Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-54514
KANAKARIS WIRELESS
PROSPECTUS SUPPLEMENT DATED AUGUST 28, 2001
TO PROSPECTUS DATED MAY 31, 2001
The prospectus of Kanakaris Wireless dated May 31, 2001 is
supplemented to include information from the quarterly report on Form 10-QSB
for the quarter ended June 30, 2001 filed with the Securities and Exchange
Commission by Kanakaris Wireless on August 16, 2001 and to include other updated
information. Our condensed consolidated financial statements and related notes
for the three and nine months ended June 30, 2001 are included at pages F-1 to
F-20 of this supplement.
THE FOLLOWING RISK FACTORS ARE UPDATED OR ADDED:
- ------------------------------------------------
RISK FACTORS
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 June 30, 2001, we had
an accumulated deficit of approximately $28,476,000. We may continue to incur
losses and may never achieve or sustain profitability. An extended period of
losses and negative cash flow may prevent us from operating and expanding our
business, especially our Internet-based business.
WE MAY NEED AND BE UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY TERMS,
WHICH COULD DILUTE OUR 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
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. We may require new financing in addition to our line of
credit with Alliance Equities. This may not be available on a timely basis, in
sufficient amounts or on terms acceptable to us. This financing may also 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
because we could lose our existing sources of funding and impair our ability
to secure new sources of funding.
CONVERSION OF OUR OUTSTANDING CONVERTIBLE SECURITIES COULD SUBSTANTIALLY DILUTE
YOUR INVESTMENT AND CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE BECAUSE THE
CONVERSION PRICE OF THOSE SECURITIES DEPENDS UPON THE MARKET PRICE OF OUR COMMON
STOCK, AND THERE IS NO CEILING ON THE NUMBER OF SHARES OF OUR COMMON STOCK THAT
ARE ISSUABLE UPON EXERCISE OF THOSE SECURITIES.
We have issued to several of the selling security holders debentures
and warrants that are convertible or exercisable at prices that are equal to the
lesser of a fixed price and a variable price that is based upon a discount on
the market price of our common stock. As of August 3, 2001, we had a total of
76,018,858 shares of common stock outstanding, the closing price of a share of
our common stock on the OTC Bulletin Board was $0.05, and the debentures and
warrants with the variable conversion and exercise prices were convertible or
exercisable into approximately 127,400,000 shares of common stock. The number of
shares that those debentures and warrants ultimately may be converted into or
exercised for could prove to be greater than this estimate if the market price
of our common stock declines. Further, to the extent the selling security
1
holders convert those debentures and exercise those warrants and then sell the
underlying shares of common stock into the market, the price of our common stock
may decline due to the additional shares available in the market. This decline
could allow the selling security holders to convert their remaining debentures
and exercise their remaining warrants into a greater number of shares of common
stock, the sale of which would further depress the stock price. You could,
therefore, experience substantial dilution and a decline in the value of your
investment as a result of the conversion of the debentures and exercise of the
warrants.
IF THE SELLING SECURITY HOLDERS OR OTHERS ENGAGE IN SHORT SALES OF OUR COMMON
STOCK, INCLUDING SALES OF SHARES TO BE ISSUED UPON CONVERSION OF CONVERTIBLE
SECURITIES, THE PRICE OF OUR COMMON STOCK MAY DECLINE.
Selling short is a technique used by a stockholder to take advantage of
an anticipated decline in the price of a security. A significant number of short
sales can create a downward pressure on the price of the security. If the
selling security holders or others sell large volumes of our common stock within
a relatively short period of time, the market price of our common stock may
decrease. The decrease in market price would allow holders of our debentures and
warrants that have conversion or exercise prices based upon a discount on the
market price of our common stock to convert their debentures and exercise their
warrants into an increased number of shares of our common stock. Further sales
of common stock issued upon conversion of debentures or exercise of warrants
could cause even greater declines in the price of our common stock. The downward
pressure on the market price caused by conversion of debentures and exercise
warrants, and the sale of the underlying shares of common stock, could encourage
short sales by the selling security holders and others and could further
undermine the value of our common stock.
