
The following table shows the high and low closing bid prices of our
common stock for the periods presented. The quotations shown below reflect
interdealer prices, without retail mark-up, mark-down or commissions, and may
not represent actual transactions.
High Low
---- ---
Year Ended September 30, 1999:
First Quarter.........................................$ .25 $ .03
Second Quarter........................................ 2.25 .17
Third Quarter......................................... 2.96875 1.09375
Fourth Quarter........................................ 1.46875 .71875
Year Ended September 30, 2000:
First Quarter.........................................$ .9375 $ .52
Second Quarter........................................ 5.96875 .6875
Third Quarter......................................... 2.40625 .705
Fourth Quarter........................................ 1.11 .47
Year Ending September 30, 2001:
First Quarter.........................................$ .70 $ .195
The closing bid price of a share of our common stock on January 12,
2000 was $.22.
Stockholders
------------
At December 12, 2000, there were approximately 256 holders of record of
our common stock. Within the holders of record of our common stock are
depositories such as Cede & Co. that hold shares of stock for brokerage firms
which, in turn, hold shares of stock for beneficial owners.
Dividend Policy
---------------
We have never paid any dividends on our common stock and do not
anticipate declaring or paying cash dividends in the foreseeable future. We
intend to retain future earnings, if any, to reinvest in our business. We expect
that covenants in our future financing agreements will prohibit or limit our
ability to declare or pay cash dividends.
Recent Sales of Unregistered Securities
---------------------------------------
In June 1998, we issued an aggregate of 27,000 shares of common stock
to two accredited investors in a private offering in exchange for $20,000 in
cash.
In June 1998, we issued 1,200 shares of common stock to one individual
in a private offering in exchange for shares of Kanakaris InternetWorks, Inc.
In June 1998, we issued 98,800 shares of common stock to one consultant
in a private offering in exchange for consulting services rendered.
In July 1998, we issued an 75,000 shares of common stock to one
accredited investor in a private offering in exchange for cash.
In July 1998, we issued 400,000 shares of common stock to one
consultant in a private offering in exchange for consulting services rendered.
In July 1998, we issued an aggregate of 13,313 shares of common stock
to eleven individuals in private offerings in exchange for shares of Kanakaris
InternetWorks, Inc.
In August 1998, we issued 450,000 shares of common stock to three
accredited investors in private offerings in exchange for cash.
In August 1998, we issued 40,000 shares of common stock to one
individual in a private offering in exchange for shares of Kanakaris
InternetWorks, Inc.
In December 1998, we issued an aggregate of 525,000 shares of common
stock to one accredited investor in a private offering in exchange for $31,500
in cash.
In January 1999, we issued an aggregate of 1,711,667 shares of common
stock to two accredited investors in private offerings in exchange for $102,700
in cash.
In January 1999, we issued 200,000 shares of common stock to one
consultant in a private offering in exchange for consulting services rendered
with an estimated value of $84,000.
In February 1999, we issued 1,130,669 shares of common stock to one
accredited investor in a private offering in exchange for $67,840 in cash.
In February 1999, we issued 100,000 shares of common stock to one
entity as consideration for the purchase of the domain name Netbook.com with
an estimated value of $106,000.
In February 1999, we issued an option to purchase up to 100,000
shares of common stock at an exercise price of $.30 per share to one consultant
in exchange for consulting services.
In March 1999, we issued an option to purchase up to 175,000 shares
of common stock at an exercise price of $.01 per share to one consultant in
exchange for consulting services.
In March 1999, we issued 150,000 shares of common stock to one
consultant in a private offering in exchange for services rendered with an
estimated value of $175,500.
In April 1999, we issued 635,000 shares of common stock to two
accredited investors in a private offering in exchange for $317,500 in cash.
In April 1999, we issued 35,000 shares of common stock to one
consultant in a private offering in exchange for services rendered with an
estimated value of $91,875.
In April 1999, we issued an aggregate of 416,100 shares of common stock
to five consultants in a private offering, 406,000 shares of which were issued
in exchange for services rendered with an estimated value of $583,625 and 10,100
shares of which were issued in satisfaction of certain accounts payable by us in
the amount of $10,000.
In June 1999, we issued an aggregate of 345,000 shares of common stock
to five consultants in a private offering in exchange for services rendered with
an estimated value of $452,640.
In July 1999, we issued 50,000 shares of common stock in a private
offering to one consultant in exchange for services rendered with an estimated
value of $53,125.
In August 1999, we issued an aggregate of 255,000 shares of common
stock to four investors in private offerings in exchange for $100,000 in cash.
In August 1999, we issued an aggregate of 337,000 shares of common
stock to six consultants in private offerings in exchange for consulting
services rendered with an estimated value of $358,063.
During August and September 1999, we issued an aggregate of $1,070,000
of our 10% convertible subordinated debentures to four accredited investors in
two private offerings. The net offering proceeds were approximately $998,500 in
cash.
In October 1999, we issued 25,000 shares of common stock in a private
offering to one consultant in exchange for services rendered with an estimated
value of $18,750.
In November 1999, we issued an aggregate of 1,001,000 shares of
common stock to two consultants in private offerings in exchange for consulting
services rendered with an estimated value of $750,750.
In December 1999, we issued an aggregate of 136,000 shares of common
stock to four accredited investors in private offerings in exchange for $68,000
in cash
In December 1999, we issued 400,000 shares of common stock to one
consultant for consulting services rendered with an estimated value of $200,000.
In December 1999, we granted options to purchase up to an aggregate of
4,220,000 shares of common stock at an exercise price of $.52 per share (the
fair market value on the date of grant) to six individuals, including two
executive officers/directors, one director, one employee and two consultants.
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 issued 14,000 shares of common stock upon partial
exercise by a former employee of an option with an exercise price of $.25 per
share.
In February 2000, 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.
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.
In April 2000, we issued 206,000 shares of common stock upon partial
exercise by a former employee of an option with an exercise price of $.25 per
share.
In April 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 $112,000.
In April 2000, we issued an aggregate of $3,000,000 of 10% convertible
debentures and accompanying warrants to purchase up to 900,000 shares of common
stock to four accredited investors in a private offering. The net offering
proceeds were approximately $2,600,000 in cash.
In April 2000, we issued an aggregate of 14,667 shares of common stock,
warrants to purchase up to 14,667 shares of common stock at an initial exercise
price of $1.725 and warrants to purchase up to 14,667 shares of common stock at
an initial exercise price of $1.95 to one consultant in a private offering in
exchange for consulting services.
In April 2000, we issued an aggregate of 788,730 shares of common stock
to three accredited investors upon conversion of $750,000 in principal amount of
10% convertible debentures and interest payable on those debentures.
In May 2000, we issued an option to purchase up to 87,500 shares of
common stock at an exercise price of $1.295 per share pursuant to our 2000 Stock
Option Plan to one consultant in connection with an amendment to an existing
consulting agreement.
In May 2000, we issued to eleven employees and executives and one
non-employee director options to purchase up to an aggregate of 1,950,000 shares
of common stock at an exercise price of $.705 pursuant to our 2000 Stock Option
Plan.
In May 2000, we issued to seven individuals and four entities an
aggregate of 809,396 shares of common stock in exchange for consulting services
rendered with a value of approximately $850,964.
In June 2000, we issued an aggregate of 788,096 shares of common stock
to one accredited investor upon conversion of $500,000 in principal amount of
two 10% convertible debentures and interest payable on those debentures.
In June 2000, we issued an aggregate of 163,120 shares to one
individual and one entity in exchange for consulting services rendered with a
value of approximately $129,680.
In June, July and August 2000, we issued an aggregate of 260,001 shares
of common stock to one individual upon exercise of options with an exercise
price of $.75 per share.
In July, August and September 2000, we issued an aggregate of 1,033,715
shares of common stock to four investors in connection with regular interest
payments and upon conversion of an aggregate of $530,000 of principal plus
related interest on our convertible debentures.
In August 2000, we issued 180,000 shares of common stock valued at
$135,000 to a consultant for services rendered.
In August 2000, we issued 30,000 shares of common stock valued at
$22,500 to an employee who subsequently became a director of our company in
exchange for services rendered.
In August 2000, we issued an aggregate of $1,500,000 of 10% convertible
debentures and accompanying warrants to purchase up to 450,000 shares of common
stock to three accredited investors in a private offering. The net offering
proceeds were approximately $1,305,000 in cash.
In August 2000, we issued to three employees who were also directors of
our company options to purchase up to an aggregate of 962,500 shares of common
stock at an exercise price of $.75 per share pursuant to the Registrant's 2000
Stock Option Plan..
In September 2000, we issued 25,000 shares of common stock valued at
$13,500 to one individual in exchange for services rendered.
In September 2000, we issued to a consultant for services rendered an
option to purchase up to 500,000 shares of common stock at an exercise price of
the lesser of $.73 and 65% of the average of the lowest three trading prices
during the 20 trading days immediately preceding exercise.
In October 2000, we issued an aggregate of 537,622 shares of common
stock to four investors in connection with regular interest payments and upon
conversion of an aggregate of $105,000 of principal plus related interest on our
convertible debentures.
In November 2000, we issued an aggregate of 2,696,442 shares of common
stock to four investors in connection with regular interest payments and upon
conversion of an aggregate of $675,000 of principal plus related interest on our
convertible debentures.
In November 2000, we issued 50,000 shares of common stock valued at
$19,000 to a consultant who subsequently became a director of our company as
compensation for services rendered.
In November 2000, we issued 100,000 shares of common stock valued at
$38,000 to a consultant who subsequently became a director of our company as
compensation for services rendered.
In November 2000, we issued 50,000 shares of common stock valued at
$19,000 to a consultant who was also a director of our company as compensation
for services rendered.
In November 2000, we issued 50,000 shares of common stock valued at
$19,000 to a consultant as compensation for consulting services rendered.
In November 2000, we issued 1,400,000 shares of common stock valued at
$532,000 to a consulting company as compensation for consulting services
rendered.
In November 2000, we issued 250,000 shares of common stock valued at
$95,000 to an employee who was also a director of our company as compensation
for services rendered.
In November 2000, we issued 50,000 shares of common stock valued at
$17,000 to a consultant as compensation for consulting services rendered.
In December 2000, we issued 50,000 shares of common stock valued at
$11,750 to a consultant who was also a director of our company as compensation
for consulting services rendered.
In December 2000, we issued an aggregate of 384,616 shares of common
stock to one individual upon exercise of options with an exercise price of $.75
per share.
In December 2000, we issued an aggregate of 2,891,154 shares of common
stock to four investors upon conversion of an aggregate of $551,000 of principal
plus related interest on our convertible debentures.
In December 2000, we issued 2,000,000 shares of common stock valued at
$510,000 to an executive employee who was also a director of our company as a
stock bonus for services rendered.
In December 2000, we issued an aggregate of 425,000 shares of common
stock valued at $108,375 to two consultants as compensation for consulting
services rendered.
As of January 5, 2001, we had issued in January 2001 an aggregate of
661,041 shares of common stock to four investors in connection with regular
interest payments and upon conversion of an aggregate of $48,000 of principal
plus related interest on our convertible debentures.
On January 5 2001, we issued an aggregate of $650,000 of 12%
convertible debentures and accompanying warrants to purchase up to 3,900,000
shares of common stock to four accredited investors in a private offering. The
net offering proceeds were approximately $631,500 in cash.
Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
<PAGE>
CAPITALIZATION
The following table sets forth our cash position and capitalization as
of September 30, 2000. The information set forth below should be read in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this document.
Sept. 30, 2000
--------------
Cash and cash equivalents......................................... $ 615,101
=============
Long-term debt.................................................... -
=============
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares;
Class A Convertible Preferred Stock; issued and outstanding
1,000,000 shares........................................ 10,000
Common stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 34,597,678 shares(1)........ 34,598
Additional paid-in capital................................... 19,178,359
Stock subscriptions.......................................... (1,260)
Accumulated deficit.......................................... (21,340,846)
-------------
Total stockholders' deficiency............................. (2,119,149)
-------------
Total capitalization.............................................. $ (1,504,048)
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-------------------
(1) Excludes 9,057,999 shares of common stock issuable pursuant to the
exercise of stock options outstanding as of September 30, 2000, at an
approximate weighted average exercise price of $.6144 per share, all of
which options were exercisable on September 30, 2000. Also excludes
8,953,069 shares of common stock that were issuable pursuant to the
conversion of convertible debentures and related warrants outstanding
as of September 30, 2000, all of which were convertible or exercisable
on September 30, 2000 but were subject to certain conversion
limitations under our debenture offering documents. Also excludes
8,604,128 shares of common stock issuable into escrow as of
September 30, 2000 as security for our performance of certain
obligations under our debenture offering documents.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, related notes and other
financial information included elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal years ended September 30, 2000 and
1999 and the consolidated balance sheets data as of September 30, 2000 and 1999
are derived from our consolidated financial statements which have been audited
by Weinberg & Company, P.A. and are included in this prospectus. Historical
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
------------- -------------
2000 1999
------------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C>
Net sales................................ $ 613,838 $ 968,758
Cost of sales............................ 373,487 661,707
------------- -------------
Gross profit........................ 240,351 307,051
------------- -------------
Operating expenses:
Marketing, advertising and
investor relations ........... 2,277,090 822,306
Provision for bad debt.............. 313,000 1,000
General and administrative.......... 6,660,385 2,849,944
------------- -------------
Total operating expenses.......... 9,250,475 3,673,250
------------- -------------
Operating loss before interest
and other income (expense)..... (9,010,124) (3,366,199)
Other expense (income) net............... (3,966,582) (175,661)
------------- -------------
Net loss.......................... $(12,976,706) $ (3,541,860)
============= =============
Basic and diluted net loss per
common share............................ $ (.44) $ (.15)
============= =============
Weighted average common
shares used in determining
net loss per share...................... 29,858,415 22,945,540
============= =============
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------
2000 1999
---- ----
CONSOLIDATED BALANCE SHEETS DATA:
<S> <C> <C>
Cash and cash equivalents................................ $ 615,101 $ 155,063
Working capital (deficiency)............................. (3,158,417) (1,189,834)
Total assets............................................. 2,488,201 1,000,303
Long-term debt........................................... -- --
Total stockholders' equity (deficiency)................. (2,119,149) (623,616)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes to financial statements
included elsewhere in this Annual Report on Form 10-KSB. This report and our
consolidated financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we
might earn if we are successful in implementing our business strategies.
The forward-looking statements and associated risks may include, relate to
or be qualified by other important factors, including, without limitation:
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 industry; and
o economic conditions generally.
We do not undertake to update, revise or correct any forward-looking
statements.
The information contained in this report is not a complete description
of our business or the risks associated with an investment in our common stock.
Before deciding to buy or maintain a position in our common stock, you should
carefully review and consider the various disclosures we made in this report,
and in our other materials filed with the Securities and Exchange Commission
that discuss our business in greater detail and that disclose various risks,
uncertainties and other factors that may affect our business, results of
operations or financial condition.
Any of the factors described above or in the "Risk Factors" section
below could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
<PAGE>
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, including www.CinemaPop.com
and www.WordPop.com. Our films are accessible by Internet users at access rates
from 56 kbps to broadband and are viewable on Pocket PCs. We have over 450
on-demand movies available with full-screen scalability and television quality.
We have approximately 700 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 August 2000, we introduced a unique system whereby authors
and publishers may interactively post books online for secure Internet
distribution. Books may also be delivered from our web site to wireless handheld
devices such as Pocket PCs and Palm(TM) handhelds.
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 have included 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. However, we have implemented a number
of means through which we anticipate deriving a significant portion of our
revenues from our Internet and e-commerce businesses in the future. 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 advertising fees;
o sales of online, downloaded and print books and other written
materials;
o movie subscription and pay-per-view fees;
o encoding services; and
o webcasting services.
We expect to continue to place significant emphasis upon the further
development and expansion of our Internet and e-commerce businesses. 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.
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED SEPTEMBER 30, 2000
AND 1999
NET SALES. Net sales decreased $354,920 (37%) from $968,758 for the
year ended September 30, 1999 to $613,838 for the year ended September 30, 2000.
Net sales derived from our e-commerce business decreased $8,568 (27%) from
$31,162 for the year ended September 30, 1999 to $22,594 for the year ended
September 30, 2000. Net sales derived from our data control console business
decreased $346,352 (37%) from $937,596 for the year ended September 30, 1999 to
$591,244 for the year ended September 30, 2000. This decrease was primarily due
to a decrease in sales of our OPCON Modular System, which we believe to be a
result of fluctuations in the timing of orders for our data control console
products caused by budget constraints and delayed receipt of expected funding by
some prospective clients.
<PAGE>
GROSS PROFIT. Gross profit decreased $66,700 (22%) from a gross profit
of $307,051 for the year ended September 30, 1999 to a gross profit of $240,351
for the year ended September 30, 2000. This decrease in gross profit was due
primarily to the decrease in total sales noted above and increased expenditures
in developing the foundation of our e-commerce business.
OPERATING EXPENSES. Total operating expenses increased $5,577,225
(152%) from $3,673,250 for the year ended September 30, 1999 to $9,250,475 for
the year ended September 30, 2000. This increase in total operating expenses was
due primarily to an increase in consulting fees, marketing, advertising and
investor relations costs, and other professional fees. Consulting fees increased
$2,351,740 (176%) from $1,339,287 for the year ended September 30, 1999 to
$3,691,027 for the year ended September 30, 2000. Marketing, advertising and
investor relations costs increased $1,454,784 (177%) from $822,306 for the year
ended September 30, 1999 to $2,277,090 for the year ended September 30, 2000,
primarily due to our increased consumer and trade advertising and marketing.
Professional fees increased $926,693 (150%) from $616,282 for the year ended
September 30, 1999 to $1,542,975 for the year ended September 30, 2000. Each of
these operating expenses was paid primarily through the issuance of shares of
our common stock to the service provider.
INTEREST AND OTHER EXPENSE. Interest and other expense increased
$3,790,921, from $175,661 for the year ended September 30, 1999 to $3,966,582
for the year ended September 30, 2000. This increase in other expense was due to
the financing cost of issuing stock through convertible debentures.
NET LOSS. Net loss increased $9,434,846 (266%) from $3,541,860 for the
year ended September 30, 1999 to $12,976,706 for the year ended September 30,
2000. This increase in net loss was due to a combination of decreased sales,
decreased gross profit, increased operating expenses, and increased interest and
other expense, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We currently finance our operations primarily through private
placements of securities and revenue generated from our operations. We also have
available to us a $7,000,000 revolving line of credit from Alliance Equities
which can be drawn upon by us for up to $500,000 per month, with interest to
accrue at the rate of 10% per annum. However, during the fiscal year ended
September 30, 2000 and through January 16, 2001, no amounts were outstanding
under the line of credit.
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, which shares were registered by us for resale by the purchasers.
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 some related expenses, were $870,000. In March and April 2000,
$750,000 of the principal amount plus interest was converted into shares of
common stock. In June 2000, the remaining $250,000 of the principal amount plus
interest was converted into shares of common stock. The shares of common stock
issued upon conversion were registered by us for resale by the purchasers.
In April and August 2000, we issued an aggregate of $4,500,000 of our
10% Convertible Debentures due May 1, 2001, which were accompanied by warrants
to purchase up to an aggregate of 1,350,000 shares of common stock. The net
proceeds of that offering, after payment of some related expenses, were
$3,905,000. The shares of common stock underlying the debentures and warrants
were registered by us for resale by the purchasers. As of January 9, 2001,
$2,159,000 of the principal amount plus certain interest payments had been
converted into shares of common stock.
<PAGE>
In January 2001, we issued $650,000 of 12% convertible debentures due
January 5, 2002 to four accredited investors. The debentures were accompanied by
warrants to purchase up to 3,900,000 shares of common stock. The net proceeds of
that offering, after payment of related expenses, were approximately $631,500.
We are obligated to register for resale by the investors the shares of common
stock underlying the debentures and warrants. The debenture purchase documents
provide that if certain conditions relating to the market price of our common
stock are met, the investors will be obligated to purchase, and we will be
obligated to issue, additional debentures in the aggregate principal amount of
$650,000, within 30 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. To the extent
debentures issued by us are converted into shares of common stock, we will not
be obligated to repay the converted amounts.
During the year ended September 30, 2000, we incurred a negative cash
flow from operating activities of $4,238,186. As of September 30, 2000, we had a
negative working capital of $3,158,417 and an accumulated deficit of
$21,340,846. As of that date, we had $615,101 in cash and cash equivalents,
$302,246 in accounts receivable, $205,000 in notes receivable from
non-stockholders, a net value for our film library of $452,916 and accounts
payable and accrued expenses of $797,992.
Cash used in our operating activities totaled $4,238,186 for the year
ended September 30, 2000, as compared to $1,231,233 for the year ended September
30, 1999. Cash used in our investing activities totaled $857,276 for the year
ended September 30, 2000. Cash provided by our investing activities totaled
$4,870 for the year ended September 30, 1999.
Cash provided by our financing activities totaled $5,555,500 for the
year ended September 30, 2000 and $1,376,011 for the year ended September 30,
1999. We raised $5,235,000 of the cash provided by financing activities during
the year ended September 30, 2000 and $620,000 of the cash provided by financing
activities during the year ended September 30, 1999 from the issuance of our
convertible debentures.
For the year ended September 30, 2000, we had net sales of $613,838 and
a net loss of $12,976,706, of which loss $8,593,761 (66%) consisted of non-cash
expenses. These non-cash expenses included $5,036,261 of common stock and
options to purchase common stock that we issued to various individuals and
entities as compensation for services rendered and a $3,257,500 non-cash expense
relating to the issuance of our convertible debentures.
In an effort to increase sales in our Internet business, we are
implementing a variety of strategies, including posting online advertisements
directed at executive management of other public companies. Other business
strategies that we intend to implement including requiring online registration
for all movie viewing on our web sites, soliciting monthly subscriptions and
pay-per-view sales of movie viewing on our web sites, introducing revenue-
sharing web partner programs and improving tracking of our market share. We
believe that if we are successful in implementing these business strategies,
we will generate increased revenues from this segment. Additionally, in
order to reduce the cost of generating movie revenues, the Company plans to
bring the encoding process for films in-house in conjunction with the
development of its proprietary software.
In an effort to increase sales of our data control console products, on
June 30, 2000 we hired two exclusive sales representatives. In addition, we
increased our original equipment manufacturing capacity by adding additional
manufacturing representation and launched a new marketing campaign that included
high-impact sales literature and a cutting-edge web site at www.desience.com. As
of September 30, 2000, we had over $250,000 in purchase orders for our data
control console products, all of which purchase orders were filled during the
quarter ended December 31, 2000. We believe that if we are successful in
implementing our business strategies for our module consoles segment, we will
generate increased revenues from this segment.
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 twelve 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 monitored our systems (both information technology and non-information
technology) throughout the Year 2000, including the proper recognition of the
leap year.
<PAGE>
BUSINESS
COMPANY HISTORY
Our company is the surviving company in a series of transactions
involving Kanakaris InternetWorks, Inc., a Delaware corporation that was
incorporated on February 25, 1997, Desience Corporation, a California
corporation that was incorporated on April 17, 1984, and Big Tex Enterprises, a
Nevada corporation that was incorporated on November 1, 1991. On October 10,
1997, Kanakaris InternetWorks, Inc. purchased all of the outstanding shares of
common stock of Desience Corporation in exchange for a royalty payable to the
prior sole stockholder of Desience Corporation based upon a percentage of
Desience Corporation's gross sales. On November 25, 1997, Big Tex Enterprises
purchased all of the outstanding shares of common stock of Kanakaris
InternetWorks, Inc. in exchange for 3,000,000 shares of our common stock owned
by Nelson Vasquez, the then president of Big Tex Enterprises, 3,000,000 newly
issued shares of our common stock and 1,000,000 newly issued shares of our
preferred stock. On November 26, 1997, Big Tex Enterprises changed its name to
Kanakaris Communications, Inc. On June 2, 2000, our company changed its name to
Kanakaris Wireless. Consequently, our company is a Nevada corporation that was
incorporated on November 1, 1991 and is the sole stockholder of Kanakaris
InternetWorks, Inc., and Kanakaris InternetWorks, Inc. is the sole stockholder
of Desience Corporation. Our common stock currently is traded on the OTC
Bulletin Board under the ticker symbol "KKRS."
COMPANY OVERVIEW
We are an Internet-based provider of online delivery of films and
books. Our Internet web site, www.KKRS.Net, is the portal to all of the
proprietary content and web sites of our company. Our films are accessible by
Internet users at access rates from 56 kilobytes per second, or 56 kbps, to
broadband at www.CinemaPop.com. We have over 450 on-demand movies available with
full-screen scalability and television quality. We have approximately 700 books
available online. The books feature re-sizable type, the ability to turn pages
without scrolling and the ability to search by word or phrase.
In addition to operating 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 have included NASA, the Federal Bureau of
Investigation, the United States Navy, Bank of America, Mitsubishi and many
others.
To date, substantially all of our revenues have been derived through
sales of our data control console systems. Our current business strategy
includes expansion of our data control console business and a significant
emphasis upon developing and expanding our Internet and e-commerce businesses.
We are in the process of further developing and expanding our
Internet-related businesses with the goal of increasing revenues from these
businesses in the near future. In that regard, we anticipate deriving revenues
from, among other sources:
o advertising fees;
o sales of online, downloaded books and other written materials;
o movie subscription and pay-per-view fees;
o encoding services; and
o webcasting services.
We store single digital source files of content on our servers. Each
single file - which may be a movie or a book is duplicated on demand as many
times as demand warrants. We deliver our content direct-over-the-Internet, which
eliminates traditional remanufacturing, storage and shipping costs. We also
design and manufacture computer command centers used by corporations and
governmental agencies. We are focused on downloadable Internet content and
anticipate that this component of our business will become a major portion of
our overall and Internet business.
Our currently available and planned Internet services are designed to
provide the following key benefits to individual consumers and businesses:
<PAGE>
ONLINE MOVIES
o Wireless Delivery Of Full-Length Films
o Works With Any Computer With An Internet Connection
o Compatible With Any Browser Or On Any Platform
o Pay-Per-View For Individual Movies
o Monthly Access To Unlimited Viewing Of Movies
o Full-Screen Viewing Of Movies
o High-Quality Encoding Of Movies Using Proprietary Technology
o Interactive Video Advertisements That Permit Consumers To
Purchase And Businesses To Sell Products
o Wireless Delivery To Pocket PCs
ONLINE BOOKS
o Real-time Delivery
o Secured Impressions
o Direct Delivery
o Dynamic Updates
o Wireless Delivery To Handheld Devices, Including Pocket PCs
and Palm(TM) handhelds
Our data control console products are designed to provide the following
key benefits to customers:
o Maximization of operator efficiency and productivity through
ergonomics, focusing on data and immediate accessibility
o Operator productivity is increased by providing an environment
which reduces visual and physical stress, enhancing the operator's
ability to focus attention and facilitating equipment access
o Maximization of the number of displays per operator in a compact
space
o Flexibility to accommodate growth and change in both hardware and
location
INTERNET INDUSTRY BACKGROUND
The Internet began in the late 1960s as an experiment in the design of
robust computer networks. The Internet is a collection of computer networks a
network of networks - that allows anyone to connect with their computer to the
Internet and immediately communicate with other computers and users across the
world. Its users for decades were primarily limited to defense contractors and
academic institutions. With the advent of high-speed modems for digital
communication over common telephone lines, individuals and organizations began
connecting to and taking advantage of the Internet's advanced global
communications ability.
Although there were several factors responsible for the growth of the
Internet, the factors that are most often attributed to its success are the
advent of HTML, the World Wide Web and Internet browsers. With the expansion in
the number of Internet users and web sites, we believe development of two
phenomena, growth in the amount of commerce that is being transacted over the
Internet and willingness of businesses to spend money to be a part of the
Internet will continue to grow for the foreseeable future.
Because the Internet has experienced rapid growth, it has developed
into a significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically. In
a 1998 report, International Data Corporation, or IDC, estimated that there were
over 51 million web users in the United States and over 97 million worldwide.
IDC projected these numbers to increase to over 135 million web users in the
United States and over 319 million worldwide by the end of 2002. Internet-based
businesses have emerged to offer a variety of products and services over the
Internet. Advances in online security and payment mechanisms have also prompted
more businesses and consumers to engage in electronic commerce. In its 1998
report, IDC estimated that the value of purchases of goods and services,
excluding fund transfers and stock transfers, on the Internet will grow from
$32.4 billion worldwide in 1998 to $425.7 billion worldwide in 2002.
<PAGE>
Over the past several years, book publishing in the United States has
shown a steady increase. As a result, the emerging online bookselling industry
is expected to grow from $630 million in 1998 to $3 billion in 2003, according
to a 1999 report by Forrester Research, Inc., a Cambridge, Massachusetts,
research group. According to a 1999 panel discussion at COMDEX, online
booksellers account for about three percent of the market for books, and
industry experts believe that this market share is growing. Microsoft
Corporation, in an advertisement in Publisher's Weekly in November 1999, stated
that by the year 2020, 90% of all book titles will be available electronically.
DATA CONTROL CONSOLE INDUSTRY BACKGROUND
The data control console industry focuses on the design, manufacture,
and implementation of high-tech furniture systems used to fully integrate
computer systems and communications systems in the workplace. Working with IBM,
we developed the first modular system for enclosing and organizing the equipment
and cabling associated with data and network control centers. The first large
installation occurred in 1985. We were the first manufacturer using a standard,
modular system that could be quickly installed by bolting together without any
site construction and could similarly be added to or reconfigured easily with
additional parts.
OUR STRATEGY
We deliver interactive content, including movies and books, directly
over the Internet to computer devices available in schools, offices, homes and
cars on a worldwide, around-the-clock basis and provide high quality data
control console products to businesses and government. Our objective is to
continue to be a leading provider of downloadable content and data control
console products. To achieve this objective, we have developed a strategy with
the following key elements:
o EXPAND OUR MOTION PICTURE LIBRARY. Currently we have over 450
movies available for viewing in full-length, full computer
screen format on demand through our "virtual theater", which
utilizes Microsoft(R) Windows Media(TM) 7.0 technology. We
intend to expand our motion picture library as funds become
available.
o CONTINUE DEVELOPMENT OF OUR MOVIE PARTNER PROGRAM. We intend
to further develop our Movie Partner Program to allow any
mainstream web site in the world to host a virtual theater.
Over 1,000 web sites have applied to participate in our
Movie Partner Program. Eligible web sites may join our
program free of charge and share in our revenues generated
through their participation in our program.
o FURTHER DEVELOP DIRECT-OVER-THE-INTERNET DELIVERY OF BOOKS. We
have implemented direct-over-the-Internet delivery of books to
Pocket PCs and Palm(TM) handhelds. We have introduced an
interactive digital books posting program that allows web site
visitors to directly post books using ION Systems, Inc.'s
technology for online delivery at www.WordPop.com and allows
authors to access information on how many of their books have
been ordered online. We intend to further develop
direct-over-the-Internet delivery of books by, among other
things, seeking new relationships with publishers and authors.
o DEVELOP AND CULTIVATE STRATEGIC ALLIANCES. We intend to
cultivate our existing strategic alliances with Microsoft
Corporation, ION Systems, Inc. and others and to develop new
strategic alliances that will aid us in building brand
awareness for our Internet and e-commerce web sites and
enhancing the products and services we provide.
o BUILD THE CINEMAPOP.COM NAME. We intend to increase our focus
on building the CinemaPop.com name. As funds become available,
we intend to launch a promotional campaign to increase
awareness of the CinemaPop.com name through, among other
things, our strategic alliances, clickable links to others'
web sites and traditional media, including print and radio.
<PAGE>
o INTRODUCE AND EXPLOIT PROPRIETARY TECHNOLOGY. Through
extensive research and development, we have developed
proprietary technologies that permit enhanced video delivery
of content over the Internet and integration of e-commerce
streaming video advertisements. We plan to market these
technologies on our web site and as a business-to-business
service.
o EXPAND OUR SUBSCRIPTION AND PAY-PER-VIEW PROGRAMS. We plan to
further develop secure e-commerce subscriptions and
pay-per-view programs for our CinemaPop.com web site. We are
building a database of viewers of movies on CinemaPop.com by
requesting information from subscribers. We are using the
database to market our Internet services.
o EXPAND OUR PRODUCTION AND INSTALLATION OF DATA CONTROL CONSOLE
PRODUCTS. We intend to continue to generate new sales
materials and aids such as our www.desiences.com web site to
enhance our product exposure and to increase our sales force
to penetrate deeper into national and international markets.
OUR INTERNET PRODUCTS AND SERVICES
ONLINE MOVIES
We operate an online movie web site at www.CinemaPop.com, which site
enables Internet users to download full-length motion pictures with no download
time and no plug-in required utilizing Microsoft(R) Windows Media(TM) 7.0. More
than 450 movies are currently available for online distribution. We offer pay-
per-view movies as well as advertising-supported free movies. We also sell
advertising to our web site. We charge a monthly access fee for those customers
who desire unlimited viewing access to a larger portion of our web site. We have
implemented a merchant service system that enables us to charge and collect
access fees for our movie web sites.
We have developed a movie partner program aimed at attracting web sites
to use our innovative technology. Over 1,000 web sites have applied to set up
clickable links to our movie content and to receive a commission for
subscription and pay-per-view fees generated by visitors to their web sites.
Many of these sites are in the process of setting up the clickable links.
Our movie partner program includes the following revenue streams:
o Commissions on monthly subscription fees for unlimited access
to a larger number of online movies
o Commissions on pay-per-view fees for individual viewers at
broadband access speeds for selected movies and events
o Clickable links to our content from other web sites to
increase traffic value of ads and the potential numbers of
subscribers and pay-per-view customers
In September 2000 we launched a new online movie web site, the third
generation of "CinemaPop.com." Features include a streamlined subscription
process, the ability for consumers to post movie reviews and the introduction of
CinemaWEAR(TM) content that is accessible to wireless handheld computing
devices.
ONLINE BOOKS
In August 2000, we launched our newest online book web site,
www.WordPop.com, which site is integrated within our web site www.KKRS.Net and
offers approximately 700 books for click and view delivery. Our books, like our
movies, are downloadable in real-time, which means there is not a significant
delay in the display of text or images. This allows consumers to obtain
immediate access to the medium of their choice. We believe that our site is
secure to the extent that it preserves the author's rights to ownership. We also
believe that we are the only online Internet publisher that provides real-time
secure fulfillment from one source file.
<PAGE>
Books and articles are now available through high-speed access for use
on desktops, laptops, personal data assistants, Pocket PCs, Palm(TM) handhelds
and other innovative end user hardware. Most importantly, there is no end user
software needed. In February 1999, we entered into an alliance with ION Systems,
Inc. for use of their secure online download technologies. Using this software,
we can rent or sell books online while allowing authors and publishers to to
retain control over their content.
Authors and publishers whose materials are available on our WordPop.com
web site determine which of the following access options will be made available
on a book-by-book basis to visitors to our web site:
o Free Browsing - Currently, a visitor may browse certain posted
materials free of charge.
o Purchase Hourly Access - We anticipate that a visitor will in the
future be able to rent the online version of the materials on an
hourly basis. The author or publisher may allow visitors to apply
a percentage of the online rental fees toward another method of
purchase or rental described below.
o Purchase of Downloaded Version - Currently, a visitor may purchase
the downloaded version of the materials, thus enabling them to use
the materials for off-line reading in unlimited sessions for an
unlimited amount of time. The copyright notice states that the
visitor cannot duplicate the book.
o Purchase Extended Access - We anticipate that a visitor will in
the future be able to purchase a password enabling them to read
the online version of the materials for five years in any number
of sessions.
The text of the online materials cannot be copied, printed, or
extracted using optical character recognition software. Our licensed technology
also prevents temporary Internet files from storing usable text. We believe this
is the first application of a technology through which the author and publisher
can retain complete control of how their creative work is used online. Any book
or document - no matter how long - can be read page by page. The reader also
maintains control over the size of the type with just the click of the mouse.
None of these features requires any special user software other than a
JAVA-enabled browser. By using this technology, a long document, book, textbook
or manual can be read without scrolling and in any type size the reader's eyes
find comfortable.
PROPRIETARY TECHNOLOGY USED WITH OUR ONLINE MOVIES AND BOOKS
WIRELESS DELIVERY
-----------------
CinemaWEAR(TM) Wireless Delivery is our proprietary technology that
provides what we believe to be the first ever full-length streaming video
delivery to handheld computing devices such as the Pocket PC. We believe that
CinemaWEAR(TM) Wireless Delivery is ideal for wide area network, or WAN, and
local area network, or LAN, users who are working at transmission rates from 10
kbps for super low streaming video with marginal signal strength, to 19.2 kbps
for streaming video for standard WANs, to 128 kbps for streaming video for LANs
and users of Ricochet service that is available in limited markets such as
Atlanta and San Francisco.
We anticipate that CinemaWEAR(TM) Wireless Delivery will produce
revenue for our Internet business by enabling us to deliver feature-length
entertainment to the mobile handheld computing device environment in addition to
our traditional delivery to desktop personal computers and other wired devices.
Projections that have appeared in consumer magazines such as Business Week
indicate that wireless Internet connections to handheld computing devices will
exceed those to personal computers by 2002.
<PAGE>
ENCODING
--------
CinemaWEAR(TM) Encoding is our proprietary encoding technology that,
when used in conjunction with Windows Media(TM) tools, significantly improves
the quality of streaming video delivery over the Internet by capturing the look
and feel of real cinema delivery. By stabilizing streaming video, we are able to
deliver 100 kbps and 300 kbps streams that have the visual quality and convey
the look and feel of 300 kbps and 700 kbps streams, respectively. This stability
is pleasing to the eye because it eliminates jerkiness and provides a full
motion picture experience with rich color and clear, full sound.
Embedded Electronic Commerce(TM), or EEC(TM), is our proprietary
e-commerce platform designed to work in tandem with our CinemaWEAR(TM) Encoding
technology. Our EEC(TM) platform enables viewers to submit secure orders for
advertised products through clickable links appearing within the streaming
video. EEC(TM) works with video delivery to all Internet-enabled devices,
including with our CinemaWEAR(TM) Wireless Delivery of full-length films to
Pocket PCs.
During the week of December 18, 2000, we presented "An American
Christmas Carol" on our www.CinemaPop.com web site to introduce CinemaWEAR(TM)
Encoding technology and our EEC(TM) interactive video advertisement technology.
The program, which was encoded using our CinemaWEAR(TM) Encoding technology, was
presented with an advertisement that used our EEC(TM) technology to enable
viewers to place secure orders for products through clickable links within the
streaming video.
BUSINESS-TO-BUSINESS SERVICES
We intend to offer high-quality encoding, production, post-production
and webcasting Internet services to other businesses. We also intend to explore,
through the further development of our technologies, the potential for consumer
software development of products enhancing individuals' ability to place video
on the Internet.
OUR DATA CONTROL CONSOLE PRODUCTS
Our primary data control console product is our OPCON Module System, a
proprietary modular system for high-end computer command centers. Our OPCON
Module Systems have been purchased and installed by major governmental agencies
such as NASA, the Federal Bureau of Investigation and the United States Navy and
by large corporations including Bank of America, Mitsubishi, Pacific Bell and
many others.
Our control center consoles are ergonomically designed to maximize
comfort, function, adaptability and efficiency for the corporate network system.
We assist clients in the planning process by making site visits, taking lists of
requirements, then providing customers with blueprint floor plans of OPCON
Module System layouts, elevated views of suggested equipment layouts and
perspective presentation drawings. In order to assure complete customer
satisfaction, we oversee the manufacturing of products as well as the
installation.
Our company, through its wholly-owned subsidiary, Desience Corporation,
has been marketing and selling the OPCON Module System to corporate and
government mainframe computer users since the early 1980's. Historically,
approximately 90% of our sales have been in the United States. During the 1990's
we experienced increased business from South America, including multiple orders
from Venezuela, and also saw increased business from Mexico. We have also sold
and installed the OPCON Module System in Canada, Barbados, Bermuda, St. Lucia,
Kuwait and Guam.
In 1999, we announced plans to develop a personal module system, Opcon
2000, to provide a single computer work station for the home or office. This
product will represent the first consumer product offering in our history. We
plan to market this product over the Internet with the intention of consumer
retail distribution throughout the world.
<PAGE>
Currently, there are five companies competing in the marketplace for
modular system solutions, including Desience Corporation, Wrightline, Evans
Consoles, and Stacking Systems, which provide metal products, and
Infrastructures, which provides wood-type products. All of our competitors have
more resources than us, and most competitors offer similar services such as
installation, warranties and customer service. Deciding factors such as price,
service and features vary according to the requirements of the customer.
We are a leader in the design and production of quality metal products.
Wood is a low cost short-range solution with no ability to endure the rigors of
years of use and frequent reconfigurations so often required in our environment.
Therefore, only the other metal products are true competition for us. Our system
is made of heavy steel, has a proprietary lens to provide better task lighting,
provides extremely open architecture for cable routing and is easy to
reconfigure. To this end, many of our existing clients return for new and
expanded systems.
STRATEGIC RELATIONSHIPS
In order to expand our Internet and e-commerce businesses, we have
developed strategic relationships with various Internet, technology and software
companies and others. The following is a brief description of some of our more
important strategic relationships.
MICROSOFT CORPORATION
In August 1999, we entered into an Internet content partner agreement
with Microsoft Corporation. Under the terms of the agreement, Microsoft promotes
certain portions of our web content and provides assistance in the use of
Microsoft's Windows Media(TM) technology. Microsoft Corporation has agreed to
promote four of our web sites through December 30, 2001. Microsoft is providing
clickable headline links to our CinemaPop.com web site consisting of brief
summaries of the content available via the site link on their WindowsMedia.com
web site. This site link enables Internet users to read about and click on the
descriptions of content available from our company and then be directly
connected to our web site.
In addition, in November 1999 our company was selected by Microsoft to
participate in the Microsoft(R) Windows Media(TM) Technologies Broadband
Jumpstart Initiative. On December 7, 1999, we launched 45 movie titles at 100
kbps and 300 kbps broadband speeds on our CinemaPop.com web site, and Microsoft
is providing links to this content from its WindowsMedia.com web site. As part
of the Broadband Jumpstart Initiative, William Gates, the Chairman of Microsoft,
introduced a new Microsoft Broadband web site at the StreamingMedia West
conference in San Jose, California on December 7, 1999. Our company is
represented on this web site through a clickable link. On that same day, InterVu
began providing server space and bandwidth for 45 movies. Microsoft Corporation
covered the cost of this service for a period of six months.
Effective as of March 6, 2000, we entered into an additional Internet
content partner agreement pursuant to which Microsoft Corporation has agreed to
promote certain additional portions of our web content through March 6, 2001 as
part of the Broadband Jumpstart Initiative.