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 have fluctuated significantly over time. In fact, for the
quarter ended June 30, 2001, the high and low closing bid prices for a share of
our common stock were $.26 and $.10, respectively. The trading prices of our
common stock could experience wide fluctuations in the future in response to:
o quarter-to-quarter variations in our operating results;
o material announcements of technological innovations;
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.
2
THE CAPITALIZATION TABLE IS REPLACED WITH THE FOLLOWING:
- --------------------------------------------------------
CAPITALIZATION
The following table sets forth our cash position and capitalization as
of June 30, 2001. The information set forth below should be read in
conjunction with our condensed consolidated financial statements and the related
notes included elsewhere in this document.
June 30, 2001
--------------
Short-term convertible debentures................................. $ 3,088,500
=============
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 68,520,847 shares(1)........ 68,521
Additional paid-in capital................................... 28,037,111
Accumulated deficit.......................................... (28,476,449)
Deferred expenses............................................ (1,155,554)
Less subscription receivable (1,260,000 shares, common)...... (501,260)
Comprehensive loss........................................... (938,400)
-------------
Total stockholders' deficiency............................. (2,956,031)
-------------
Total capitalization.............................................. $ (2,956,031)
=============
- -------------------
(1) Excludes 6,135,383 shares of common stock issuable pursuant to the
exercise of stock options outstanding as of June 30, 2001, at an
approximate weighted average exercise price of $.5107 per share, all of
which options were exercisable on June 30, 2001. Also excludes
70,367,749 shares of common stock that were issuable pursuant to the
conversion of convertible debentures and related warrants outstanding
as of June 30, 2001, all of which were convertible or exercisable
on June 30, 2001 but were subject to certain conversion and
exercise limitations under our debenture offering documents.
3
THE SELECTED CONSOLIDATED FINANCIAL DATA TABLE IS REPLACED WITH THE FOLLOWING:
- ------------------------------------------------------------------------------
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 document. The consolidated
statements of operations data for the fiscal years ended September 30, 1999
and 2000 and the consolidated balance sheets data as of September 30, 1999 and
2000 are derived from our consolidated financial statements that have been
audited by Weinberg & Company, P.A. and are included in this document. The
selected data presented below for the nine-month periods ended June 30, 2000
and 2001 are derived from the unaudited statements of our company included
elsewhere in this document. Historical results are not necessarily indicative of
future results.
FISCAL YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------- ------------- -----------------------------
1999 2000 2000 2001
------------- ------------- ------------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales................................ $ 968,758 $ 613,838 $ 253,112 $ 1,472,369
Cost of sales............................ 661,707 373,487 204,419 457,375
------------- ------------- ------------- ------------
Gross profit........................ 307,051 240,351 48,693 1,014,994
------------- ------------- ------------- ------------
Operating expenses:
Marketing, advertising and
investor relations............... 822,306 2,277,090 2,093,300 626,703
Provision for bad debt.............. 1,000 313,000 - -
General and administrative.......... 2,849,944 6,660,385 4,874,524 4,589,683
------------- ------------- ------------- ------------
Total operating expenses.......... 3,673,250 9,250,475 6,967,824 5,216,386
------------- ------------- ------------- ------------
Operating loss.................... (3,366,199) (9,010,124) (6,919,131) (4,201,392)
Financing and other income (expense) net. (175,661) (3,966,582) (3,377,491) (2,934,211)
------------- ------------- ------------- -------------
Net loss.......................... $ (3,541,860) $(12,976,706) $(10,296,622) $ (7,135,603)
============= ============= ============= =============
Net loss attributable to
common shares................... $ (3,541,860) $(12,976,706) $(10,296,622) $ (7,135,603)
============= ============= ============= =============
Basic and diluted net loss per
common share............................ $ (.15) $ (.44) $ (.35) $ (.14)
============= ============= ============= =============
Weighted average common
shares used in determining
net loss per share...................... 22,945,540 29,858,415 29,326,819 49,752,754
============= ============= ============= =============
AT SEPTEMBER 30, JUNE 30,
---------------------- ------------
1999 2000 2001
---- ---- ----
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................ $ 155,063 $ 615,101 $ 1,664
Working capital (deficiency)............................. (1,189,834) (3,158,417) (3,996,444)
Total assets............................................. 1,000,303 2,488,201 1,381,484
Long-term debt........................................... - - -
Total stockholders' equity (deficiency).................. (623,616) (2,119,149) (2,956,031)
4
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
- --------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read with our condensed
consolidated financial statements and notes to financial statements included
elsewhere in this document. Except for historical information, the following
discussion contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions and our current beliefs regarding revenues we might earn if we are
successful in implementing our business strategies. See "Special Note Regarding
Forward-Looking Statements" for further information regarding forward-looking
statements. Our actual results may differ materially from the results discussed
in the forward-looking statements as a result of a number of factors, many of
which are beyond our control, including those factors discussed under "Risk
Factors" and other headings in this document.