ION SYSTEMS, INC.
Our license agreement with ION Systems, Inc. allows us to use their
secure online download technologies. The agreement continues through December
31, 2004, and thereafter will be renewable automatically for additional renewal
terms of five years each. Under this agreement, ION Systems, Inc. has granted us
a license to use their E*Web(R) and the X*Maker(R) computer software which allow
for the secure downloading and viewing of our web sites. ION Systems' software
may be used by us solely for the publishing, displaying, promoting, marketing,
offering and selling for a fee of certain specified book categories as well as
of products or services listed in the books published.
<PAGE>
iBEAM BROADCASTING CORPORATION
On March 10, 2000, we entered into a one-year webcast distribution
agreement with iBEAM Broadcasting Corporation. iBEAM Broadcasting Corporation
provides storage space for the content for our CinemaPop.com and
CineManiaNetwork.com web sites, on demand streaming of that content and some
promotional support for our company.
LAIN INTERNATIONAL
On November 9, 1999, we signed a memorandum of understanding with Lain
International, or Lain. Lain has agreed to make available to us all
Spanish-language, Spanish-dubbed and Spanish-subtitled films to which it has
Internet distribution rights. We have created a KKRS web site called
CineManiaNetwork.com, which is devoted exclusively to these titles. We have
agreed to collect web visit statistics and perform accounting functions for the
site and will pay Lain royalties based upon advertising, subscription and
pay-per-view fees less expenses.
DISTRIBUTION RIGHTS TO "DEAD ANGEL"
On April 20, 2000, we entered into a distribution agreement with John
Clark for the Internet distribution rights to his book "Dead Angel," which book
pertains to his relationship with entertainer Jerry Garcia. Under the terms of
the agreement, we paid $7,000 to support the completion of the book and $6,000
in expenses for promotional interviews with Cliff Garcia and others as well as a
promotional party, both of which were webcast on our web site and made into a
videotape. Also, under the terms of agreement, John Clark has agreed to pay to
us 50% of the gross sales of the book on the Internet in perpetuity and 50% of
the royalties generated by the book and the interviews and party videotape for
two years.
CONTENT ACQUISITION
As part of our objective to become a leader in downloadable content, we
continually seek to acquire new content for our web sites. Examples of
agreements under which we have acquired content include:
MEISELMAN-REDE MEDIA GROUP
In May 2000, we entered into two agreements with Meiselman-Rede Media
Group, or MRMG. Based upon the terms of the first agreement, we paid MRMG
$100,000 in exchange for the future Internet rights to the first 16 two-minute
duration episodes of a project known as "Paris Falls." As of December 25, 2000,
eight episodes had been delivered. Based upon the terms of the second agreement,
we paid MRMG $100,000 for exclusive Internet distribution rights in perpetuity
to a film known as "LA River Story" and the right to receive 50% of the sums
actually received by MRMG from the exploitation of the "LA River Story" project
in all media, including, but not limited to, text, film, video, theater, cable
and syndicated television.
MARS PRODUCTIONS
On November 9, 2000, we entered into two license agreements with Mars
Productions. The agreement relates to full-length feature films entitled "James
Dean Live Fast, Die Young" and "Wish Me Luck." The agreements give us the
exclusive license to premiere and broadcast each film electronically worldwide
via the Internet for a period of 90 consecutive days from the first day of each
broadcast. According to the agreement, we will not charge a fee to viewers
during the 90-day term, but we may negotiate with Mars Productions to charge a
fee to viewers after the expiration of the 90-day term. Also, we have obtained
the right to broadcast clips and trailers of the films for advertising and
promotion purposes.
GRANT RAYNHAM
On December 7, 2000, we entered into a licensing agreement with Grant
Raynham for the full-length feature films "An American Christmas Carol,"
"Shattered Vows," "The Hound of the Baskervilles," "The Sign of Four,"
"Sidekicks" and "Satin Smoke". Under the agreement, we have an exclusive license
to premiere and broadcast the film electronically worldwide via the Internet for
a period of six months from the first day of broadcast. We have the right to
charge viewers a pay-per-view fee and to include the films in our monthly
subscriptions for members. Also, we have the right to broadcast clips and
trailers of the film for advertising and promotion purposes.
<PAGE>
JASON ROSETTE DBA CAMERADO
On October 17, 2000, we entered into a license agreement with Jason
Rosette dba Camerado relating to a full-length documentary entitled "Book Wars."
The agreement gives us an exclusive license to premiere and broadcast the film
electronically worldwide via the Internet for a period of 120 consecutive days
from the first day of broadcast. According to the agreement, we have the right
to charge viewers a pay-per-view fee and to include the films in our monthly
subscriptions for members. Also, we have the right to broadcast clips and
trailers of the film for advertising and promotion purposes.
RETROFILM.COM
On October 14, 2000, we purchased from RetroFilm.com high-quality
master tapes and cleared licenses for the following films: "Chinese Connection,"
"Beat the Devil," "M," "Asylum," "Girl Hunter," "Gorgo," "Hells Angels on
Wheels," "To Kill a Mockingbird," "I Cover the Waterfront," "McClintock,"
"Chopping Mall" and "Little Shop of Horrors."
ANTIGUA
On September 12, 2000, we entered into a license agreement with Antigua
relating to two full-length feature films entitled "Checkmate" and "Dangerous."
The agreement gives us the exclusive license to premiere and broadcast the films
electronically worldwide via the Internet for a period of 90 consecutive days
from the first day of broadcast. According to the agreement, we have the right
to charge viewers a pay-per-view fee and to include the films in our monthly
subscriptions for members. Also, we have the right to broadcast clips and
trailers of the film for advertising and promotion purposes.
SOFTORBIT.COM
On August 25, 2000, we entered into a Co-Distributor Agreement with
Softorbit.com for the distribution of 400 proprietary celebrity interviews and
film trailers on an exclusive basis for a period of six months from the date of
the agreement. Under the agreement, we have the rights to webcast, edit, copy,
excerpt, revise, digitize, encode, host, publicly display, show, broadcast,
perform, promote, and otherwise use and make available the Softorbit.com content
on and through our web sites and the Internet. After the six month exclusivity
period, we have these rights on a non-exclusive basis for an additional 42
months.
SALES AND MARKETING
Sales and marketing activities with respect to our Internet and
e-commerce businesses currently are limited primarily to headline links provided
by Microsoft Corporation from its web site to our CinemaPop.com web site and
clickable links to others' web sites. Also, on November 14, 2000, we entered
into an advertising contract with eConnect pursuant to which we will provide
eConnect with banner advertisements appearing on the home page and other pages
of www.CinemaPop.com and www.WordPop.com, send e-mail messages to eConnect's
entire subscriber and web partner databases, place an advertisement at the
beginning of at least one feature film per month and other services. Also, we
are soliciting monthly subscriptions, pay-per-view sales and advertising sales
for our CinemaPop.com web site.
Sales and marketing activities with respect to our data control console
business currently are handled by a limited number of manufacturer's
representatives and the employees of our company that are engaged primarily in
this portion of our business. These representatives and employees locate
potential customers and assist them in the planning process by making site
visits, taking lists of requirements, then providing customers with proposed
blueprints and drawings suited to the customers' individual needs. In an effort
to increase sales of our data control consoles, in June 2000 we hired two
exclusive sales representatives. We intend to increase the number of
manufacturer's representatives and employees devoted to these functions as funds
and opportunities become available so that we can continue to enhance Desience
Corporation's name as the pioneer and a modern leader in the data control
console business.
<PAGE>
In August 2000, we introduced new sales literature and launched a new
web site at www.desience.com for our Desience division. As discussed more fully
below, to capitalize on our business model, we intend to initiate a more
traditional marketing campaign as funds allow. Such a campaign is likely to
initially include targeted print and radio advertising and may also include
hiring marketing staff that would be primarily responsible for communications,
advertising and public relations for our data control console business and our
Internet and e-commerce businesses.
ADVERTISING AND PROMOTION
We have placed advertisements for the CinemaPop.com web site in
influential trade publications catering to the entertainment industry, such as
the national and international editions of The Hollywood Reporter. Since 1997,
we have created Internet web events in order to drive traffic to our web sites.
We intend to continue to create high profile Internet events as a means to
further promote our business.
Alex Kanakaris, our Chairman of the Board, President and Chief
Executive Officer, is the author of a book that highlights the impact of the
Internet on our society. From December 2000 to January 2001, over 2,500 copies
of the book were downloaded from www.WordPop.com. We believe that ongoing
exposure of this book will bring further attention to our web sites and our
company.
As part of our advertising and promotion efforts, we have entered into
a number of agreements, including:
INTERNATIONAL VISION LTD.
In October 2000, we entered into an agreement with International Vision
LTD., or IVL, under which IVL agreed to place a 30-second commercial advertising
the Chinese version of our www.CinemaPop.com web site on the television series
"You Can Start A Business," which series airs in various geographic locations,
including China, Hong Kong and Singapore. The series consists of three blocks of
ten episodes. IVL and our company have agreed to meet at the end of each block
of ten episodes to determine whether the advertisement will run on the next
block of episodes. We have agreed to pay IVL half of all profits derived in the
locations in which the advertisement airs, up to $50,000 per airing.
WALL STREET WEBCAST
In September 2000, we entered into an agreement with Wall Street
Webcast pursuant to which Wall Street Webcast provided us with a three-day
investment tour, including a due diligence meeting with approximately 30
stockbrokers and money managers, and a meeting hosted by Gloria Star Kins,
President of The Kins Group, at which we were introduced to prominent New York
financial and business leaders. Also, over a two-day period, Wall Street Webcast
arranged several individual meetings for us with small cap funding managers in
the New York and Boston areas.
IFILM
In May 2000, we entered into an agreement with IFILM under the terms of
which IFILM has agreed to allow users of the IFILM web site to view multimedia
content by uniform resource locater, or URL, links to the CinemaPop.com web
site. IFILM has agreed to provide CinemaPop.com with "Preferred Partner" status
on the IFILM site, which means that IFILM will provide CinemaPop.com with a
suite of benefits and services that may include placement of the CinemaPop.com
logo on the IFILM site, listing on the IFILM Preferred Partners page, placement
of a link to the CinemaPop.com home page on the IFILM home page on a rotating
basis with other Preferred Partners, and other promotional or preferential
services that IFILM accords to its Preferred Partners in the future. In exchange
for IFILM's commitments under the agreement, we have agreed to deliver film
information to IFILM by making accessible a document matching IFILM's formatting
standards. We have agreed to keep the film information current to reflect any
changes to the URLs for the multimedia content. Also, CinemaPop.com has granted
to IFILM a non-exclusive, worldwide, royalty-free license to reproduce,
distribute, publicly perform and publicly display on the IFILM site
CinemaPop.com's logo and film information.
<PAGE>
CRIER COMMUNICATIONS
In September 2000, we entered into an agreement with Crier
Communications pursuant to which Crier Communications has agreed to provide us
with guidance in public relations development on a month-to-month basis.
COMPETITION
The Internet and e-commerce businesses are extremely competitive and
can be significantly affected by many factors, including changes in local,
regional or national economic conditions, changes in consumer preferences, brand
name recognition and marketing and the development of new and competing
technologies. We expect that existing businesses that compete with us and which
have greater resources than us will be able to undertake more extensive
marketing campaigns and adopt more aggressive advertising sales policies than
us, thereby generating more traffic to their web sites.
We believe that KKRS.Net is the only web site that currently offers
both direct-over-the-Internet movies and direct-over-the-Internet books. We
believe that our unique combination of products on our web sites will assist us
in becoming and remaining competitive with other movie and book web sites by
allowing us to share traffic, and therefore share revenue potential, between our
various web sites.
Although there are numerous movie web sites on the Internet, we believe
that we have a competitive edge in the online movie industry because, among
other things:
o We have introduced subscription, pay-per-view, advertising
and web partner programs to our CinemaPop.com movie site
in order to provide a variety of revenue streams.
o We believe that CinemaPop.com currently offers the largest
number of full-length, mainstream Hollywood movies with
Internet access at multiple access speeds.
o Most of our full-length movies start to stream and can begin
to be viewed in approximately one minute rather than having a
downloading process of a few hours before the movie can be
viewed, as required on many other web sites.
o We currently have over 450 full-length films online, which are
viewable in streams from 56 kbps to broadband. Because of the
significant time involved in translating film into streaming
media technology, we believe that our film library gives us a
significant lead over others in the online movie industry.
o Our content can be viewed on multiple platforms, including
through CinemaWEAR(TM) wireless delivery to Pocket PCs and
Palm(TM) handhelds.
o Our Embedded Electronic Commerce(TM) technology allows us to
enable viewers to place secure online orders for products
offered by businesses through clickable links within streaming
video.
<PAGE>
Although there are numerous book sites on the Internet, we believe that
our WordPop.com web site is the only web site that provides real-time secure
fulfillment from one source file. In addition, we believe that WordPop.com is
the only web site that currently uses proprietary technology which enables
consumers to read posted books and other materials without scrolling and in any
type size the consumer's eyes find comfortable while allowing authors and
publishers to maintain ownership and control over their proprietary content.
With respect to competition with our data control console business, we
believe there are five companies competing in the marketplace for modular system
solutions, including Desience Corporation, Wrightline, Evans Consoles, and
Stacking Systems, which provide metal products, and Infrastructures, which
provides wood-type products. Most of our competitors offer similar services,
such as installation, warranties and customer service. Deciding factors such as
price, service, features and materials vary according to the requirements of the
customer.
Although we were the pioneers in this industry and are a leader in the
design and production of quality metal data control console products, we believe
that all of our competitors currently have more financial and other resources
than us. Nevertheless, we have remained competitive in the data control console
industry based upon our delivery of quality products and services with
relatively minimal overhead. We intend to maintain and enhance our competitive
position in this industry by committing additional staffing and other resources
to our data control console business as funds become available.
PATENTS AND PROPRIETARY RIGHTS
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary technology and
intellectual property rights. We do not hold any patents. However, we believe
that some of our proprietary technologies, including our CinemaWEAR(TM) encoding
technology, our CinemaWEAR(TM) Wireless Delivery technology and our Embedded
Electronic Commerce(TM) technology, could benefit from patent protection.
Accordingly, we intend to file patent applications for those technologies with
the United States Patent and Trademark Office. There can be no assurance that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop comparable or superior technologies
or obtain unauthorized access to our proprietary technologies.
Third party products and brand names referred to in this document may
be trademarks or registered trademarks of their respective owners. We own,
license or have otherwise obtained the right to use certain technologies
incorporated into our web sites. We may receive infringement claims from third
parties relating to our technologies. In such event, we intend to investigate
the validity of any such claims and, if we believe the claims have merit, we
intend to respond through licensing or other appropriate actions. Certain of
these claims may relate to technology that we have licensed from third parties
for incorporation into our web sites. In such event, we would forward these
claims to the appropriate third party. If we were unable to license or otherwise
provide any necessary technology on a cost-effective basis, we could be
prohibited from using that technology, incur substantial costs in redesigning
our web sites, products and services that incorporate that technology, or incur
substantial costs defending any legal action taken against us, all of which
could have a material adverse effect on our business, prospects, financial
condition, results of operations and cash flows.
We hold the Internet domain names "KKRS.Net," "WordPop.com,"
"NetBooks.com," "CinemaPop.com" and many others. Under current domain name
registration practices, no one else can obtain an identical domain name, but
someone might obtain a similar name, or the identical name with a different
suffix, such as ".org", or with a country designation. The regulation of domain
names in the United States and in foreign countries is subject to change, and we
could be unable to prevent third-parties from acquiring domain names that
infringe or otherwise decrease the value of our domain names.
<PAGE>
GOVERNMENT REGULATION
The United States Congress has recently passed or is considering
legislation regulating certain aspects of the Internet, including online
content, copyright infringement, user privacy, taxation, access charges, digital
signatures and liability for third-party activities. The European Union also has
enacted several directives relating to the Internet, including directives that
address the use of personal data, e-commerce activities, security, commercial
piracy, consumer protection and taxation of e-commerce transactions. Various
states have adopted and are considering Internet-related legislation and
regulations. Governmental authorities in the United States and abroad are
considering other legislative and regulatory proposals to further regulate the
Internet. Areas of potential regulation include libel, pricing, quality of
products and services and intellectual property ownership. We cannot predict
what new laws will be enacted, or how courts will interpret existing and new
laws, and therefore are uncertain as to how new laws or the application of
existing laws will affect our business. In addition, our business may be
indirectly affected by legislation that affects the ability of our customers to
engage in e-commerce activities. Increased regulation of the Internet may
decrease the growth in the use of the Internet, which could decrease the demand
for our products and services, increase our cost of doing business or otherwise
harm our business, results of operations and financial condition.
EMPLOYEES
As of January 10, 2001, we employed or contracted a total of seven
employees and five consultants on a full or part-time basis. Four of our workers
are devoted primarily to our Internet and e-commerce businesses, three of our
workers are devoted primarily to our data control console business and three of
our personnel are devoted to both our Internet and e-commerce businesses and our
data control console business.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. Our employees are not represented by any collective
bargaining unit. We have never experienced a work stoppage. We believe our
relationship with our employees is good.
FACILITIES
We currently occupy approximately 1,780 square feet of office space at
our headquarters in Costa Mesa, California. Our long-term lease for this space
expired in August 2000. We are renting this space on a month-to-month basis
while we consider relocating.
<PAGE>
LEGAL PROCEEDINGS
On September 15, 1999, Robert Adams filed a complaint against our
company and our Chairman of the Board, President and Chief Executive Officer,
Alex Kanakaris, individually, in Los Angeles Superior Court (Case No. LC050023)
alleging breach of contract and fraud. Mr. Adams based his fraud claim primarily
on alleged misrepresentations and concealment involving a consulting agreement
between our company and Mr. Adams. Mr. Adams alleged that he was entitled to
certain stock options, of which 75% of the option price allegedly was already
deemed paid in exchange for services allegedly rendered by Mr. Adams to our
company. Mr. Adams attempted to exercise the options for the purchase of a
certain number of shares to which he claimed to be entitled pursuant to the
agreement. The claims against Mr. Kanakaris individually were dismissed. On
November 1, 2000, Mr. Adams and our company entered into a Settlement Agreement
and General Release pursuant to which we agreed to pay a total of $24,000 to Mr.
Adams and his attorney in three equal installments of $8,000 each on November 1,
2000, March 1, 2001 and July 1, 2001 in exchange for dismissal with prejudice of
the entire action after the three payments have been made.
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 was 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
were prepared to tender to the court the stock certificates to which our
company, Institutional Management and Pinnacle Management are each laying claim.
In July 2000, that tender was effectuated, and the claims asserted by and
against Alpha Tech and MJ&K were dismissed. The stock, therefore, has been and
will remain issued in the name of the United States District Court until the
dispute is resolved.
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of our company and their ages and
positions are as follows:
Name Age Position
---- --- --------
Alex Kanakaris*............... 44 Chairman of the Board, President,
Chief Executive Officer and Director
Branch Lotspeich*............. 53 Vice Chairman of the Board, Vice
President, Secretary and Director
John Robert McKay*............ 38 Webmaster and Director
Patrick McKenna............... 33 Director
Robert Sherry................. 43 Director
Lisa Lawrence................. 25 Vice President of Internet, Director
of Internet Business Affairs and
Director
Jeff Hall..................... 49 Director
Rose Forbes................... 51 Director
Thomas S. Hughes.............. 52 Director
David T. Shomaker............. 44 Acting Chief Financial Officer and
Advisor to the Board
---------------
* Member of executive committee and 2000 Stock Option Plan committee.
BUSINESS EXPERIENCE
DIRECTORS
Alex F. Kanakaris has served as a director and as our Chairman of the
Board, President and Chief Executive Officer since November 1997. Mr. Kanakaris
served as the President of Kanakaris InternetWorks, Inc. from 1994 until it was
acquired by our company in November 1997. During the past 15 years, Mr.
Kanakaris created innovative web sites, including www.cyberpop.com and
www.NetBooks.com, and he served as editor-in-chief of various publications such
as Video Swapper, Video Entertainment, New Talent Streetscene and L.A. POP. Mr.
Kanakaris is author of the book "Signs of Intelligent Life on the Internet"
published by Dace/Brentwood Media Group, November 1999.
On August 2, 1999, the Securities and Exchange Commission filed suit in
the United States District Court in the District of Nevada against our company,
Mr. Kanakaris, David Valenti, a stockholder of our company, and another
individual seeking permanent injunctions and civil penalties based on alleged
violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities Act of
1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in connection with the sale of approximately 6,000,000 shares of our
company's common stock in 1996 and 1997 to the former stockholders of Kanakaris
InternetWorks, Inc., a subsidiary of our company. On August 9, 1999, a final
judgment of permanent injunction and other relief was entered in connection with
the execution by each defendant of a consent to entry of injunction and the
payment by each of Mr. Kanakaris and Mr. Valenti of a $25,000 civil penalty.
Without admitting or denying any guilt involving the violations cited in the
decrees, Mr. Kanakaris, Mr. Valenti and our company each have agreed pursuant to
the consents to entry of injunction not to take actions that would violate
federal securities laws in connection with the offer, purchase or sale of
securities.
<PAGE>
Branch Lotspeich has served as President of Desience Corporation since
June 1997. He has served as our Vice Chairman of the Board and Secretary and as
a director since November 1997. Mr. Lotspeich was appointed Vice President of
our company in May 2000. Prior to that, he served as Vice President of Desience
Corporation from March 1992 through June 1997. Prior to that, Mr. Lotspeich
worked as an independent consultant in telecommunications, acquiring accounts
including Proctor & Gamble and Cincinnati Bell Telephone. Mr. Lotspeich is a
Summa Cum Laude graduate of the University of Cincinnati with a Bachelor of Fine
Arts degree in Television Broadcasting.
John Robert McKay has served as a director and as our Webmaster since
August 1999. Mr. McKay served as our Vice President-Internet Division from May
1997 through July 1998. Mr. McKay has been a webmaster since 1995 and has worked
both full-time and as a consultant to our company's Chairman of the Board,
President and Chief Executive Officer, Alex Kanakaris, since 1994. Mr. McKay was
a web site administrator for NNA Services, a non-profit educational
organization, from 1993 to 1994. Prior to that, he served as Sales Promotion
Manager for ORA Electronics/Alliance Corporation, an international consumer
electronics company, from 1991 to 1992. From 1987 to 1991, Mr. McKay served as
the advertising manager for Kelly-Moore Paint Co. Mr. McKay is a graduate of San
Francisco State University with a Bachelor of Science degree in Marketing.
Patrick McKenna has served as a director since March 2000. During the
past five years, Mr. McKenna has held various positions in Seattle, Washington.
Mr. McKenna has served as Director of Strategy for iBEAM Broadcasting
Corporation, an Internet broadcasting company, since March 2000. Mr. McKenna
served as a business development manager for Kiket.com, a software company, from
July 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
Washington State University.
Robert Sherry has served as a director since September 2000. Mr. Sherry
is currently Senior Vice President of sales with the Internet firm Business.com,
and has held similar positions in the online industry at Internet companies such
as NetZero and ValueClick. In these roles, his responsibilities included
launching and managing outside and inside sales operations, establishing sales
accountability and revenue goals and developing new product streams. Mr. Sherry
has been with Business.com as Senior Vice President of Sales since October 2000.
Prior to that time, Mr. Sherry was Vice President of Sales at Netzero, Inc. from
July 2000 to September 2000. From September 1999 to June 2000, Mr. Sherry was
Senior Vice President of Sales at Valueclick, Inc. and held the same position
from July 1998 until September 1999 with WHERE International, L.L.C. From March
1994 until July 1998, Mr. Sherry held the position of Sales Director with
Reader's Digest Association. Mr. Sherry has a Bachelor of Arts degree in English
from Georgetown University.
Lisa Lawrence has served as a director since September 2000. Ms.
Lawrence has been associated with our company since 1996. Ms. Lawrence currently
holds the offices of Director of Internet Business Affairs, which she has held
since July 1999, and Vice President of Internet, which she has held since July
2000. Ms. Lawrence develops and administers our business relationships with
leading Internet companies. Ms. Lawrence also assists our Chief Executive
Officer in implementing his business vision, including the expansion of our
movie web sites. >From August 1997 until June 1999, Ms. Lawrence worked at Curb
Entertainment, where her responsibilities included sales of international film
rights and representation at major film festivals. Prior to her employment at
Curb Entertainment, Ms. Lawrence was a student at Pepperdine University, where
she earned a Bachelor of Arts degree in Telecommunications.
Jeff Hall has served as a director since November 2000 and was an
advisor to our board of directors since November 1997. Mr. Hall serves part-time
as an associate to our Chief Executive Officer in the role of a strategist and
as a hands-on business implementer. Mr. Hall has been the President and owner of
the Brentwood Media Group since 1991. Prior to that time, Mr. Hall joined the
Los Angeles Times as Vice President of Marketing Services, was promoted to
become the first President of the San Fernando Valley edition of the Los Angeles
<PAGE>
Times and launched the Ventura County edition of the Los Angeles Times. Mr. Hall
was one of twelve individuals to be selected from 855 applicants nationwide to
serve one year as a White House fellow. Mr. Hall started his professional
newspaper career as a general assignment reporter for the Kansas City Star, a
Capital Cities/ABC newspaper, where he attained the position of Vice President
of Marketing. Mr. Hall has a Master of Business Administration degree from
Harvard Business School and is a graduate of Stanford University with a Bachelor
of Arts degree in Communications.
Rose Forbes has served as a director since November 2000 and was an
advisor to our board of directors since November 1997. Ms. Forbes' background
includes work at Sony Pictures Entertainment, MCEG/Virgin Home Entertainment and
Paramount Pictures. Ms. Forbes is currently Manager of Music Clearance at Sony
Pictures Entertainment and has been with Sony since July 1990.
Thomas S. Hughes has served as a director since November 2000 and was
an advisor to our board of directors since November 1997. Mr. Hughes is
President and Chief Executive Officer of eConnect, Inc. and its subsidiary,
Powerclick. Mr. Hughes has personally led eConnect's innovative and proprietary
technology development for e-commerce, which includes the eCashPad electronic
secure payment system. Mr. Hughes has been with eConnect since May 1995 and has
been President and Chief Executive Officer of Electronic Transactions &
Technologies since June 1998.
All directors hold office until the next annual stockholders' meeting
or until their respective successors are elected or until their earlier death,
resignation or removal. Each officer serves at the discretion of the board of
directors.
ADVISORS TO OUR BOARD OF DIRECTORS
David T. Shomaker has served as our acting Chief Financial Officer
since May 1999 and as an advisor to our board of directors since May 1999. He
has been a partner of Haynie & Company, Certified Public Accountants, based in
Orange County, California and Salt Lake City, Utah since 1990. Mr. Shomaker is a
Certified Public Accountant in the States of California and Utah and is a
Certified Fraud Examiner and a Certified Valuation Analyst. Mr. Shomaker holds a
Bachelor of Science degree in Accounting from Brigham Young University, Provo,
Utah.
Frank Ake has served as an advisor to our board of directors since
November 1997. He has acted as a consultant in connection with over one billion
dollars of real estate acquisition, development and redevelopment projects
worldwide, some of which projects have used state of the art Internet
technology. Mr. Ake's experience includes a position with Skidmore Owings &
Merrill as Chicago Intern Architect with the world's largest architecture firm
at their headquarters office from 1976-1979. Mr. Ake participated in the design
of over seven billion dollars of airports, hotels, and office towers worldwide
from 1979-2000. Mr. Ake has an architectural degree from The Illinois Institute
of Technology in Chicago.
George Atkinson has served as an advisor to our board of directors
since November 1997. He was a pioneer of home video and was the President of the
600+ Video Station network, which preceded major chains such as Blockbuster. He
was named by the Video Software Dealers Association as Video Retailer of the
Year and Video Man of the Year in 1979, and was a central character in the New
York Times best selling book "Fast Forward: Hollywood, the Japanese and the VCR
Wars" by James Lardner. Mr. Atkinson assists us in obtaining content for our
movie web site CinemaPop.com.
Dr. Steven A. Newman has served as an advisor to our board of directors
since September 2000 and served as a director of our company from March 2000 to
September 2000. Dr. Newman has held, during the last five years, various
positions at Xybernaut Corporation, the leading provider of mobile, wearable
computing hardware, software and services, bringing wireless communications and
full-function Pentium computing power in a hands-free design to people when and
where required. Dr. Newman has been a director of Xybernaut Corporation since
January 1995, Vice Chairman of the Board of Xybernaut Corporation since August
<PAGE>
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. Currently, Dr. Newman 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.
Beryl Wolk has served as an advisor to our board of directors since
November 1997. Mr. Wolk developed a family-founded and owned business that
presently is comprised of 21 autonomous companies with 1,250 employees and major
facilities in four states. Mr. Wolk's business emphasis has been on developing
unique targeted media, which evolve into a series of integrated, marketing
multi-media. Mr. Wolk founded the Internet Marketing Consortium, a large group
of companies that have joined together to enhance each other's marketing. Mr.
Wolk was an innovator in the use of newspapers for distribution of direct
response marketing in a magazine format. Mr. Wolk has, as co-founder of the
Cable Advertising Bureau, also been a leader in the cable industry. He was
co-founder and co-owner of cable television's largest circulation magazine, The
Cable Guide, which merged with TV Guide. Mr. Wolk conceived and founded the
first company that produced 30-minute "infomercials." In addition, Mr. Wolk is a
co-founder of CartCade, a kiosk company whose carts are used for lead generation
surveys, literature distribution, various forms of recruitment and the sale of
products. Mr. Wolk developed Dial-A-Fax, Inc., publisher of a facsimile
telephone directory. Mr. Wolk is a graduate of the University of Pennsylvania's
Wharton School of Business and is a retired Lieutenant Commander in the United
States Naval Reserve.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors, and persons who beneficially own
more than 10% of a registered class of our common stock, to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission. Such officers, directors and stockholders are required by
Securities and Exchange Commission regulations to furnish our company with
copies of all reports that they file.
Based solely upon a review of copies of reports furnished to us during
and after the fiscal year ended September 30, 2000, or any written
representations received by our company from a director, officer or beneficial
owner of more than 10% of our company's common stock that no other reports were
required, we believe that, for the fiscal year ended September 30, 2000, all
Section 16(a) filing requirements applicable to our company's reporting persons
were met.
COMPENSATION OF DIRECTORS
Our directors receive no compensation for attending meetings of the
Board of Directors.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation earned for all services rendered to our company in all capacities
during the fiscal year ended September 30, 2000, for our Chief Executive Officer
and for our two other executive officers whose total compensation exceeded
$100,000 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- -------------
AS OF
YEAR OTHER SECURITIES
NAME AND ENDED ANNUAL UNDERLYING
PRINCIPAL POSITION SEPT. 30 SALARY BONUS COMPENSATION(1) STOCK OPTIONS
------------------ ------ ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Alex Kanakaris 2000 $175,000(2) $42,760(3) -- 3,762,500
Chairman of the Board, 1999 $105,000 $97,098(4) -- --
President and Chief
Executive Officer
Branch Lotspeich 2000 $125,000(5) $ 4,829(6) -- 1,525,000
Vice Chairman of the 1999 $105,000 $25,134(7) -- --
Board and President of
Desience Corporation
John Robert McKay 2000 $105,000(8) $12,145(9) -- 495,000
Webmaster and Director 1999 $ 14,998 $ 9,513(10) -- --
</TABLE>
------------------------
(1) Aggregate amounts do not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported in this table.
(2) Salary changed in January 2000 from $105,000 to $150,000 and in August
2000 from $150,000 to $175,000.
(3) Represents forgiveness of indebtedness as bonus compensation in the
aggregate principal amount of $39,495 and the approximate interest
amount of $3,265.
(4) Represents cash bonus compensation in the amount of $73,378 and
forgiveness of indebtedness as bonus compensation in the aggregate
principal amount of $14,080 and the approximate interest amount of
$9,640.
(5) Salary changed in January 2000 from $105,000 to $125,000.
(6) Represents forgiveness of indebtedness as bonus compensation in the
aggregate principal amount of $3,920 and the approximate interest
amount of $909.
(7) Represents cash bonus compensation in the amount of $18,838 and
forgiveness of indebtedness as bonus compensation in the aggregate
principal amount of $3,920 and the approximate interest amount of
$2,376.
(8) Salary changed in April 2000 from $80,000 to $105,000.
(9) Represents cash bonus compensation in the amount of $5,000 and
forgiveness of indebtedness as bonus compensation in the approximate
aggregate principal amount of $5,800 and the approximate interest
amount of $1,345.
(10) Represents forgiveness of indebtedness as bonus compensation in the
approximate aggregate principal amount of $5,800 and the approximate
interest amount of $3,713.
<PAGE>
OPTION GRANTS FOR THE LAST FISCAL YEAR
The following table provides information regarding option grants in the
fiscal year ended September 30, 2000 to the Named Officers. We did not grant any
stock appreciation rights in the year ended September 30, 2000.
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE
GRANTED EMPLOYEES IN PRICE EXPIRATION
Name (#) FISCAL YEAR(1) ($/SH)(2) DATE
------------------- ----------- -------------- ------------ -----------
Alex F. Kanakaris... 2,100,000 57.38% $.520 12/31/2009
... 900,000 57.38% $.705 5/25/2010
... 762,500 57.38% $.750 8/01/2010
Branch Lotspeich.... 1,200,000 23.26% $.520 12/31/2009
.... 325,000 23.26% $.705 5/25/2010
John Robert McKay... 345,000 7.55% $.520 12/31/2009
... 100,000 7.55% $.705 5/25/2010
... 50,000 7.55% $.750 8/01/2010
-------------------
(1) Based on options to purchase 6,557,500 shares of common stock granted
to employees during the fiscal year ended September 30, 2000.
(2) The options were granted at an exercise price equal to the fair market
value of a share of common stock on the date of grant.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no exercises of options by the Named Officers during the
fiscal year ended September 30, 2000. The following table sets forth the number
of exercisable and unexercisable in-the-money stock options and their values at
September 30, 2000 for the Named Officers. An option is "in-the-money" if the
fair market value for the underlying securities exceeds the exercise price of
the option.
NUMBER OF
SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Alex F. Kanakaris... 3,762,500 -- $0 --
Branch Lotspeich.... 1,525,000 -- $0 --
John Robert McKay... 495,000 -- $0 --
---------------
(1) The closing price of our common stock as of September 30, 2000 as
reported by a member firm of the NASD that effects transactions in
stocks quoted on the OTC Electronic Bulletin Board was $.5156.
<PAGE>
2000 STOCK OPTION PLAN
Our board of directors and stockholders have approved our 2000 Stock
Option Plan, or the 2000 Plan. The 2000 Plan is designed to enable us to offer
an incentive-based compensation system to employees, officers and directors of
our company and to employees of companies who do business with our company. The
2000 Plan provides for the grant of incentive stock options, or ISOs, and
nonqualified stock options, or NQOs. ISOs and NQOs are collectively referred to
below as options.
A total of 3,000,000 shares of our common stock are authorized for
issuance under the 2000 Plan. As of January 11, 2001, we had a total of 18
employees, officers and directors eligible to receive options under the 2000
Plan, and options to purchase up to 3,000,000 shares of our common stock were
outstanding under the 2000 Plan. Any shares of common stock that are subject to
an award but are not used because the terms and conditions of the award are not
met, or any shares which are used by participants to pay all or part of the
purchase price of any Option, may again be used for awards under the 2000 Plan.
The 2000 Plan is to be administered by a committee of not less than two
nor more than five persons appointed by the board of directors, each of whom
must be a director of our company. Notwithstanding the foregoing, the board of
directors may act as the committee under the 2000 Plan. It is the intent of the
2000 Plan that it be administered in a manner such that option grants and
exercises would be exempt under Rule 16b-3 of the Securities Exchange Act of
1934, as amended. Since the adoption of the 2000 Plan in May 2000, the committee
for the 2000 Plan has been comprised of Alex Kanakaris, Branch Lotspeich and
John McKay.
The committee is empowered:
o to select those eligible persons to whom options shall be granted
under the 2000 Plan;
o to determine the time or times at which each option shall be
granted, whether options will be ISOs or NQOs, and the number of
o shares to be subject to each option; and
o to fix the time and manner in which each such option may be
exercised, including the exercise price and option period, and
other terms and conditions of such options, all subject to the
terms and conditions of the 2000 Plan.
The committee has sole discretion to interpret and administer the 2000
Plan, and its decisions regarding the 2000 Plan are final.
ISOs granted under the 2000 Plan must have an exercise price of not
less than 100% of the fair market value of the common stock on the date the ISO
is granted and must be exercised, if at all, within ten years from the date of
grant. In the case of an ISO granted to an optionee who owns more than 10% of
the total voting securities of our company on the date of grant, such exercise
price shall be not less than 110% of fair market value on the date of grant, and
the option period may not exceed five years. NQOs granted under the 2000 Plan
must have an exercise price of not less than 85% of the fair market value of the
common stock on the date the NQO is granted.
Options may be exercised during a period of time fixed by the
committee, except that no option may be exercised more than ten years after the
date of grant. In the discretion of the committee, payment of the purchase price
for the shares of stock acquired through the exercise of an option may be made
in cash, shares of our common stock or a combination of cash and shares of our
company's common stock.
The 2000 Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time and from time to time by the board of
directors. The board of directors may not (i) materially impair any outstanding
options without the express consent of the optionee or (ii) materially increase
the number of shares subject to the 2000 Plan, materially increase the benefits
to optionees under the 2000 Plan, materially modify the requirements as to
eligibility to participate in the 2000 Plan or alter the method of determining
the option exercise price without stockholder approval. No Option may be granted
under the 2000 Plan after May 24, 2010.
<PAGE>
Although not intended as an anti-takeover measure by the board of
directors, one of the possible effects of the 2000 Plan could be to place
additional shares, and to increase the percentage of the total number of shares
outstanding, in the hands of the directors and officers of our company. Such
persons may be viewed as part of, or friendly to, incumbent management and may,
therefore, under certain circumstances be expected to make investment and voting
decisions in response to a hostile takeover attempt that may serve to discourage
or render more difficult the accomplishment of such attempt.
In addition, options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of the assets of
our company, or other attempted changes in the control of our company. In the
opinion of the board of directors, such an acceleration provision merely ensures
that optionees under the 2000 Plan will be able to exercise their options as
intended by the board of directors and stockholders of our company prior to any
such extraordinary corporate transaction that might serve to limit or restrict
such right. The board of directors is, however, presently unaware of any threat
of hostile takeover involving our company.
MEETINGS OF THE BOARD OF DIRECTORS
Our board of directors held five meetings during the fiscal year ended
September 30, 2000, and took action by unanimous written consent on 19
occasions. No incumbent director during the fiscal year ended September 30, 2000
attended fewer than 75% of the total number of meetings of the board of
directors and the total number of meetings held by all committees of the board
on which the director served during the director's term of service thereon.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not have audit, nominating or compensation committees of the
board of directors and, except as described below, no committee of the board of
directors performs similar functions.
Our board of directors appointed an executive committee consisting of
three directors: Alex Kanakaris, Branch Lotspeich and John Robert McKay. Subject
to any actions that may be taken by our full board of directors, the executive
committee has the authority to:
o Appoint officers and agents of our company and determine their
salaries;
o Borrow money, and issue bonds, notes or other obligations and
evidences of indebtedness;
o Authorize the corporate seal to be affixed to documents of our
company;
o Determine questions of general policy with regard to the
business of our company;
o Make recommendations as to declaration of dividends;
o Issue equity securities for cash, property or services
rendered, at prices no less than 40% of the last bid price on
the NASD's OTC Bulletin Board on the day prior to approval of
issuance; and
o Make loans from time to time to officers and employees of our
company and determine the amount, interest rate and due date
for the loans and whether the loans will be collateralized,
provided that no loan may result in an outstanding loan
balance of more than $300,000 at any one time (notwithstanding
any loans made prior to May 17, 2000) and provided further
that no funds received from any debenture agreement entered
into by our company during 1999 and 2000 may be used to fund
any such loans.
The executive committee of our board of directors held no meetings
during the fiscal year ended September 30, 2000, and took action by unanimous
written consent on twelve occasions.
The 2000 Stock Option Plan committee held no meetings during our fiscal
year ended September 30, 2000 and took action by unanimous written consent on
two occasions.
No executive officer of our company has served as a director or member
of the compensation committee of any other entity whose executive officers
served as a director of our company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and Bylaws, as amended and restated,
provide that our company shall, to the fullest extent permitted by Nevada
Revised Statutes section 78.751, indemnify all persons that we have power to
indemnify under that section against all expenses, liabilities or other matters
covered by that section, and that this indemnification is not exclusive of any
other indemnification rights to which those persons may be entitled.
Indemnification under this provision would be both as to action in an official
capacity and in another capacity while holding office. Indemnification would
continue as to a person who has ceased to be a director, officer, employee or
agent and would extend to the benefit of the heirs, executors and administrators
of such a person. Section 78.751 of the Nevada Revised Statutes provides that
the expenses of our officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by us as they are incurred and
in advance of the final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by us.
Our Articles of Incorporation, as amended and restated, also provide
that a director of our company shall not be liable to our company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the Nevada Revised Statutes. Any amendment, modification or
repeal of this provision by our stockholders would not adversely affect any
right or protection of a director of our company in respect of any act or
omission occurring prior to the time of such amendment, modification or repeal.
Our Articles of Incorporation do not, however, eliminate or limit a director's
liability for (i) any act or omission involving intentional misconduct, fraud
or a knowing violation of law, or (ii) the payment of unlawful distributions
to stockholders. Furthermore, they do not limit liability for claims against
a director arising out of his or her role as an officer or in any other
capacity, nor would it affect the director's responsibilities under the
federal securities laws or any other law. However, we have purchased directors
and officers liability insurance to protect our directors and executive
officers against liability under circumstances specified in the policy.
Certain of the selling security holders and our company each have
agreed to indemnify the other and their respective officers, directors and other
controlling persons against certain liabilities in connection with this
registration, including liabilities under the Securities Act of 1933, and to
contribute to payments those persons may be required to make in connection
with this registration.
To the extent indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of our company under the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
<PAGE>
PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of January 5, 2001 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 5% or more of our
outstanding common stock;
o Each of the selling security holders;
o Each of our directors;
o Each of our executive officers named in the summary compensation
table in this prospectus; and
o All of our directors and executive officers as a group.
The following calculations of the percent of outstanding shares are
based on 46,746,494 shares of our common stock and 1,000,000 shares of our Class
A Convertible Preferred Stock issued and outstanding as of January 5, 2001.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants, conversion of outstanding shares of Class A
Convertible Preferred Stock and conversion of outstanding convertible debentures
that are exercisable or convertible, as the case may be, within sixty days of
the date of the table, as more particularly described in the footnotes below.