OVERVIEW
We provide online delivery of films and books and offer business
services, including encoding of video for online delivery. In addition, we
design, manufacture and install ergonomic data control console systems for
high-end computer command centers.
We derive our revenue from both our wireless content delivery and sales
of our data control console systems. We expect to continue to place significant
emphasis upon the further development and expansion of our wireless content
delivery and e-commerce activities. As funds become available, we intend to
increase our marketing efforts substantially in order to develop awareness,
brand loyalty and sales for our newly introduced www.AK.TV interactive online
channel and our CinemaWEAR(TM) video-to-Internet encoding process. We intend to
generate revenue from advertising sponsorships, subscriptions, pay-per-view and
product sales pertaining to the AK.TV channel. We also intend to derive revenue
from both product sales and service fees pertaining to our CinemaWEAR(TM)
encoding. We also intend to continue to invest in the development of new
products and services that enhance AK.TV and CinemaWEAR(TM) encoding. In
addition, we intend to further develop our existing wireless products and
services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
NET SALES. Net sales increased $336,000 (647%) from $52,000 for the
three months ended June 30, 2000 to $388,000 for the three months ended June 30,
2001. The portion of net sales derived from our wireless businesses increased
$363,000 (6,000%) from $6,000 for the three months ended June 30, 2000 to
$369,000 for the three months ended June 30, 2001, due primarily to an
increase in advertising sponsorship revenues. We are working to increase our
advertising sponsorship revenue by making additional sponsorship opportunities
available in conjunction with AK.TV. The portion of net sales derived from the
sales of our data control console systems decreased $27,000 (59%) from $46,000
for the three months ended June 30, 2000 to $19,000 for the three months ended
June 30, 2001. This decrease primarily was due to a slowdown in the economy
that resulted in slower sales. We expect our data control console sales to
increase as a result of our enhanced sales activities and an increase in our
original equiment manufacturing capacity.
GROSS PROFIT. Gross profit increased $246,000 (984%) from a gross
profit of $25,000 for the three months ended June 30, 2000 to a gross profit of
$271,000 for the three months ended June 30, 2001. This increase in gross
profit was due primarily to the increase in advertising revenues noted above.
OPERATING EXPENSES. Total operating expenses decreased $1,032,000
(42%) from $2,478,000 for the three months ended June 30, 2000 to $1,446,000
for the three months ended June 30, 2001. This decrease in total operating
expenses primarily was due to decreases in consulting services and marketing,
advertising and investor relations costs. Consulting services decreased $328,000
(48%) from $677,000 for the three months ended June 30, 2000 to $349,000 for
the three months ended June 30, 2001. Marketing, advertising and investor
5
relations costs decreased $1,132,000 (94%) from $1,205,000 for the three
months ended June 30, 2000 to $73,000 for the three months ended June 30, 2001.
These fees and costs decreased primarily because of an emphasis placed on
reducing such costs. The decreases in these fees and costs were offset by
increases in executive compensation of $330,000 (254%) and in salaries of
$59,000 (94%) for the three months ended June 30, 2001 as compared to the
comparable prior year period.