Except as described below, beneficial ownership and, accordingly, percent of
class ownership, is calculated pursuant to Securities and Exchange Commission
Rule 13d-3.
Amounts shown in the table as beneficially owned by Bristol Investment
Fund, Ltd., AJW Partners, LLC, New Millennium Capital Partners, LLC, Bank
Insinger de Beaufort and Equilibrium Equity, LLC, or the debenture investors,
are determined in part based upon the terms of convertible debentures and
related warrants held by these five debenture investors as of the date of the
table. Beneficial ownership amounts for Bristol Investment Fund, Ltd., AJW
Partners, LLC, New Millennium Capital Partners, LLC and Equilibrium Equity, LLC
exclude shares of common stock underlying an additional $650,000 of convertible
debentures that we are obligated to issue and those four debenture investors are
obligated to purchase if conditions relating to the market price of our common
stock are met at the time the Securities and Exchange Commission declares
effective a registration statement that we intend to file covering the shares of
common stock issuable upon conversion of debentures and exercise of warrants
issued to those four debenture holders in connection with our January 2001
debenture offering.
For purposes of the table, we have disregarded provisions contained in
the debentures and warrants that prohibit conversion of the debentures or
exercise of the warrants to the extent that conversion of the debentures would
result in the debenture investor, together with its affiliates, beneficially
owning in excess of 4.999% or 9.999% of our outstanding shares of common stock,
and to the extent that exercise of the warrants would result in the debenture
investor, together with its affiliates, beneficially owning in excess of 4.9% of
our outstanding shares of common stock. These limitations may be waived by a
debenture investor upon prior written notice to us. Further, these limitations
do not preclude a debenture investor from converting or exercising and selling
shares underlying the debentures and warrants in stages over time where each
stage does not cause the debenture investor to beneficially own in excess of the
limitation amounts.
In light of the above discussion regarding the terms of the debentures
and warrants, the number of shares shown in the table as beneficially owned by
each debenture investor represents a good faith estimate of the number of shares
of common stock issuable upon conversion of the debentures and upon exercise of
the warrants as of the date of the table and has not been calculated in strict
compliance with Rule 13d-3.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders, but we will receive
proceeds from the exercise, if any, of the warrants whose underlying shares are
offered under this prospectus, and we will record a reduction in indebtedness to
the debenture investors upon conversions, if any, of the debentures whose
underlying shares are offered under this prospectus. We intend to use any
proceeds we receive for general corporate purposes.
<PAGE>
We have agreed to pay the expenses, other than broker discounts and
commissions, if any, in connection with this prospectus. We have agreed to
prepare and file all amendments and supplements to the registration statement of
which this prospectus is a part as may be necessary in accordance with the rules
and regulations of the Securities Act of 1933, as amended, to keep it effective
until the earlier to occur of the following:
o The date as of which all shares of common stock offered under
this prospectus may be resold in a public transaction without
volume limitations or other material restrictions without
registration under the Securities Act, including without
limitation, pursuant to Rule 144 under the Securities Act; and
o The date as of which all shares of common stock offered under
this prospectus have been resold.
<TABLE>
<CAPTION>
Shares of Class Shares of
Beneficially Class Being Shares of Class
Name and Address of Title of Owned Prior Offered Pursuant Beneficially Owned
Beneficial Owner(1) Class to this Offering to this Prospectus After this Offering(2)
----------------- ----- ------------------- ------------------ ------------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
AJW Partners, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 11,144,356(3) 19.33% 1,867,526(4) 9,276,830 16.68%
New Millennium Capital Partners II, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 11,144,356(3) 19.33% 1,867,526(4) 9,276,830 16.68%
Alex F. Kanakaris.....................Common 7,052,046(5) 13.69% - 7,052,046 13.69%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
Bristol Investment Fund, Ltd.
c/o Olympia Capital (Cayman) Limited
Williams House
20 Reid Street
Hamilton HM 11, Bermuda...............Common 5,600,000(6) 10.70% - 5,600,000 10.70%
Bank Insinger de Beaufort
Heregracht 551
1017 BW Amsterdam
Netherlands...........................Common 4,397,559(7) 8.79% 600,000(8) 3,797,559 7.86%
Equilibrium Equity, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 4,498,311(9) 8.79% 1,589,642(10) 2,908,669 5.89%
Branch Lotspeich......................Common 2,814,976(11) 5.83% - 2,814,976 5.83%
Alliance Equities
12147 NW 9th Drive
Coral Springs, FL 33071..............Common 2,180,000 4.66% 672,167 1,507,833 3.32%
John Robert McKay.....................Common 1,150,500(12) 2.44% - 1,150,500 2.44%
Lisa Lawrence.........................Common 970,000(13) 2.05% - 970,000 2.05%
Patrick McKenna.......................Common 300,000(14) * - 300,000 *
Rose Forbes...........................Common 100,000 * - 100,000 *
Jeff Hall.............................Common 80,000(15) * - 80,000 *
Robert Sherry.........................Common 50,000 * - 50,000 *
Thomas S. Hughes......................Common 50,000 * - 50,000 *
David T. Shomaker.....................Common 15,000 * - 15,000 *
All directors and executive
officers as a group
(10 persons).......................Common 12,582,522(16) 23.09% - 12,582,522 23.09%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
</TABLE>
<PAGE>
---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each person in this table is
c/o Kanakaris Wireless, 3303 Harbor Boulevard, Suite F-3, Costa Mesa,
California 92626. Mr. Kanakaris, Mr. Lotspeich, Mr. McKay and Ms.
Lawrence are directors and executive officers of our company. Mr.
McKenna, Mr. Sherry, Ms. Forbes, Mr. Hall and Mr. Hughes are directors
of our company. Mr. Shomaker is Acting Chief Financial Officer of our
company and an advisor to our board of directors.
(2) Assumes all shares of class being offered are sold.
(3) Consists of 250,813 shares of common stock issued and outstanding,
1,105,086 share of common stock issuable upon exercise of warrants and
9,788,457 shares of common stock issuable upon conversion of
debentures.
(4) Consists of 94,389 shares of common stock issued and outstanding,
450,000 shares of common stock issuable upon exercise of warrants and
1,323,137 shares of common stock issuable upon conversion of
debentures.
(5) Consists of 2,289,546 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 3,762,500 shares of common stock
issuable upon exercise of options.
(6) Consists of 2,400,000 shares of common stock issuable upon exercise of
warrants and 3,200,000 shares of common stock issuable upon conversion
of debentures.
(7) Consists of 1,109,105 shares of common stock issued and outstanding,
640,449 shares of common stock issuable upon exercise of warrants and
2,648,005 shares of common stock issuable upon conversion of
debentures.
(8) Consists of 600,000 shares of common stock issuable upon exercise of
warrants.
(9) Consists of 95,985 shares of common stock issued and outstanding,
410,612 shares of common stock issuable upon exercise of warrants and
3,991,714 shares of common stock issuable upon conversion of
debentures.
(10) Consists of 59,872 shares of common stock issued and outstanding,
150,000 shares of common stock issuable upon exercise of warrants and
1,379,770 shares of common stock issuable upon conversion of
debentures.
(11) Consists of 1,289,976 shares of common stock issued and outstanding and
1,525,000 shares of common stock issuable upon exercise of options.
(12) Consists of 655,500 shares of common stock issued and outstanding and
495,000 shares of common stock issuable upon exercise of options.
(13) Consists of 295,000 shares of common stock issued and outstanding and
675,000 shares of common stock issuable upon exercise of options.
(14) Consists of 50,000 shares of common stock issued and outstanding and
250,000 shares of common stock issuable upon exercise of options.
(15) Consists of 50,000 shares of common stock issued and outstanding and
30,000 shares of common stock issuable upon exercise of options.
(16) Consists of 4,845,022 shares of common stock issued and outstanding,
6,737,500 shares of common stock issuable upon exercise of options and
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock.
<PAGE>
DESCRIPTION OF 10% CONVERTIBLE DEBENTURES DUE MAY 1, 2001
The securities being offered by AJW Partners, LLC, New Millennium
Capital Partners, LLC, Bank Insinger de Beaufort and Equilibrium Equity, LLC
include shares of common stock that are issuable upon the conversion of
debentures and upon the exercise of warrants that we issued in a private
offering in April 2000. The debentures sold in that offering were in the
original aggregate principal amount of $4,500,000. The debentures bear interest
at the rate of 10% per annum. In that transaction, we also issued five-year
warrants to purchase an aggregate of 1,350,000 shares of our common stock at an
initial exercise price of $1.90 per share. The debentures initially were
convertible into common stock at a rate equal to the lower 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. Based upon anti-dilution and price
protection provisions contained in the warrants and debentures, as a result of
our January 2001 debenture offering, the exercise price of the warrants was
adjusted to $1.78, the aggregate number of shares underlying the warrants was
adjusted to 1,441,011 and the conversion price of the debentures is to be
adjusted based upon a formula to be applied at the time of future conversions.
The terms of the warrants and debentures are subject to further adjustment if
we conduct additional offerings that trigger the anti-dilution and price
protection provisions.
The debentures may not be converted into common stock, nor may the
holder receive shares in payment of interest, if the debenture holder and its
affiliates would, as a result, beneficially own more than 4.999% or 9.999% of
our outstanding shares of common stock. This limitation could be waived by the
holder as to itself by giving prior notice to us. Further, the warrants may not
be exercised to the extend that a holder, together with its affiliates, would
beneficially own in excess of 4.9% of our outstanding common stock. This
provision can also be waived by the holder as to itself by giving prior notice
to us. These limitations do not preclude a holder from converting or exercising
and selling shares underlying the debentures and warrants in stages over time
where each stage does not cause the holder to beneficially own in excess of the
limitation amounts.
As security for our performance of our obligation to issue shares upon
conversion of the debentures, we are obligated to deposit into an escrow account
8,604,128 shares of our common stock underlying those debentures. If we fail to
issue the appropriate number of shares of common stock upon conversion of the
debentures, the escrow agent will transfer the appropriate number of escrow
shares to the holder. The escrow arrangement terminates when the debentures have
been converted or redeemed by us or otherwise repaid to the holders in full.
Upon termination of the escrow arrangement, the shares of our common stock, if
any, remaining in the escrow account will be returned to us.
This prospectus does not cover the sale or other transfer of the
debentures or warrants or the issuance of shares of common stock to holders of
debentures upon conversion or to holders of warrants upon exercise. If a selling
security holder transfers its debentures or warrants prior to conversion or
exercise, the transferee of the debentures or warrants may not sell the shares
of common stock issuable upon conversion or exercise of the debentures or
warrants under the terms of this prospectus unless this prospectus is
appropriately amended or supplemented by us.
For the period a holder holds our debentures or warrants, the holder
has the opportunity to profit from a rise in the market price of our common
stock without assuming the risk of ownership of the shares of common stock
issuable upon conversion of the debentures or exercise of the warrants. The
holders of the debentures and warrants may be expected to voluntarily convert
their debentures or exercise their warrants when the conversion or exercise
price is less than the market price for our common stock. Further, the terms on
which we could obtain additional capital during the period in which the
debentures or warrants remain outstanding may be adversely affected.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition by Kanakaris InternetWorks, Inc. of
Desience Corporation in October 1997, Mr. Lotspeich, our Vice Chairman of the
Board and Secretary, became entitled to receive 2.5% of the gross sales of
Desience Corporation. Effective as of January 1, 2000, Mr. Lotspeich voluntarily
relinquished his rights to receive a percentage of gross sales for periods after
December 31, 1999. As of September 30, 2000, $16,526 was due and payable to Mr.
Lotspeich pursuant to this arrangement.
Effective as of February 26, 1997, Alex Kanakaris, who is our Chairman
of the Board, President and Chief Executive Officer and who was then a director
and the President of Kanakaris InternetWorks, Inc., executed an unsecured
promissory note in favor of Kanakaris InternetWorks, Inc. in the principal
amount of the smaller of $50,000 or the sum of the drawn amounts between
February 26, 1997 and September 30, 1997, with interest at an annual rate of
6.625%. Interest payments under the note are due annually commencing June 30,
1998, with a final interest payment due at maturity of the note on February 26,
2002. Principal payments are due in five equal annual installments commencing
December 31, 1998, with a final principal payment due at maturity of the note.
Amounts due under this note through December 31, 2000 have been forgiven by our
company as part of compensation for services rendered. As of September 30, 2000,
the outstanding principal balance of this note was $29,760.
Effective as of April 7, 1997, John McKay, who is a director and the
webmaster of our company and who was then a director and the webmaster of
Kanakaris InternetWorks, Inc., executed an unsecured promissory note in favor of
Kanakaris InternetWorks, Inc. in the principal amount of the smaller of $18,000
or the sum of the drawn amounts between April 7, 1997 and September 30, 1997,
with interest at an annual rate of 6.625%. Interest payments under the note are
due annually commencing June 30, 1998, with a final interest payment due at
maturity of the note on April 7, 2002. Principal payments are due in five equal
annual installments commencing December 31, 1998, with a final principal payment
due at maturity of the note. Amounts due under this note through December 31,
2000 have been forgiven by our company as part of compensation for services
rendered. As of September 30, 2000, the outstanding principal balance of this
note was $10,200.
Effective as of May 19, 1997, Branch Lotspeich, who is a director and
executive officer of our company and who was then a director of Kanakaris
InternetWorks, Inc. and the President of Desience Corporation, executed an
unsecured promissory note in favor of Kanakaris InternetWorks, Inc. in the
principal amount of the smaller of $10,000 or the sum of the drawn amounts
between May 19, 1997 and September 30, 1997, with interest at an annual rate of
6.625%. Interest payments under the note are due annually commencing June 30,
1998, with a final interest payment due at maturity of the note on May 19, 2002.
Principal payments are due in five equal annual installments commencing December
31, 1998, with a final principal payment due at maturity of the note. Amounts
due under this note through December 31, 2000 have been forgiven by our company
as part of compensation for services rendered. As of September 30, 2000, the
outstanding principal balance of this note was $5,760.
Effective as of September 30, 1997, Alex Kanakaris executed an
unsecured promissory note in favor of Kanakaris InternetWorks, Inc. in the
principal amount of $153,000, with interest at an annual rate of 8.0%. Principal
and interest payments under the note are due in annual installments of $38,250
commencing September 30, 1998 and continuing until September 30, 2002, at which
time the remaining unpaid principal and interest shall be due in full. Amounts
due under this note through December 31, 2000 have been forgiven by our company
as part of compensation for services rendered. As of September 30, 2000, the
outstanding principal balance of this note was $76,500.
Effective as of December 31, 1997, John McKay executed an unsecured
promissory note in favor of Kanakaris InternetWorks, Inc. in the principal
amount of the smaller of $50,000 or the sum of the drawn amounts between January
1, 1998 and December 31, 1998, with interest at an annual rate of 6.625%.
Interest payments under the note are due annually commencing June 30, 1999, with
a final interest payment due at maturity of the note on January 1, 2003.
Principal payments are due in five equal annual installments commencing December
31, 1999, with a final principal payment due at maturity of the note. Amounts
due under this note through December 31, 2000 have been forgiven by our company
as part of compensation for services rendered. As of September 30, 2000, the
outstanding principal balance of this note was $7,200.
<PAGE>
Effective as of December 31, 1997, Alex Kanakaris executed an unsecured
promissory note in favor of Kanakaris InternetWorks, Inc. in the principal
amount of the smaller of $85,000 or the sum of the drawn amounts between January
1, 1998 and December 31, 1998, with interest at an annual rate of 6.625%.
Interest payments under the note are due annually commencing June 30, 1999, with
a final interest payment due at maturity of the note on January 1, 2003.
Principal payments are due in five equal annual installments commencing December
31, 1998, with a final principal payment due at maturity of the note. Amounts
due under this note through December 31, 2000 have been forgiven by our company
as part of compensation for services rendered. As of September 30, 2000, the
outstanding principal balance of this note was $12,480.
Effective as of December 31, 1997, Branch Lotspeich executed an
unsecured promissory note in favor of Kanakaris InternetWorks, Inc. in the
principal amount of the smaller of $30,000 or the sum of the drawn amounts
between January 1, 1998 and December 31, 1998, with interest at an annual rate
of 6.625%. Interest payments under the note are due annually commencing June 30,
1999, with a final interest payment due at maturity of the note on January 1,
2003. Principal payments are due in five equal annual installments commencing
December 31, 1998, with a final principal payment due at maturity of the note.
Amounts due under this note through December 31, 2000 have been forgiven by our
company as part of compensation for services rendered. As of September 30, 2000,
the outstanding principal balance of this note was $6,000.
David Shomaker, our acting Chief Financial Officer, is a partner of
Haynie & Co., a certified public accounting firm. Our company engaged Haynie &
Co. to provide us with accounting assistance, tax preparation services and
acting Chief Financial Officer services for the twelve months commencing in May
1999. Through September 30, 2000, we have issued 325,000 shares of common stock
to Haynie & Co. in connection with this arrangement. Also in connection with
this arrangement, our company paid to Haynie & Co. a fee of $1,000 per month
during each month from May 1999 through October 1999, $2,000 per month from
November 1999 through January 2000 and $4,000 per month commencing in February
2000.
On April 29, 1999, we issued 5,000 shares of common stock to Lisa
Lawrence as part inducement to become an employee of our company.
In September 1999, our company issued an aggregate of $550,000 of 10%
convertible subordinated debentures in a private offering to three accredited
investors. The net offering proceeds were approximately $550,000 in cash. The
debentures were convertible into shares of common stock at $.60 per share and
provided for the issuance of additional shares in excess of those issuable based
on a conversion price of $.60 per share in the event the stock price declined
below 150% of the conversion price.
On December 27, 1999, our company executed an unsecured promissory note
in favor of Branch Lotspeich in the principal amount of $35,000, with interest
at an annual rate of 5%. Payment of principal and accrued interest is due on or
before January 10, 2002, with monthly payments of at least 5% of the outstanding
balance to be made beginning in February 2000. As of September 30, 2000, the
outstanding principal balance of this note was $0.
On December 31, 1999, we granted options to purchase up to 2,100,000
shares of common stock to Alex Kanakaris, options to purchase up to 1,200,000
shares of common stock to Branch Lotspeich, options to purchase up to 345,000
shares of common stock to John McKay and options to purchase up to 275,000
shares of common stock to Lisa Lawrence, each with an exercise price of $.52
per share, which was the fair market value of a share of common stock on the
date of grant.
In January 2000, we issued an aggregate of 916,669 shares of common
stock of which 250,000 shares were issued to Bank Insinger de Beaufort, 416,667
shares were issued to AJW Partners, LLC, and 250,002 shares were issued to New
Millennium Capital Partners II, LLC upon conversion of an aggregate of $550,000
in principal amount plus interest on the debentures purchased by each of the
Bank, AJW Partners and New Millennium in the September offering, of which
$250,000 was converted by AJW Partners, $150,000 was converted by New Millennium
and $150,000 was converted by the Bank.
On January 7, 2000, our company's Desience Division executed an
unsecured promissory note in favor of Alex Kanakaris in the principal amount of
$35,000, with interest at an annual rate of 5%. Payment of principal and accrued
interest was due on or before May 10, 2000. This note was repaid in full.
<PAGE>
On January 12, 2000, our board of directors authorized us to obtain a
term life insurance policy in the amount of $10,000,000 covering Alex Kanakaris
which, in the event of the death of Mr. Kanakaris, shall result in 80% of the
proceeds of the policy being paid to us and 20% of the proceeds of the policy
being paid to the heirs of Mr. Kanakaris.
On January 13, 2000, we granted options to purchase up to 30,000 shares
of common stock to Jeff Hall at an exercise price of $1.31 per share, which was
approximately, but not in excess of, the fair market value of a share of common
stock on the date of grant.
On January 17, 2000, we issued 50,000 shares of common stock to Robert
Sherry as compensation for consulting services rendered.
In February 2000, our company issued an aggregate of $1,000,000 of 10%
convertible debentures and accompanying warrants to purchase up to 300,000
shares of common stock in a private offering to three accredited investors. The
net offering proceeds were approximately $1,000,000 in cash. The debentures
initially were convertible into shares of common stock at the lesser of $.97 per
share or 66.66% of the average closing bid price of a share of common stock
during the 20 trading days immediately preceding conversion, and the warrants
were exercisable into shares of common stock at an initial exercise price of
$1.90 per share.
In March 2000, we issued an aggregate of 522,808 shares of common stock
of which 261,404 shares were issued to each of AJW Partners, LLC and New
Millennium Capital Partners II, LLC upon conversion by each of them of $250,000
in principal amount plus interest on the debentures purchased by each of them in
the February offering.
In April 2000, we issued an aggregate of 7,908 shares of common stock
to Bank Insinger de Beaufort as payment of interest owed on the debentures
purchased by the Bank in the February offering; additionally, we issued 258,014
shares of common stock to Bank Insinger de Beaufort upon conversion of $250,000
in principal amount plus interest on the debentures purchased by the Bank in the
February offering.
In April 2000, our company issued an aggregate of $3,000,000 of 10%
convertible debentures and accompanying warrants to purchase up to 900,000
shares of common stock in a private offering to four accredited investors. Each
of the investors, if certain conversion limitations are disregarded, were
beneficial owners of 5% or more of our outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $0.97 per share and 66.66% of the average closing bid price of a share of
common stock during the 20 trading days immediately preceding conversion, and
the warrants were exercisable into shares of common stock at an initial exercise
price of $1.90 per share. Bank Insinger de Beaufort purchased $1,500,000 of
these debentures and received a proportionate number of the accompanying
warrants. Each of AJW Partners, LLC and New Millennium Capital Partners II, LLC
purchased $625,000 of these debentures and received a proportionate number of
the accompanying warrants. Equilibrium Equity, LLC purchased $250,000 of these
debentures and received a proportionate number of the accompanying warrants.