OTHER EXPENSE. Other expense decreased $619,000 (26%) from
$2,406,000 for the three months ended June 30, 2000 to $1,787,000 for the three
months ended June 30, 2001. This decrease primarily was due to a decrease in
the cost of convertible debt financing costs.
NET LOSS. Net loss decreased $1,897,000 (39%) from $4,859,000 for the
three months ended June 30, 2000 to $2,962,000 for the three months ended June
30, 2001. This decrease in net loss was due to a combination of increased
revenues and decreased operating expenses, as discussed above.
NINE MONTHS ENDED JUNE 30, 2001 COMPARED TO NINE MONTHS ENDED JUNE 30, 2000
NET SALES. Net sales increased $1,219,000 (481%) from $253,000 for the
nine months ended June 30, 2000 to $1,472,000 for the nine months ended June 30,
2001. The portion of net sales derived from our wireless businesses increased
$1,131,000 (6,652%) from $17,000 for the nine months ended June 30, 2000 to
$1,148,000 for the nine months ended June 30, 2001, due primarily to an increase
in advertising sponsorship revenues. The portion of net sales derived from the
sales of our data control console systems increased $88,000 (37%) from $236,000
for the nine months ended June 30, 2000 to $325,000 for the nine months ended
June 30, 2001. This increase primarily was due to our enhanced sales activities.
We expect our data control console sales to increase further as a result of our
enhanced sales activities and an increase in our original equipment
manufacturing capacity.
GROSS PROFIT. Gross profit increased $966,000 (1,971%) from a gross
profit of $49,000 for the nine months ended June 30, 2000 to a gross profit of
$1,015,000 for the nine months ended June 30, 2001. This increase in gross
profit was due primarily to the increase in advertising sponsorship revenues
noted above.
OPERATING EXPENSES. Total operating expenses decreased $1,752,000 (25%)
from $6,968,000 for the nine months ended June 30, 2000 to $5,216,000 for the
nine months ended June 30, 2001. This decrease in total operating expenses
primarily was due to decreases in consulting services, marketing, advertising
and investor relations costs, and professional fees. Consulting services
decreased $980,000 (38%) from $2,583,000 for the nine months ended June 30, 2000
to $1,603,000 for the nine months ended June 30, 2001. Marketing, advertising
and investor relations costs decreased $1,466,000 (70%) from $2,093,000 for the
nine months ended June 30, 2000 to $627,000 for the nine months ended June 30,
2001. Professional fees decreased $678,000 (51%) from $1,335,000 for the nine
months ended June 30, 2000 to $657,000 for the nine months ended June 30, 2001.
These fees and costs each decreased primarily as a result of our successful
completion of several steps in the development of our business. These steps,
which required consulting, marketing and professional services, included content
acquisition, encoding of our content, database building, web site design,
e-commerce applications and other one-time expenses. The decreases in these fees
and costs were offset by increases in executive compensation of $897,000 (275%)
and in salaries of $210,000 (120%) for the nine months ended June 30, 2001 as
compared to the comparable prior year period.
OTHER EXPENSE. Other expense decreased $443,000 (13%) from
$3,377,000 for the nine months ended June 30, 2000 to $2,934,000 for the nine
months ended June 30, 2001. This decrease primarily was due to a decrease in
the cost of convertible debt financing costs.
NET LOSS. Net loss decreased $3,162,000 (31%) from $10,297,000 for
the nine months ended June 30, 2000 to $7,135,000 for the nine months ended
June 30, 2001. This decrease in net loss was due to a combination of increased
revenues and decreased operating expenses, as discussed above.
6
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.
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 were paid with cash and/or 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 as payment of interest accrued and payable
on, and upon conversion of portions of the principal balances of our 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
that 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 August 14, 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 debentures 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.
7
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 April 30, 2001,
$1,848,500 of the principal amount remained outstanding under these debentures.
As of April 30, 2001, we entered into an agreement with the holders of these
debentures to extend the due date of these debentures to May 1, 2002. In
consideration for the extension, we granted to the holders warrants to purchase
up to an aggregate of 1,350,000 shares of common stock at an exercise price
equal to the lesser of the average of the lowest three intraday trading prices
during the 20 trading days immediately preceding the grant of the warrants,
discounted by 37.5%, and the average of the lowest three intraday trading prices
of a share of common stock during the 20 trading days immediately preceding
exercise of the warrants. As of August 8, 2001, $1,688,500 of the original
$4,500,000 principal balance of these debentures remained outstanding.
In January 2001, we issued $650,000 of 12% convertible debentures due
January 5, 2002 to four accredited investors in the first stage of a two-stage
offering. The debentures were accompanied by warrants to purchase up to an
aggregate of 3,900,000 shares of common stock. The net proceeds of that
offering, after payment of related expenses, were approximately $631,500. In
March 2001, we issued $650,000 of 12% convertible debentures due March 9, 2002
in the second stage of the offering. The net proceeds of that offering, after
payment of some related expenses, were approximately $647,500. We have
registered for resale by the investors the shares of common stock underlying the
January and March debentures and warrants.
On June 29, 2001, we issued an aggregate of $500,000 of 12% convertible
debentures in a private offering to three accredited investors. The debentures
initially are convertible into shares of common stock at the lesser of $.10 per
share and 50% of the average of the lowest three intraday trading prices of a
share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,500,000 shares of common stock. The net proceeds of that
offering, after payment of related expenses, were approximately $420,000. We are
in the process of registering for resale by the purchasers shares of common
stock underlying these debentures and warrants.
As of June 29, 2001, we entered into a letter agreement with some of
our debenture holders. The agreement provided various anti-dilution adjustments
to the debentures and warrants issued in April and August 2000 and in January
2001 and March 2001. These adjustments were made partly in lieu of other
adjustments that would have been imposed under the terms of the debenture
offering documents. As a result of these adjustments, the conversion prices for
the debentures issued to these holders in April and August 2000 and in January
2001 and March 2001 were reduced to the lesser of $0.10 per share and 50% of the
average of the three lowest intraday trading prices of a share of our common
stock for the 20 trading days immediately preceding the conversion of the
debentures. In addition, the exercise prices of the warrants issued to the
holders in connection with the offering of the debentures in April and August
2000 and in January 2001 and March 2001 were reduced to the lesser of $0.0584
per share and the average of the three lowest intraday trading prices of a share
of our common stock for the 20 trading days immediately preceding the exercise
of the warrants.
As of June 30, 2001, we had negative working capital of approximately
$3,996,000 and an accumulated deficit of approximately $28,476,000. As of that
date, we had approximately $1,660 in cash, and approximately $142,000 of
accounts and notes receivable. We had accounts payable of approximately
$1,152,000 and convertible debentures of $3,088,500. To the extent debentures
issued by us are converted into shares of common stock, we will not be obligated
to repay the converted amounts.
8
Cash used in our operating activities totaled $2,051,000 for the nine
months ended June 30, 2001 and $3,246,000 for the nine months ended June 30,
2000. Cash provided by our investing activities totaled $232,000 for the nine
months ended June 30, 2001, and cash used in our investing activities totaled
$338,000 for the nine months ended June 30, 2000.
Cash provided by our financing activities totaled $1,205,000 for the
nine months ended June 30, 2001 and totaled $3,971,000 for the nine months ended
June 30, 2000. We raised $1,110,000 of the cash provided by financing activities
during the nine months ended June 30, 2001 and $3,818,000 of the cash provided
by financing activities during the nine months ended June 30, 2000 from the
issuance of our convertible debentures.
For the quarter ended June 30, 2001, we had net sales of $388,000 and a
net loss of $2,962,000, of which loss $2,239,000 (76%) consisted of non-cash
expenses. These non-cash expenses included $1,718,018 of convertible debt
financing costs incurred with respect to converted debentures.
In an effort to increase sales related to our wireless business, we are
implementing an enhanced marketing and sales strategy. For example, we are
selling advertising sponsorships to our AK.TV 24-hour streaming Internet
television channel. We also are completing research and development of
additional attributes to our CinemaWEAR(TM) technology with the goal of
launching an interactive personal meeting site within the AK.TV interactive
channel.