On May 11, 2000 we issued 10,000 shares of common stock to Lisa
Lawrence as compensation for consulting services rendered.
On May 17, 2000, Alex Kanakaris executed a promissory note in favor of
our company in the principal amount of $160,000, with interest on the unpaid
principal balance at an annual rate of 7%. Principal and all accrued interest
are due on or before May 16, 2001. The note is collateralized by 142,223 shares
of common stock of our company owned by Mr. Kanakaris.
On May 25, 2000, we granted non-qualified stock options to purchase
shares of common stock at $0.705 per share, which was the closing sale price of
a share of common stock on the trading day immediately preceding that date,
pursuant to our 2000 Stock Option Plan to certain officers and directors as
follows: Alex Kanakaris received an option to purchase 900,000 shares, Branch
Lotspeich received an option to purchase up to 325,000 shares, John McKay
received an option to purchase up to 100,000 shares, Patrick McKenna received an
option to purchase up to 250,000 shares and Lisa Lawrence received an option to
purchase up to 250,000 shares.
<PAGE>
In June 2000, we issued an aggregate of 788,096 shares of common stock
to Bank Insinger de Beaufort upon conversion of $250,000 in principal amount
plus interest on the debenture purchased by the Bank in the April offering and
$250,000 in principal amount plus interest on a debenture purchased by the Bank
in our February offering.
Effective as of June 12, 2000, David Shomaker executed an unsecured
promissory note in favor of our company in the principal amount of $15,000, with
interest on the unpaid principal balance at an annual rate of 10%. As of
September 30, 2000, the entire outstanding principal balance of this note,
including accrued interest thereon, was zero.
In July 2000, we issued an aggregate of 20,989 shares of common stock
to Bank Insinger de Beaufort, of which 8,219 shares were issued as back-payment
of accrued and unpaid interest owed on certain previously fully converted
debentures purchased by the Bank in September 1999 and 12,770 shares were issued
as payment of interest owed on the debentures purchased by the Bank in the April
offering; additionally, we issued an aggregate of 213,187 shares of common stock
of which 88,828 shares were issued to each of AJW Partners, LLC and New
Millennium Capital Partners II, LLC upon conversion by each of them of $50,000
in principal amount plus interest on the debentures purchased by each of them in
the April offering, and of which 35,531 shares were issued to Equilibrium
Equity, LLC upon conversion of $20,000 in principal amount plus interest on the
debenture purchased by it in the April offering.
In August 2000, our company issued an aggregate of $1,500,000 of 10%
convertible debentures and accompanying warrants to purchase up to 450,000
shares of common stock in a private offering to four accredited investors. Each
of the investors, if certain conversion limitations are disregarded, were
beneficial owners of 5% or more of our outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $0.97 per share and 66.66% of the average closing bid price of a share of
common stock during the 20 trading days immediately preceding conversion, and
the warrants were exercisable into shares of common stock at an initial exercise
price of $1.90 per share. Each of AJW Partners, LLC and New Millennium Capital
Partners II, LLC purchased $625,000 of these debentures and received a
proportionate number of the accompanying warrants. Equilibrium Equity, LLC
purchased $250,000 of these debentures and received a proportionate number of
the accompanying warrants.
In August 2000, we issued an aggregate of 52,680 shares of common
stock, of which 21,950 shares were issued to each of AJW Partners, LLC and New
Millennium Capital Partners II, LLC, and of which 8,780 were issued to
Equilibrium Equity, LLC as payment of interest owed on the debentures purchased
by them in the April offering; additionally, we issued an aggregate of 645,409
shares of common stock of which 268,920 shares were issued to each of AJW
Partners and New Millennium upon conversion by each of them of $150,000 in
principal amount plus interest on the debentures purchased by each of them in
the April offering and of which 107,569 shares were issued to Equilibrium
Equity, LLC upon conversion of $60,000 in principal amount plus interest on the
debenture purchased by it in the April offering.
In August 2000, we issued 30,000 shares of common stock valued at
$22,500 to Lisa Lawrence as compensation for services rendered.
In August 2000, we granted non-qualified stock options to purchase
shares of common stock at $0.75 per share, which was the closing sale price of a
share of common stock on the trading day immediately preceding that date,
pursuant to our 2000 Stock Option Plan to certain officers and directors as
follows: Alex Kanakaris received an option to purchase 762,500 shares, John
McKay received an option to purchase up to 50,000 shares and Lisa Lawrence
received an option to purchase up to 150,000 shares.
In September 2000, we issued an aggregate of 101,450 shares of common
stock, of which 43,116 shares were issued to each of AJW Partners and New
Millennium upon conversion by each of them of $21,250 in principal amount plus
interest on the debentures purchased by each of them in the April offering and
of which 15,218 shares were issued to Equilibrium Equity, LLC upon conversion of
$7,500 in principal amount plus interest on the debenture purchased by it in the
April offering.
<PAGE>
In October 2000, we issued an aggregate of 191,687 shares of common
stock, of which 115,555 shares were issued to Bank Insinger de Beaufort, 31,680
shares were issued to each of AJW Partners, LLC and New Millennium Capital
Partners II, LLC, and 12,772 shares were issued to Equilibrium Equity, LLC as
payment of interest owed on the debentures purchased by the Bank, AJW Partners,
New Millennium and Equilibrium Equity in the April offering. Also, we issued
155,238 shares of common stock to the Bank upon conversion of $50,000 in
principal amount plus interest on the debentures purchased by the Bank in the
April offering. Finally, we issued an aggregate of 190,697 shares of common
stock, of which 81,046 shares were issued to each of AJW Partners, LLC and New
Millennium Capital Partners II, LLC upon conversion by each of them of $23,375
in principal amount plus interest on the debentures purchased by each of them in
the April offering and of which 28,605 shares were issued to Equilibrium Equity,
LLC upon conversion of $8,250 in principal amount plus interest on the debenture
purchased by it in the April offering.
In November 2000, we issued an aggregate of 27,223 shares of common
stock, of which 11,359 shares were issued to each of AJW Partners, LLC and New
Millennium Capital Partners II, LLC and of which 4,505 shares of common stock
were issued to Equilibrium Equity, LLC as payment of interest owed on the
debentures purchased by each of them in the April offering. Also, we issued
1,575,307 shares of common stock to Bank Insinger de Beaufort upon conversion of
$400,000 in principal amount plus interest on the debentures purchased by the
Bank in the April offering. Finally, we issued an aggregate of 1,093,912 shares
of common stock, of which 464,912 shares were issued to each of AJW Partners and
New Millennium upon conversion by each of them of $116,875 in principal amount
plus interest on the debentures purchased by each of them in the April offering
and of which 164,088 shares were issued to Equilibrium Equity, LLC upon
conversion of $41,250 in principal amount plus interest on the debenture
purchased by it in the April offering.
On November 6, 2000, we issued 50,000 shares of common stock valued at
$19,000 to Jeff Hall as compensation for consulting services rendered.
On November 6, 2000, we issued 100,000 shares of common stock valued at
$38,000 to Rose Forbes as compensation for consulting services rendered.
On November 6, 2000, we issued 250,000 shares of common stock valued at
$95,000 to Lisa Lawrence as compensation for extraordinary services rendered.
On November 6, 2000, we issued 50,000 shares of common stock valued at
$19,000 to Pat McKenna as compensation for consulting services rendered.
In December 2000, we issued 2,024,016 shares of common stock to Bank
Insinger de Beaufort upon conversion of $380,000 in principal amount plus
interest on the debentures purchased by the Bank in the April offering. Also, we
issued an aggregate of 867,138 shares of common stock, of which 368,533 shares
were issued to each of AJW Partners and New Millennium upon conversion by each
of them of $72,675 in principal amount plus interest on the debentures purchased
by each of them in the April offering and of which 130,072 shares were issued to
Equilibrium Equity, LLC upon conversion of $25,650 in principal amount plus
interest on the debenture purchased by it in the April offering.
On December 1, 2000, we issued 50,000 shares of common stock valued at
$11,750 to Tom Hughes as compensation for consulting services rendered.
On December 11, 2000, we issued 2,000,000 shares of common stock valued
at $510,000 to Alex Kanakaris as a stock bonus for extraordinary services
rendered.
As of January 5, 2001, we issued in January 2001 an aggregate of
360,794 shares of common stock, of which 63,430 shares were issued to Bank
Insinger de Beaufort, 123,208 shares were issued to each of AJW Partners, LLC
and New Millennium Capital Partners II, LLC, and 50,948 shares were issued to
Equilibrium Equity, LLC as payment of interest owed on the debentures purchased
by the Bank, AJW Partners, New Millennium and Equilibrium Equity in the April
offering. Also, we issued an aggregate of 300,247 shares of common stock, of
which 127,605 shares were issued to each of AJW Partners and New Millennium upon
conversion by each of them of $20,400 in principal amount plus interest on the
debentures purchased by each of them in the April offering and of which 45,037
shares were issued to Equilibrium Equity, LLC upon conversion of $7,200 in
principal amount plus interest on the debenture purchased by it in the April
offering.
<PAGE>
On January 5 2001, our company issued an aggregate of $650,000 of 12%
convertible debentures and accompanying warrants to purchase up to 3,900,000
shares of common stock in a private offering to four accredited investors. Each
of the investors, if certain conversion limitations are disregarded, were
beneficial owners of 5% or more of our outstanding shares of common stock. The
debentures initially are convertible into shares of common stock at the lesser
of $0.15 per share and 62.5% of the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days immediately
preceding conversion, and the warrants are exercisable into shares of common
stock at the lesser of $0.125 per share and the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding exercise. Bristol Investment Fund, Ltd. purchased $400,000
of these debentures and received a proportionate number of the accompanying
warrants. Each of AJW Partners, LLC and New Millennium Capital Partners II, LLC
purchased $104,125 of these debentures and received a proportionate number of
the accompanying warrants. Equilibrium Equity, LLC purchased $41,750 of these
debentures and received a proportionate number of the accompanying warrants.
EXPERTS
The consolidated financial statements of Kanakaris Wireless (formerly
Kanakaris Communications, Inc.) and subsidiaries for the years ended September
30, 2000 and 1999 have been included in this prospectus and in the registration
statement of which this prospectus is a part in reliance upon the report of
Weinberg & Company, P.A., independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of that firm as experts in
accounting and auditing.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
KANAKARIS WIRELESS (FORMERLY KANAKARIS COMMUNICATIONS, INC.) AND SUBSIDIARIES
Page
----
Independent Auditor's Report................................................F-2
Consolidated Balance Sheets as of September 30, 2000 and 1999...............F-3
Consolidated Statements of Operations for the Years Ended September 30,
2000 and 1999...........................................................F-5
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
for the Years Ended September 30, 2000 and 1999.........................F-6
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000 and 1999...........................................................F-8
Notes to Consolidated Financial Statements as of September 30, 2000
and 1999................................................................F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of:
Kanakaris Wireless
We have audited the accompanying consolidated balance sheets of Kanakaris
Wireless (formerly Kanakaris Communications, Inc.) and Subsidiaries as of
September 30, 2000 and 1999 and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kanakaris Wireless
(formerly Kanakaris Communications, Inc.) and Subsidiaries as of September 30,
2000 and 1999 and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/S/ WEINBERG & COMPANY, P.A.
Boca Raton, Florida
November 27, 2000
F-2
<PAGE>
<TABLE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
<CAPTION>
ASSETS
------
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 615,101 $ 155,063
Accounts receivable 302,246 154,110
Inventory 4,455 -
Current maturities of note and loan receivable, net 102,500 -
Current maturities of notes receivable -
shareholders and related parties 249,529 61,695
Interest receivable 10,069 2,404
Prepaid expenses 165,033 60,813
------------- -------------
Total Current Assets 1,448,933 434,085
------------- -------------
PROPERTY AND EQUIPMENT
Furniture and equipment 80,232 50,051
Less: Accumulated depreciation 30,356 12,718
------------- -------------
Total Property and Equipment 49,876 37,333
------------- -------------
OTHER ASSETS
Note and loan receivable - non-current 102,500 -
Notes receivable - shareholders and related parties -
non-current 95,810 185,338
Film library - net of amortization 452,916 -
Goodwill - net of amortization 336,766 340,697
Other 1,400 2,850
------------- -------------
Total Other Assets 989,392 528,885
------------- -------------
TOTAL ASSETS $ 2,488,201 $ 1,000,303
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND 1999
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 797,992 $ 933,210
Convertible debentures 3,720,000 620,000
Due to former shareholder of subsidiary 89,358 70,709
------------ ------------
Total Current Liabilities 4,607,350 1,623,919
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
1,000,000 Class A Convertible issued and outstanding in
2000 and 1999 10,000 10,000
Common stock, $0.001 par value; 100,000,000 shares authorized;
34,597,678 issued and outstanding in 2000, 25,958,050
issued and 25,859,026 outstanding in 1999 34,598 25,958
Additional paid-in capital 19,178,359 7,907,746
Accumulated deficit (21,340,846) (8,364,140)
Less subscriptions receivable (1,260,000 shares, common) (1,260) (1,260)
------------ ------------
Total paid-in capital and accumulated deficit (2,119,149) (421,696)
Less cost of treasury stock (99,024 shares, common) - (201,920)
------------ ------------
Total Stockholders' Equity (Deficiency) (2,119,149) (623,616)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 2,488,201 $ 1,000,303
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-----------------------------------------------
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
NET SALES $ 613,838 $ 968,758
COST OF SALES 373,487 661,707
------------- -------------
GROSS PROFIT 240,351 307,051
------------- -------------
OPERATING EXPENSES
Executive compensation 424,380 390,988
Salaries 253,900 111,671
Employee benefits 15,517 6,158
Payroll taxes 43,319 20,852
Consulting fees 3,691,027 1,339,287
Royalties 2,333 23,440
Travel and entertainment 206,507 105,649
Telephone and utilities 62,630 43,846
Marketing, advertising and investor relations 2,277,090 822,306
Professional fees 1,542,975 616,282
Rent 23,420 25,459
Office and other expenses 199,689 89,143
Equipment rental and expenses 3,485 11,558
Insurance 59,553 20,706
Auto expense 234 676
Depreciation and amortization 66,091 33,135
Bad debt provision 313,000 1,000
Taxes - other 9,286 2,728
Repairs and maintenance - 5,138
Outside labor 52,957 -
Bank charges 3,082 3,228
------------- -------------
TOTAL OPERATING EXPENSES 9,250,475 3,673,250
------------- -------------
LOSS BEFORE INTEREST AND OTHER INCOME (EXPENSE) (9,010,124) (3,366,199)
------------- -------------
INTEREST AND OTHER INCOME (EXPENSE)
Interest income 16,526 10,215
Dividend income 5,563 -
Interest and financing expense (4,238,671) (208,641)
Other income - debt forgiveness - 25,607
Settlement agreement - attorney 250,000 -
Loss on abandonment of assets - (2,842)
------------- -------------
TOTAL INTEREST AND OTHER INCOME (EXPENSE) (3,966,582) (175,661)
------------- -------------
NET LOSS $(12,976,706) $ (3,541,860)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.44) $ (.15)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 29,858,415 22,945,540
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-----------------------------------------------
<CAPTION>
Additional
Common Stock Common Stock To Be Issued Preferred Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
----------- -------- ------------ -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1998 19,179,636 $19,179 1,340,140 $ 1,340 1,000,000 $ 10,000 $5,155,362
Stock Issued For:
Cash 50,000 50 - - - - 12,450
Consulting services 941,000 941 - - - - 1,221,814
Professional services 485,000 485 - - - - 413,410
Advertising services 157,600 158 - - - - 173,004
504 & 506 offering 3,979,674 3,980 - - - - 739,531
Issuance of common
stock 1,340,140 1,340 (1,340,140) (1,340) - - -
Convertible debt -
financing costs - - - - - - 195,000
Cancelled shares (175,000) (175) - - - - (2,825)
Net loss 1999 - - - - - - -
----------- -------- ------------ -------- ----------- ---------- -----------
Balance,
September 30, 1999 25,958,050 25,958 - - 1,000,000 10,000 7,907,746
Stock Issued For:
Cash 646,001 646 - - - - 324,854
Accounts payable 73,516 74 - - - - 52,936
Compensation 40,000 40 - - - - (135,060)
Consulting services 2,021,000 2,021 - - - - 2,040,502
Marketing,
advertising and
investor relations 1,090,236 1,090 - - - - 1,277,126
Professional services 375,000 375 - - - - 887,625
Converted debentures 4,393,875 4,394 - - - - 2,804,508
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
Accumulated Stock Subscriptions
Deficit Amount Receivable Total
-------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance,
September 30, 1998 $ (4,822,280) $(201,920) $ (1,260) $ 160,421
Stock Issued For:
Cash - - - 12,500
-
Consulting services - - 1,222,755
Professional services - - - 413,895
Advertising services - - - 173,162
504 & 506 offering - - - 743,511
Issuance of common
stock - - - -
Convertible debt -
financing costs - - - 195,000
Cancelled shares - - - (3,000)
Net loss 1999 (3,541,860) - - (3,541,860)
-------------- ---------- ------------ -----------
Balance,
September 30, 1999 (8,364,140) (201,920) (1,260) (623,616)
Stock Issued For:
Cash - - - 325,500
Accounts payable - - - 53,010
Compensation - 201,920 - 66,900
Consulting services - - - 2,042,523
Marketing,
advertising and
investor relations - - - 1,278,216
Professional services - - - 888,000
Converted debentures - - - 2,808,902
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-----------------------------------------------
<CAPTION>
Additional
Common Stock Common Stock To Be Issued Preferred Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------ -------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Convertible debt -
financing costs - - - - - - 3,257,500
Issuance of common
stock options to
consultants - - - - - - 760,622
Net Loss 2000 - - - - - - -
------------ -------- ------------ --------- ---------- ---------- ------------
BALANCE,
SEPTEMBER 30, 2000 34,597,678 $34,598 - $ - 1,000,000 $ 10,000 $19,178,359
============ ======== ============ ========= ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
Accumulated Stock Subscriptions
Deficit Amount Receivable Total
-------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Convertible debt -
financing costs - - - 3,257,500
Issuance of common
stock options to
consultants - - - 760,622
Net Loss 2000 (12,976,706) - - (12,976,706)
-------------- ---------- ------------ ------------
BALANCE,
SEPTEMBER 30, 2000 $ (21,340,846) $ - $ (1,260) $(2,119,149)
============== ========== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
<TABLE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-----------------------------------------------
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,976,706) $ (3,541,860)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of goodwill 27,580 26,003
Depreciation and amortization 38,511 7,132
Organization costs written off 1,450 -
Other income - debt forgiveness - (25,607)
Income from settlement agreement (250,000) -
Loss on abandonment of assets - 2,842
Provision for bad debts 313,000 1,000
Consulting, advertising, marketing, investor relations, professional fees and
compensation incurred in exchange for common stock and treasury stock 4,275,639 1,756,812
Common stock options issued to consultants 760,622 -
Convertible debt - financing costs 3,257,500 195,000
Convertible debt - marketing costs 715,000 -
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (161,136) (35,637)
Inventory (4,455) 10,122
Prepaid expenses (104,220) (10,813)
Advances to suppliers - 7,839
Interest receivable (7,665) 14,279
Increase (decrease) in:
Accounts payable and accrued expenses (123,306) 391,082
Customer deposits - (29,427)
------------- -------------
Net cash used in operating activities (4,238,186) (1,231,233)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (31,631) (30,710)
(Increase) decrease in notes receivable - shareholders and related parties (98,306) 36,280
Increase in security deposits - (700)
(Increase) in loan receivable (300,000) -
Note receivable repayments 45,000 -
Acquisition of film library (472,339) -
------------- -------------
Net cash provided by (used in) investing activities (857,276) 4,870
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to former shareholder of subsidiary (5,000) -
Proceeds from convertible debt 5,235,000 620,000
Proceeds from sale of common stock and additional paid-in capital 325,500 756,011
------------- -------------
Net cash provided by financing activities 5,555,500 1,376,011
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 460,038 149,648
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 155,063 5,415
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 615,101 $ 155,063
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-----------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
-----------------------------------------------------------------------
During the year ended September 30, 2000, the Company issued 3,486,236 shares of
common stock for consulting, marketing, advertising, investor relations and
professional services having a fair value of $4,208,739.
The Company distributed 99,024 of shares of treasury stock and issued 40,000
shares of common stock in lieu of compensation of $32,000 and $66,900,
respectively.
During the year ended September 30, 2000, the Company issued 73,516 shares of
common stock in exchange for the satisfaction of certain accounts payable having
a value of $53,010.
During the year ended September 30, 2000, the Company recorded a note receivable
in the amount of $250,000 which represented a legal settlement.
The Company has incurred a liability in the total amount of $89,358 in 2000 and
$70,709 in 1999 which represents the amount due to the former sole shareholder
of the Company's subsidiary pursuant to the acquisition agreement.
During the year ended September 30, 2000, the Company issued 967,500 common
stock options to consultants for services with a fair value as computed under
SFAS No. 123 using the Black-Scholes Model of $760,622.
During the year ended September 30, 1999, the Company issued 1,583,600 shares of
common stock for consulting, professional and advertising services having a fair
value of $1,806,812, of which $50,000 was for professional services that were
prepaid at September 30, 1999.
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------ ------------------------------------------
(A) BUSINESS ORGANIZATION AND ACTIVITY
--------------------------------------
Kanakaris Wireless, which on June 2, 2000 changed its name from
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 data control consoles.
(B) BUSINESS COMBINATIONS
-------------------------
On October 10, 1997 (the "Acquisition Date"), Kanakaris Internetworks,
Inc. ("KIW") consummated a Stock Purchase Agreement with the
shareholder (the "Seller") of Desience Corporation ("Desience") to
purchase 10,000 common shares representing 100% of its issued and
outstanding common stock in exchange for a 4% royalty on the gross
sales (after collection) of Desience subsequent to the Acquisition
Date, to be paid monthly for as long as Desience remains in business or
its products are sold. Pursuant to APB 16, since the seller has no
continuing affiliation with the Company, the 4% royalty is accounted
for as an increase to goodwill at the date the amount is determinable.
In addition, the Seller shall receive 5% of funds which are to be
allocated to Desience arising from KIW's next securities offering as a
non-refundable advance on the royalty. As of September 30, 2000, no
advances have been given. KIW will hold harmless the Seller from any
claims, causes of action, costs, expenses, liabilities, and prior
shareholder advances. Immediately following the exchange, Desience
became a wholly owned subsidiary of KIW. The fair value of the assets
and liabilities acquired pursuant to the acquisition of Desience was
$148,776 and $468,120, respectively, which resulted in goodwill of
$319,344 at the date of acquisition since no trademarks, copyrights,
existing or identified long term requirement contracts or other
intangibles existed at that date. Additions to goodwill resulting from
the royalty for the years ended September 30, 2000 and 1999 were
$23,649 and $39,722, respectively (See Note 1(H)).
Desience is not a high technology company, but designs and installs
specialized business furniture for a variety of industries utilizing
base designs developed in 1985. No changes have been made or are
contemplated to be made to the basic furniture design, with the
exception of minor additions or accoutrements. Because of the relative
stability of the design of the furniture, management considered the
goodwill attributable to the acquisition to be greater than 10 years.
However, because of the potential for changes to the basic design in
the future, management decided that a life of 20 years was not
appropriate. Consequently a 15-year life was adopted.
F-10
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
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") (See Note 6). Big Tex was founded in
1991 for the purpose of lawful business or enterprise, but had been
inactive since 1991. Immediately following the exchange, Big Tex
changed its name to Kanakaris Communications, Inc., which was
subsequently changed to Kanakaris Wireless.
Generally accepted accounting principles require that the company whose
stockholders retain the majority interest in a combined business be
treated as the acquirer for accounting purposes. Accordingly, the Big
Tex acquisition was accounted for as an acquisition of Big Tex by KIW
and a recapitalization of KIW. The financial statements immediately
following the acquisition are as follows: (1) the balance sheet
includes KIW's net assets at historical costs and Big Tex's net assets
at historical costs and (2) the statement of operations includes KIW'S
operations for the period presented and Big Tex's operations from
November 25, 1997.
(C) PRINCIPLES OF CONSOLIDATION
-------------------------------
The accompanying consolidated financial statements include the accounts
of the Company, and its wholly owned subsidiaries Kanakaris
Internetworks Inc., and Desience. All significant intercompany balances
and transactions have been eliminated in consolidation.
(D) USE OF ESTIMATES
--------------------
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
(E) CASH AND CASH EQUIVALENTS
-----------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
(F) PROPERTY AND EQUIPMENT
--------------------------
Property and equipment are stated at cost and depreciated using the
declining balance method over the estimated economic useful life of 5
to 7 years. Maintenance and repairs are charged to expense as incurred.
Major improvements are capitalized. Depreciation expense for the years
ended September 30, 2000 and 1999 was $10,806 and $7,132, respectively.
(G) INVENTORIES
---------------
Inventories at September 30, 2000 consisted of parts and finished goods
and were recorded at the lower of cost or market, cost being determined
using the first-in, first-out method.
(H) FILM LIBRARY
----------------
The cost to acquire and encode the Company's film library, which at
September 30, 2000 aggregated $452,916, is being amortized on a
straight-line basis over a 5 year period. Amortization expense for the
year ended September 30, 2000 amounted to $19,423.
(I) GOODWILL
------------
Goodwill arising from the acquisition of Desience, as discussed in Note
1 (B) - Business Combinations, is being amortized on a straight-line
basis over 15 years. Amortization expense for the years ended September
30, 2000 and 1999 was $27,580 and $26,003, respectively.
(J) REVENUE RECOGNITION
-----------------------
Kanakaris Wireless produces revenues from the sale of monthly
non-refundable subscriptions to its website for movies and books.
Revenues are recognized as they are received.
F-12
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
Desience, a wholly-owned subsidiary of the Company, produces revenues
from product sales of business furniture and modular consoles and
incidental revenues for installation and freight. Product sale revenue
and freight revenues are recognized when the product is shipped.
Installation revenues are recognized as work is completed.
(K) EARNINGS PER SHARE
----------------------
Earnings (loss) per share is computed using the weighted average of
common shares outstanding as defined by Financial Accounting Standards
No. 128, "Earnings Per Share." There were no common stock equivalents
outstanding at September 30, 2000. The assumed exercise of common share
equivalents was not utilized in 2000 since the effect was
anti-dilutive.
(L) INCOME TAXES
----------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future
events other than enactments of changes in the tax law or rates. Any
available deferred tax assets arising from net operating loss
carryforwards have been offset by a deferred tax valuation allowance on
the entire amount (See Note 12).
(M) CONCENTRATION OF CREDIT RISK
--------------------------------
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk for cash and cash equivalents.
(N) NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 133, as amended by
Statements No. 137 and 138, "Accounting for Derivative Instruments and
Hedging Activities" establishes accounting and reporting standards for
derivative instruments and related contracts and hedging activities.
This statement is effective for all fiscal quarters and fiscal years
beginning after June 15, 2000.
The Company believes that its adoption of these pronouncements will not
have any effect on the Company's financial position or results of
operations.
F-13
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
(O) FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments for
which it is practicable to estimate the value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties other than in a forced sale or liquidation.
The carrying amount of the Company's financial instruments, including
accounts receivable, accounts payable, accrued liabilities, current
debentures and amount due to the former Desience stockholder,
approximates fair value due to the relatively short period to maturity
for these instruments.
(P) ADVERTISING COSTS
---------------------
In accordance with the Accounting Standards Executive Committee
Statement of Position 93-7 ("SOP 93-7"), costs incurred for producing
and communicating advertising of the Company are charged to operations.
(Q) STOCK OPTIONS
-----------------
In accordance with Statement of Financial Accounting Standards No. 123
(SFAS No. 123), the Company has elected to account for stock options
issued to employees under Accounting Principles Board Opinion No. 25
("APB Opinion No. 25") and related interpretations (See Note 8). The
Company accounts for stock options issued to consultants and for other
services in accordance with SFAS No. 123 (See Note 9).
F-14
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 2 NOTES RECEIVABLE - SHAREHOLDERS AND RELATED PARTIES
------ ---------------------------------------------------
<TABLE>
The following is a summary of notes receivable at September 30, 2000 and 1999:
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Notes receivable - Shareholder, unsecured. Interest at 6.625% is payable $ 42,240 $ 56,320
beginning June 30, 1998 when all accrued interest will be due, then annually on
each subsequent June 30. Principal payments are due beginning December 31,
1998 when one-fifth of the outstanding amount is due. Subsequent payments are
due one-fifth each December 31 until February 26, 2002 when all outstanding
principal and interest is due.
Notes receivable - Shareholder, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually
on each subsequent June 30. Principal payments are due beginning December 31,
1998 when one-fifth of the outstanding amount is due. Subsequent payments are
due one-fifth each December 31 until February 26, 2002 when all outstanding
principal and interest is due. 37,440 49,920
Notes receivable - Shareholder, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually
on each subsequent June 30. Principal payments are due beginning December 31,
1998 when one-fifth of the outstanding amount is due. Subsequent payments are
due one-fifth each December 31 until February 26, 2002 when all outstanding
principal and interest is due. 17,399 23,198
Notes receivable - Shareholder, unsecured. Interest at 6.625% is payable
beginning June 30, 1998 when all accrued interest will be due, then annually
on each subsequent June 30. Principal payments are due beginning December 31,
1998 when one-fifth of the outstanding amount is due. Subsequent payments are
due one-fifth each December 31 until February 26, 2002 when all outstanding
principal and interest is due. 11,760 15,680
Note receivable - Shareholder, unsecured. Interest at 8%, principal and interest
is payable in five annual installments of $38,250 beginning September 30,
1998. The note was prepaid through a portion of the year 2000. 76,500 101,915
Note receivable - Shareholder, secured by 142,223 shares of the Company's common
stock held by the shareholder. Interest at 7% is payable in full in May 2001
when all accrued and outstanding interest will be due. Principal payment is
due in full in May 2001. 160,000 -
------------- -------------
Total Notes Receivable 345,339 247,033
Less: Current maturities 249,529 61,695
------------- -------------
TOTAL NOTES RECEIVABLE - LESS CURRENT MATURITIES $ 95,810 $ 185,338
============= =============
</TABLE>
F-15
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
The aggregate amount of related party notes receivable maturing in each of the
four years subsequent to September 30, 2000 is as follows:
For the year ending September 30,
-------------------------------------
2001 $ 249,529
2002 36,280
2003 36,280
2004 23,250
---------------
$ 345,339
===============
NOTE 3 NOTE AND LOAN RECEIVABLE
------ ------------------------
As a result of certain actions by its former securities attorney, which
led, among other things, to the Company's recognition of a bad debt in
the year ended September 30, 1998 of $300,000, the Company entered into
a settlement agreement with the former attorney and received a $250,000
non-interest bearing promissory note dated February 3, 1999. The note
was payable in monthly installments of $20,833 commencing February 15,
1999. The note was in default and the Company had recorded a bad debt
allowance on the entire amount of the note as of September 30, 1999.
During the year ended September 30, 2000, the Company received $45,000
in payments from the former securities attorney and believes that the
balance of the note, in the amount of $205,000, will be fully
collectible under a new repayment agreement by March 2003. Therefore,
the Company reinstated the note in the amount of $250,000 during the
year ended September 30, 2000. The new monthly payments were originally
scheduled to begin in January 2000 in the amount of $5,694.44 per
month. This repayment schedule was subsequently revised on December 1,
2000, calling for payments in the amount of $6,000 per week. As of
December 28, 2000 the Company has received four payments aggregating
$24,000 under the revised repayment schedule.
On August 3, 2000, the Company executed a non-binding letter of intent
relating to the acquisition of all of the outstanding shares of stock
of PCS Link, Inc., a California Corporation dba Greenwood & Hall. The
letter of intent provided, among other things, that the Company would
issue 3,000,000 shares of restricted common stock to the sellers at the
closing and would be obligated to issue an additional 2,000,000 shares
of restricted common stock approximately one year later if certain
performance criteria were met. In addition, the letter of intent
provided that the Company would be required to provide Greenwood & Hall
with working capital of $1,200,000 over the next twelve months, of
which $300,000 had already been advanced.
F-16
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
As of October 2000 the letter of intent effectively has been cancelled
and the Company is due $300,000 for the funds previously advanced. A
dispute exists between the parties with regard to the period of time
over which the loan may be repaid. The Company wants the loan to be
repaid within one year, but Greenwood & Hall wants to repay the loan
over a two year period. The Company and Greenwood & Hall are currently
in negotiations to resolve this dispute. As of September 30, 2000, the
Company is accounting for such advances as a demand loan. The loan is
collateralized by 25% of the outstanding common stock of Greenwood &
Hall. The ability of the Company to recover these advances and the
value of the loan's collateral is in doubt, therefore, a bad debt
allowance for the entire amount of the loan has been recorded at
September 30, 2000. If the dispute is not resolved in a timely manner,
management may bring a legal action against Greenwood & Hall.
The aggregate amount of the note receivable maturing in each of the two
years subsequent to September 30, 2000 is as follows:
Year Ending September 30, Amount
------------------------------------ -----------------
2001 $ 102,500
2002 102,500
-----------------
$ 205,000
=================
NOTE 4 COMMITMENTS AND CONTINGENCIES
------ -----------------------------
(A) LEASES
----------
On October 8, 1998 the Company, as subtenant, entered into a sublease
agreement with the then existing tenant of the Company's headquarters
space commencing on October 15, 1998. The term of the sublease was
through and including the end of the original term of the tenant's
lease of the premises, which was August 20, 2000. The monthly rent on
this sublease was $1,512 through August 20, 1999 at which time it
increased to $1,579 a month until August 20, 2000. As of September 30,
2000, the Company occupies the same facilities under a month to month
rental agreement. Rent expense for the years ended September 30, 2000
and 1999 was $23,420 and $25,459, respectively.
(B) LEGAL ACTIONS
-----------------
On September 15, 1999, an individual filed a complaint against the
Company and the executive who is the Chairman of the Board, President,
and Chief Executive Officer of the Company 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 was entitled to certain stock options, of
which 75% of the option price allegedly was already deemed paid in
F-17
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
exchange for services allegedly rendered to the Company. The individual
attempted to exercise the options for the purchase of a certain number
of shares to which he claimed to be entitled pursuant to the agreement.
The claims against the Company executive were dismissed. The case was
submitted for mediation, and a hearing was held resulting in the
Company and the individual entering into a Settlement Agreement and
General Release on November 1, 2000 whereby the Company agreed to pay
$24,000 to the individual and his attorney in three equal installments
of $8,000. As of September 30, 2000, no payments had been made. As of
the date of this report, the first payment of $8,000 was made leaving a
balance of $16,000. Two additional payments of $8,000 each are due on
March 1, 2001 and July 1, 2001. The financial statements include a
$24,000 accrued liability for these consulting services as of September
30, 2000.
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 of the Illinois Corporation's claims.
The Company also counterclaimed against the Illinois corporation and
commenced a third-party action against its three affiliates. In the
Company's counterclaim and cross-claims, it 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 unjust enrichment.
The Company intends to vigorously pursue all available remedies against
the aforementioned parties.
The Illinois corporation and its affiliates countered by attempting to
assert claims against the Company in a separate action in Utah. In the
Utah action, the parties were challenging the Company's 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 stayed by that court in favor of the action
currently pending in Illinois.
F-18
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
The stock at issue was in the hands of the Company's transfer agent and
a stock brokerage firm that clears the trades of introducing brokers.
Both of these parties filed actions for interpleader, by which they
were prepared to tender to the court the stock certificates to which
the Company and the Illinois corporation are each laying claim. In July
2000, that tender was effectuated, and the claims asserted by and
against the transfer agent and brokerage firm were dismissed. The
stock, therefore, has been and will remain issued in the name of the
United States District Court until the dispute is resolved.
(C) SECURITIES AND EXCHANGE COMMISSION INQUIRY
----------------------------------------------
On August 9, 1999, as the result of an informal inquiry, a final
judgement of permanent injunction and other relief was entered into by
the Securities and Exchange Commission in connection with the sale of
shares of the Company in 1996 and 1997. The Company's President and
former Vice President each paid a $25,000 civil penalty, and without
admitting or denying any guilt involving any alleged violations agreed
pursuant to the settlement not to take any actions that would violate
federal securities laws in conjunction with the offer, purchase or sale
of securities.
(D) 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 distributions 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. SyCoNet.com, Inc. is currently being restructured and once
this process is completed they will be able to fulfill their obligation
under the memorandum of understanding.
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
royalties on at least a quarterly basis, in 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. As of September 30, 2000 both parties are meeting
their obligations under this memorandum of understanding. For the year
ended September 30, 2000, $10,000 has been paid and charged to
operations under this agreement.
F-19
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
(E) 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
renewable automatically for additional renewal terms of five years
each, ending on December 31 of each fifth year. Under the terms of the
Agreement, as amended to date, ION grants to the Company a license to
use its products, the E*Web (R) and the X*Maker (R) computer software
enabling the secure downloading and viewing of websites, for or in
connection with the Company's websites. 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 website.
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, 175,000 shares at $.01 until May 1, 2003, and 87,500 shares
at $1.295 until May 1, 2003.
In addition, on May 23, 2000, the Company agreed to pay ION $55,000 for
software which will provide for the sale of electronic books on line.
As of June 30, 2000, the required payment under this agreement was paid
and charged to cost of sales account.
(F) SERVICE AGREEMENTS
----------------------
The Company signed an agreement with ValueClick in January 2000 whereby
ValueClick will drive advertisers to the Company's website. 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 website.
F-20
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
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.
On March 1, 2000, the Company entered into a one-year agreement with
Sonar Network, a business unit of Double Click, Inc. ("Doubleclick"),
to sell media space on the Company's various websites for the display
of advertising. The Company will receive 50% of the net revenues
generated from the sale of advertisements.
In June 2000, the Company entered into a one-year agreement with the
Fortino Group, Inc. Based upon the terms of the contract, the Fortino
Group will provide media relations services in connection with the
marketing and promotion of the Company's business, products and/or
services. The Company will pay approximately $300,000 for these
services. As of September 30, 2000, $108,706 of this amount has been
paid and charged to operations.
(G) 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 (R) Windows Media Technology (TM) on the Company's
web sites through December 30, 2001. No expense or income has been
recorded by the Company for the years ended September 30, 2000 and 1999
relating to this agreement because under APB No. 29, Accounting For
Non-monetary Transactions, the fair values of such web site promotions
are not determinable within reasonable limits.
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 paid
ScreamingMedia $12,000, of which $3,000 was paid in August 1999. The
balance of $9,000 was 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 will
assist the Company with the development of an audio/video enhanced
website which delivers timely and relevant audiovisual content using
Windows Media (TM) Technologies in a broadband network infrastructure.
F-21
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
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 website which delivers
timely and relevant audiovisual 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 website promotions are not determinable within reasonable limits.
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 websites.
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 book pertains to Clark's relationship to Jerry Garcia.
Kanakaris paid $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 that was webcast on the Kanakaris website
and made into a videotape. In consideration of this, Clark agreed to
pay to the Company in perpetuity a 50% royalty on the gross sales of
the book on the internet and to pay to the Company 50% of all royalties
generated for two years by the book, interview and party video, as well
as all other ancillary rights.
In May 2000, the Company entered into an agreement with Meiselman-Rede
Media Group ("MRMG"). Based upon the terms of the agreement, the
Company paid MRMG $100,000 in exchange for the future internet
distribution rights to the first sixteen two-minute duration episodes
of a project known as "Paris Falls". The $100,000 payment has been
accounted for as a prepaid expense. As of September 30, 2000 the
Company has received six of the episodes and charged $37,500 against
operations. Under the terms of a second agreement with MRMG, the
Company paid $100,000 in May 2000 for the exclusive internet
distribution rights to a film known as "LA River Story" and the right
to receive 50% of the sums actually received by MRMG from the
exploitation of this film in all types of media.
In June 2000, the Company entered into a six-month agreement with
Stockcom International, Inc. whereby the Company will receive various
advertisement services in exchange for $28,000, $4,000 due upon signing
and $4,000 per month thereafter. As of September 30, 2000, the Company
has received three months of service and charged $12,000 against
operations.
F-22
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
On August 25, 2000, the Company entered into a co-distributor agreement
with Softorbit.com, Inc. The terms of the agreement are for the Company
to obtain the exclusive worldwide rights and royalty-free status to
co-distribute Softorbit.com, Inc. content on the Company's website
during the term of six months from the effective date of the agreement,
and upon termination of the exclusive rights, the agreement shall
remain in force on a non-exclusive basis for an additional forty-two
months.
During the term of co-distribution rights, the Company is permitted the
right to edit, copy, excerpt, revise, digitize, encode, host, publicly
display, show, broadcast, perform, promote and otherwise use and make
available on and through the World Wide Web, the internet and the
Company's channel sites. In consideration for the co-distribution
authorization and rights, the Company paid $10,000 upon the execution
of the agreement. As of September 30, 2000, $10,000 has been paid and
charged to operations under this agreement.
(H) INTERNET CONTENT PROVIDER AGREEMENTS
----------------------------------------
Effective August 1, 1999, the Company entered into an agreement with
InXsys Corporation (InXsys) granting the Company the right to
incorporate InXsys's Aggregated ClassiFIND On-Line Classifieds, Buy
Sell Bid On-Line Personals Co-Branded Services as Revenue-Generating
and Traffic-Building Content within the Company's Website by placement
of one or more hotlinks and/or banners to the InXsys sites. Under the
terms of this agreement, the Company shall receive a referral
commission equal to a percentage, as defined in the agreement, of the
net user fees collected.
On May 29, 2000, the Company entered into an agreement with Tribune
Media Services, Inc. ("TMS"). Under the agreement TMS will provide
movie title and background information to be viewed in conjunction with
the Company's on line movies. The agreement is for 600 movies for a fee
of $2.50 per movie.
(I) 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. As of September 30, 2000 a joint
venture agreement with eConnect has not been executed.
F-23
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
(J) PUBLIC RELATIONS
--------------------
(i) On September 19, 2000, the Company entered into a public
relations agreement with Crier Communications, Inc., a company
that has agreed to provide the Company with guidance in public
relations development on a month to month basis. The agreement
is for $12,500 per month. As of September 30, 2000, no fees
had been charged to operations and no services had been
performed. On October 27, 2000, the Company paid $10,000 to
Crier Communications, Inc. as a retainer due in order to
secure future services.
(ii) On October 20, 1999, the Company entered into an agreement
with Multi-Media Productions to produce an interview-style
video presentation for corporate marketing. The Company paid
and charged to operations $47,000 during the year ended
September 30, 2000 in connection with this agreement.
(K) INVESTOR RELATIONS
----------------------
On September 20, 2000, the Company entered into an investor relations
program with WallStreetWebcast.Com. The program is designed to
introduce the Company's concept to investment professionals. The cost
for the program was $12,500. As of September 30, 2000, $12,500 had been
paid and charged to operations.
(L) CONSULTING
--------------
(i) On September 26, 2000, the Company entered into a consulting
agreement with an individual to provide financial advisory
services. The consultant will be used for general business
matters with a goal to furthering the Company's business
strategies. The term of the agreement is for twelve months
from the effective date of the agreement.
In consideration for services to be rendered, the Company
issued 500,000 non-qualified stock options which vested
immediately upon the execution of the consulting agreement.
The options expire 5 years from the effective date of the
option agreement. The exercise price of the option is equal to
the lesser of (i) $.73 and (ii) the average of the lowest
three trading prices during the twenty trading days
immediately prior to the exercise of the options, discounted
by 35%.
F-24
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
(ii) On October 1, 2000, the Company entered into a memorandum of
understanding with an individual who would provide a complete
turnkey set of text, graphics, audio, video and database
materials upon which a website may be created by the Company.
The initial term of the agreement is for three months, during
which time the individual will provide complete editorial
comment with dynamic features such as interviews with
prominent individuals for the website.
The services rendered and to be rendered will total $30,000,
payable in three equal installments of $10,000 each. As of
September 30, 2000, no services had been rendered. Subsequent
to September 30, 2000 and as of the date of this report,
$10,000 has been paid and charged to operations.
NOTE 5 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. Under the terms of
the Agreement, as amended to date, Alliance will make available through
December 10, 2001, a $7 million revolving line of credit with interest
on the unpaid principal at 10% per annum. Under the terms of the
Agreement, the Company may draw up to $500,000 per month on the total
line of credit upon written request by the Company to the Lender.
Additionally the parties have agreed that any portion of the
indebtedness may be paid back by the Company either with cash or by the
issuance of common stock. Furthermore, in a separate Memorandum of
Agreement the two parties agreed that Alliance will provide ongoing
consulting services to the Company including, but not limited to,
strategic growth advice and introductions, marketing advice, and
business ideas. Alliance will be compensated for these services at the
option of the Company either in cash, or through the issuance of stock
or credit towards the purchase of stock. See Note 11(A) for issuance of
convertible debt to Alliance. As of September 30, 2000, no amounts were
outstanding under this line of credit.
NOTE 6 PREFERRED STOCK
------ ---------------
The Company's Articles of Incorporation authorize the issuance of
5,000,000 shares of preferred stock. The 1,000,000 shares of preferred
stock issued in connection with the Big Tex business combination
discussed in Note 1 (B) are convertible to common stock at an initial
conversion rate of one share of common stock per share of Class A
convertible preferred stock. Initially, each share of preferred stock
was entitled to,among other things, three non-cumulative votes per
share on all matters presented to the Company's stockholders for
action. At a special meeting of the Company's stockholders held on May
24, 2000, the holders of the Company's preferred stock and common stock
agreed to amend the Company's Articles of Incorporation so that the
voting rights of the preferred stock were increased from 3 votes per
share to 20 votes per share. As a result of this increase in voting
rights, the Chairman of the Board, who is President and Chief Executive
Officer, became entitled to exercise voting control over the Company.
F-25
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 7 PRIVATE PLACEMENTS
------ ------------------
During the years ended September 30, 2000 and 1999 in non-public
offerings, the Company completed private placements wherein it sold to
investors an aggregate of 616,001 and 4,267,436 common shares for cash
of $303,251 and $619,540, respectively. Additionally, during 2000 and
1999 the Company issued common shares in lieu of compensation and for
outside services.
NOTE 8 STOCK INCENTIVE PLANS AND EMPLOYEE STOCK OPTIONS
------ ------------------------------------------------
During the year ended September 30, 2000, the Board of Directors
terminated the Company's 1999 stock incentive plan which had been
adopted on July 9, 1999. As a result of this termination, the
2,350,000 options granted under this plan were cancelled.
Effective as of May 24, 2000, the Company's Board of Directors and
stockholders adopted a new stock option plan, entitled the 2000 Stock
Option Plan (the "Plan"). The Plan was developed to provide a means
whereby designated officers, employees and non-employee directors of
the Company and its subsidiaries and employees of companies who do
business with the Company may be granted incentive or non-qualified
stock options to purchase common stock of the Company.
The Plan authorizes the issuance of options to purchase up to an
aggregate of 3,000,000 shares of the Company's common stock. Incentive
stock options granted under the Plan must have an exercise price of not
less than 100% of the fair market value of the common stock on the date
the option is granted and must be exercised, if at all, within ten
years from the date of grant. In the case of an incentive stock option
granted to an optionee who owns more than 10% of the total voting
securities of the Company on the date of grant, such exercise price
shall not be less than 110% of fair market value on the date of grant,
and the option period may not exceed five years. Non-qualified stock
options granted under the Plan must have an exercise price of not less
than 85% of fair market value of the common stock on the date the
option is granted. Options may be exercised during a period of time
fixed by the committee that administers the Plan, except that no option
may be exercised more than 10 years after the date of grant.
F-26
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
Effective May 25, 2000 and August 2, 2000, the Company's Board of
Directors approved grants of 1,950,000 and 962,500 options,
respectively, under the Plan to various officers, directors and
employees. Additionally, effective as of May 4, 2000, 87,500 options
were granted under the Plan non-employee consultants (See Note 9).
Effective December 31, 1999, the Company's Board of Directors also
approved grants of 3,920,000 options to various officers, directors and
employees outside of any stock option plan. Additionally, 300,000
options were granted to non-employee consultants outside of any stock
option plan (See Note 9).
For financial statement disclosure purposes, the fair market value of
each stock option granted on December 31, 1999 was estimated on the
date of grant using the Black-Scholes Model in accordance with
Statement No. 123 using the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate of 5.75%,
volatility of 87% and expected term of three years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for options issued to employees,
officers and directors under the plans for the years ended September
30, 2000 and 1999. Had compensation cost for the Company's stock-based
compensation plans been determined on the fair value basis at the grant
dates for awards under the plans, consistent with Statement of
Accounting Standards No 123, "Accounting for Stock Based Compensation"
(Statement No. 123), the Company's net loss for the years ended
September 30, 2000 and 1999 would have been increased to the pro-forma
amounts indicated below.
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C> <C>
Net loss As reported $ (12,976,706) $ (3,541,860)
Pro forma $ (15,725,139) $ (3,844,673)
Net loss per share (basic
and diluted) As reported $ (.44) $ (0.15)
Pro forma $ (.52) $ (0.17)
</TABLE>
F-27
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net loss for future
years due to, among other things, the effects of vesting.
A summary of the Company's Stock Option Plans as of September 30, 2000
and changes during the year is presented below:
<TABLE>
<CAPTION>
Weighted Average
Number of Options Exercise Price
------------------ ----------------
Stock Options
-------------
<S> <C> <C>
Balance at beginning of period 2,350,000 $ 0.22
Cancelled (2,350,000) $ (0.22)
Granted 2,912,500 $ 0.73
Exercised - -
Forfeited - -
----------------- ---------------
Balance at end of period 2,912,500 $ 0.73
================= ===============
Options exercisable at end of period 2,912,500 $ 0.73
================= ===============
Weighted average fair value of options granted
during the period $ 0.54
===============
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of September 30, Contractual Exercise September 30, Exercise
Exercise Price 2000 Life Price 2000 Price
--------------- ---------------- --------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.71 1,950,000 10 Years $ 0.71 1,950,000 $ 0.71
$ 0.75 962,500 10 Years 0.75 962,500 0.75
--------------- ---------------- ------------- --------------- ------------
$ 0.71 - 0.75 2,912,500 $ 0.73 2,912,500 $ 0.73
=============== ================ ============= =============== ============
</TABLE>
F-28
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 9 COMMON STOCK OPTIONS ISSUED FOR CONSULTING AND OTHER SERVICES
------ -------------------------------------------------------------
The Company issued 300,000 common stock options on December 31, 1999,
at an exercise price of $.52 per share as consideration for consulting
services. The fair market value of the options, aggregating $91,351,
was estimated on the grant date using the Black-Scholes option pricing
method as required under SFAS 123 with the following weighted average
assumptions: expected dividend yield 0%, volatility 87%, risk-free
interest rate 5.75%, expected option life 3 years. The $91,351 was
charged to consulting expense at the grant date (See Note 8).
The Company issued 250,000 common stock options on January 12, 2000, at
an exercise price of $.25 per share as consideration for consulting
services. The fair market value of the options, aggregating $322,268,
was estimated on the grant date using the Black-Scholes option pricing
method as required under SFAS 123 with the following weighted average
assumptions: expected dividend yield 0%, volatility 87%, risk-free
interest rate 5.75%, expected option life 3 years. The $322,268 was
charged to consulting expense at the grant date.
The Company issued 330,000 common stock options on January 13, 2000, at
an exercise price of $1.31 per share as consideration for consulting
services. The fair market value of the options, aggregating $287,294,
was estimated on the grant date using the Black-Scholes option pricing
method as required under SFAS 123 with the following weighted average
assumptions: expected dividend yield 0%, volatility 87%, risk-free
interest rate 5.75%, expected option life 3 years. The $287,294 was
charged to consulting expense at the grant date.
The Company issued 87,500 common stock options on May 4, 2000, at an
exercise price of $1.30 per share as consideration for consulting
services. The fair market value of the options, aggregating $59,709,
was estimated on the grant date using the Black-Scholes option pricing
method as required under SFAS 123 with the following weighted average
assumptions: expected dividend yield 0%, volatility 87%, risk-free
interest rate 5.75%, expected option life 3 years. The $59,709 was
charged to consulting expense at the grant date (See Note 8).
NOTE 10 COMMON STOCK RESALE REGISTRATIONS
------- ---------------------------------
In January 2000, the Securities and Exchange Commission declared
effective a registration statement on Form SB-2 whereby 866,667 shares
of the Company's common stock underlying convertible debentures
described in Note 11(A) were registered for resale by Alliance
Equities, Inc.
In March 2000, the Securities and Exchange Commission declared
effective a registration statement on Form SB-2 whereby 2,568,046
shares of the Company's common stock underlying convertible debentures
and warrants issued in 1999 and described in Note 11(B) were registered
for resale by the holders of the debentures and warrants.
F-29
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
In July 2000, the Securities and Exchange Commission declared effective
a registration statement on Form SB-2 whereby 15,231,886 shares of the
Company's common stock underlying portions of the convertible
debentures and warrants issued in 2000 and described in Note 11(B) and
Note 11(C) were registered for resale by the holders of the debentures
and warrants. In addition, the 816,667 shares registered in January
2000 and 1,293,204 of the shares registered in March 2000 were carried
forward onto this registration statement.
As described in Note 14(B), the Company is obligated to register for
resale shares of common stock that are issuable in connection with its
January 2001 debenture offering.
NOTE 11 CONVERTIBLE DEBT
------- ----------------
(A) ALLIANCE EQUITIES
---------------------
In order to provide working capital and financing for the Company's
expansion, on August 5, 1999 the Company entered into an agreement with
Alliance Equities ("the Purchaser") whereby the Purchaser acquired
$520,000 of the Company's 10% Convertible Subordinated Debentures, due
August 4, 2000.
The Purchaser converted the debenture and accrued interest to common
stock during the year ended September 30, 2000 at a conversion price of
$0.60 per share.
The debenture contained 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 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 in 1999. There was no amortization
period for these financing costs since the debentures were convertible
immediately upon issuance.
(B) ADDITIONAL DEBENTURE INVESTORS
----------------------------------
In order to provide working capital and financing for the Company's
expansion, on various dates during 1999 and 2000 the Company entered
into several agreements with four accredited investors the
("Purchaser") whereby the Purchaser acquired $550,000, $500,000 and
$3,500,000 of the Company's 10% Convertible Debentures, due September
29, 2000, February 1, 2001 and May 1, 2001, respectively.
F-30
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
The Purchaser converted the 1999 debentures and accrued interest into
shares of common stock at a conversion price equal to $.60 per share.
The Purchaser has converted portions of the 2000 debentures and accrued
interest at various times at the initial conversion price which was
equal to the lesser of $.97 and 66.66% of the average closing bid price
during the 20 trading days immediately preceding the conversion dates.
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 debenture issuance date over the fixed conversion
price, which amounted to $2,977,500 in 2000 and $65,000 in 1999. There
is no amortization period for these financing costs since the
debentures are convertible immediately upon issuance.
As of September 30, 2000 and 1999, the Company was indebted for
$2,470,000 and $100,000 respectively, on these convertible debentures
(See Note 14 (B) for additional issuances of convertible debentures).
(C) BANK INSINGER DE BEAUFORT
-----------------------------
In order to provide working capital and financing for the Company's
expansion, on February 4, 2000 and April 14, 2000 the Company entered
into agreements with Bank Insinger De Beaufort ("the Purchaser")
whereby the Purchaser acquired $500,000 and $1,500,000 of the Company's
10% Convertible Debentures, due February 1, 2001 and May 1, 2001,
respectively.
The Purchaser has converted portions of the 2000 debentures and accrued
interest at various times at the initial conversion price which was
equal to the lesser of $.97 and 66.66% of the average closing bid price
during the 20 trading days immediately preceding the conversion dates.
The debenture contains a contingency provision whereby, if the Company
issues common stock at a price less than both the fixed conversion
price and the then market price on the date of issuance, the fixed
conversion price shall be adjusted as stipulated in the agreement.
Pursuant to the Rules and Regulations of the Securities and Exchange
Commission regarding beneficial conversion features, the Company has
expensed as financing costs any excess of the fair market value of the
common stock at the debenture issuance date over the fixed conversion
price, which amounted to $280,000. There is no amortization period for
these financing costs since the debentures are convertible immediately
upon issuance. As of September 30, 2000, the Company is indebted for
$1,250,000 on these convertible debentures to Bank Insigner.
F-31
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 12 INCOME TAXES
------- ------------
The Company's tax expense differs from the "expected" tax expense
(benefit) for the years ended September 30, 2000 and 1999 (computed by
applying the Federal corporate tax rate of 34 percent to loss before
taxes) as follows:
2000 1999
------------ ------------
Computed "expected" tax (benefit) $(2,824,000) $ (589,000)
Change in valuation allowance 2,824,000 589,000
------------ ------------
$ - $ -
============ ============
As discussed in Note 1(L), the tax effects of temporary
differences that give rise to significant portions of deferred
tax assets and liabilities at September 30, 2000 and 1999 are
as follows:
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 3,699,000 $ 875,500
------------ ------------
Total gross deferred tax assets 3,699,000 875,500
Less valuation allowance 3,699,000 875,500
------------ ------------
$ - $ -
============ ============
At October 1, 1999, the valuation allowance was $875,500. The net
change in the valuation allowance during the year ended September 30,
2000 was an increase of $2,824,000. As of September 30, 2000, the
Company has net operating loss carryforwards in the aggregate of
$10,720,000 which expire in various years through 2020.
F-32
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 13 SEGMENT INFORMATION
------- -------------------
As discussed in Note 1(A), the Company's operations are classified into
two reportable business segments: Kanakaris Wireless which supplies
internet products for electronic commerce and Desience Corporation
which designs and installs modular consoles primarily for various
business and government agencies. Both of the Company's business
segments have their headquarters and major operating facilities located
in the United States. The principal markets for the Company's products
are in the United States. There were no inter-segment sales or
purchases. Financial information by business segment is summarized as
follows:
<TABLE>
<CAPTION>
2000 Internet Commerce Modular Consoles Total
------------------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues $ 22,594 $ 591,244 $ 613,838
Segment profit (loss) (13,012,736) 36,030 (12,976,706)
Total assets 2,384,966 103,235 2,488,201
Additions to long-lived
assets 503,636 1,254 504,890
Depreciation and amortization 63,004 3,087 66,091
1999 Internet Commerce Modular Consoles Total
------------------------------ ----------------- ------------------ ------------------
Revenues $ 31,162 $ 937,596 $ 968,758
Segment profit (loss) (3,692,570) 150,710 (3,548,860)
Total assets 738,435 261,868 1,000,303
Additions to long-lived
assets 30,710 - 30,710
Depreciation and amortization 32,165 970 33,135
</TABLE>
NOTE 14 SUBSEQUENT EVENTS
------- -----------------
(A) ADVERTISING AGREEMENT
-------------------------
On November 14, 2000, the Company entered into an advertising agreement
with eConnect, a publicly traded corporation. The terms of the
agreement grant eConnect the exclusive ability to place banner
advertisements with hyperlinks on the home pages of CinemaPop.com and
WordPop.com, the Company's web sites for movies and books. The Company
will also send one e-mail message per month to its subscriber and web
partner base with a message provided by eConnect and include
information about eCash pads in trade magazine advertisements.
Additionally, the Company plans to provide the eConnect website with
access to several video feature films so that it may demonstrate the
eCash pad ordering system with a link.
F-33
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
The term of this agreement is for six months, with one six-month
renewal option. In consideration for the services the Company will
render under this agreement, the Company was paid $1,000,000 in the
form of eConnect restricted stock valued at the closing price of $1.25
per share on November 14, 2000, amounting to 800,000 shares.
(B) CONVERTIBLE DEBENTURES
--------------------------
In order to provide future working capital and financing for the
Company's expansion, effective as of January 5, 2001, the Company
entered into a securities purchase agreement and related agreements
with four accredited investors (the "Purchaser") for the purchase of
the Company's 12% Convertible Debentures due January 5, 2002.
The Purchaser will make investments in tranches, the first in the
amount of $650,000, which was received upon signing of the definitive
investment agreements and the second, in the amount of $650,000, if
certain conditions relating to the market price of the Company's common
stock are met upon the effectiveness of the registration statement
discussed in the final paragraph below.
Upon the issuance of the first $650,000 of convertible debentures, the
Purchaser received five-year term warrants to purchase three shares of
the Company's common stock for each $1.00 to be invested into the two
$650,000 tranches of convertible debentures. The exercise price of the
warrants is equal to the lesser of (i) $0.125 and (ii) the average of
the lowest three intraday trading prices during the twenty trading days
immediately prior to exercise. No additional warrants will be issued by
the Company at the time the second $650,000 of convertible debentures
are purchased. For all debentures issued, interest will be 12% per
annum, payable quarterly in common stock or cash at the option of the
investor.
The debentures are immediately convertible into shares of the Company's
common stock. The conversion price for the initial $650,000 of
debentures is equal to the lesser of (i) $0.15 and (ii) the average of
the lowest three inter-day trading prices during the twenty trading
days immediately prior to the conversion date discounted by 37.5%.
The Company has agreed to register with the SEC on Form SB-2 200% of
the Company's common stock underlying the convertible debentures and
the 3,900,000 shares of the Company's common stock underlying the
warrants issued within thirty days of signature of the definitive
agreements, and the effectiveness of such registration shall he
within ninety days of signature.
F-34
<PAGE>
KANAKARIS WIRELESS
(FORMERLY KANAKARIS COMMUNICATIONS, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999
---------------------------------
NOTE 15 LIQUIDITY
------- ---------
During the year ended September 30, 2000 the Company incurred a
negative cash flow from operating activities of $4,238,186 and at
September 30, 2000 had a working capital deficiency of $3,158,417.
The Company has a $7,000,000 revolving line of credit from Alliance
Equities which can be drawn upon by the Company for up to $500,000 per
month. In January 2001 the Company issued $650,000 of convertible
debentures due January 5, 2002 and warrants to purchase up to 3,900,000
shares of common stock to four accredited investors. Proceeds from
these debentures, after payment of related expenses, were approximately
$631,500. The debenture purchase agreement provides that if certain
conditions relating to the market price of the Company's common stock
are met, the accredited investors will be obligated to purchase
additional debentures in the aggregate principal amount of $650,000,
within thirty 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.
In an effort to increase sales in the internet commerce segment, the
Company is implementing a variety of business strategies, including
posting online advertisements directing sales of these advertisements
at executive management of other public companies. Other business
strategies to be implemented include requiring online registration for
all movie viewing on its web sites, soliciting monthly subscriptions
and pay-per-view sales of movie viewing on its web sites, introducing
revenue-sharing web partner programs and improving tracking of its
market share. The Company believes that if it is successful in
implementing these business strategies, it will generate increased
revenues through this segment. Additionally, in order to reduce the
cost of generating movie revenues, the Company plans to bring the
encoding process for films in-house in conjunction with the
development of its proprietary software.
In order to increase sales in its modular consoles segment, the Company
hired two exclusive sales representatives in June 2000, increased
original equipment manufacturing capacity and launched a new marketing
campaign that included high-impact sales literature and a web site at
www.desience.com. The Company believes that if it is successful in
implementing its business strategies for the modular consoles segment,
it will generate increased revenues through this segment.
The Company believes that current and future available capital
resources, revenues generated from operations, and other existing
sources of liquidity including the revolving line of credit with
Alliance Equities, will be adequate to meet the working capital
requirements needed to fund its operations and its capital expenditure
requirements for at least the next twelve months. However, if the
Company's capital requirements or cash flow vary materially from the
current projections or if unforeseen circumstances occur, the Company
may require additional financing sooner than it anticipates. The
failure to raise necessary capital could restrict the Company's growth,
limit its development of new products and services or hinder its
ability to compete.
F-35