Also, we are enhancing our efforts to obtain online user registration
for movie viewing on AK.TV, soliciting monthly subscriptions to and pay-per-view
sales of movie viewing on AK.TV, introducing revenue-sharing web partner
programs and improving tracking of our market share. We believe that if we are
successful in implementing the above business strategies, we will generate
increased revenues from our wireless content and technology business segment.
In an effort to increase sales of our data control console products by
increasing our production capacity for our Desience Division OPCON Modular
System, we recently reached agreement with two established manufacturers to
provide for our original equipment manufacturing production needs. In addition,
we launched a marketing campaign that includes high-impact sales literature and
a cutting-edge web site at www.desience.com. We believe that if we are
successful in implementing our business strategies for our modular 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.
9
THE FOLLOWING INFORMATION IS ADDED TO THE BUSINESS SECTION:
- -----------------------------------------------------------
BUSINESS
We introduced in August 2001 www.AK.TV, a global interactive
television-styled web channel that we anticipate will incorporate the content
currently accessible through www.CinemaPop.com and that is available for viewing
on a variety of Internet-enabled devices, including Pocket PCs and laptop and
desktop computers and that, through an imbedded video player, shows regularly
scheduled and on-demand programming. We have been an innovator in electronic
book delivery and are in the process of preparing and incorporating our next
generation e-book web site www.WordPop.com and its content into our www.AK.TV
web channel. We anticipate that by the end August 2001, there will be over 100
movies and excerpts of over 400 books available on-demand through www.AK.TV.
We plan to market devices that will easily make the content provided
through www.AK.TV viewable through the use of a standard television set by
connecting the set to an Internet-enabled computer. We also plan to offer
various products of the pop culture genre and print-on-demand books through an
area of the www.AK.TV web channel dedicated to shopping. In addition, we plan to
solicit sponsorships from businesses for advertising content to be displayed
with the programming provided through our www.AK.TV web channel. We are also
developing an interactive meeting place, tentatively called My Personal Video,
as a future enhancement to the www.AK.TV web channel through which we plan to
offer various messaging services, including one-on-one video meetings and
on-line chat features.
Our www.AK.TV initiative represents the culmination of the development
of our Internet content and technology, and we anticipate that the basic
services and content provided through www.AK.TV will be available at no
additional charge for those with Internet connectivity. We anticipate that by
the end of August 2001, www.AK.TV will serve as the portal to all of the
proprietary content and web sites of Kanakaris Wireless.
THE MANAGEMENT SECTION IS REVISED TO REFLECT THE FOLLOWING:
- -----------------------------------------------------------
MANAGEMENT
For personal reasons, Mr. Robert Sherry resigned from his position on
our board of directors effective as of July 30, 2001. Effective as of August 6,
2001, Mr. Van Holster was appointed as our Chief Operating Officer. Effective
August 13, 2001, Mr. Holster was appointed as a member of our board of
directors. As of that date, Mr. Holster was 31 years old. During the past five
years, Mr. Holster served as Product Manager of our Desience Division from May
1996 to August 2001, where his responsibilities included duties relating to
order initiation, product fulfillment and installation and customer support.
Prior to his employment with our Desience Division, Mr. Holster was a student at
Pasadena City College, where he earned an Associate in Arts Degree in Liberal
Arts and an Associate in Science Degree in Marketing.
10
THE PRINCIPAL AND SELLING SECURITY HOLDERS SECTION IS REPLACED WITH THE
FOLLOWING:
- --------------------------------------------------------------------------------
PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of August 3, 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 76,018,858 shares of our common stock and 1,000,000 shares of our Class
A Convertible Preferred Stock issued and outstanding as of the date of the
table. 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, are calculated according 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, Equilibrium Equity, LLC, and Alliance Equities, Inc., or
the debenture investors, are determined in part based upon the terms of
convertible debentures and related warrants held by these six debenture
investors as of the date of the table. Shares being offered under this
prospectus by the debenture investors also include shares of common stock that
may become issuable upon conversion of interest that is scheduled to become
payable on debentures after sixty days from the date of the table.
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 prior to this offering 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.
11
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders. All of the shares being offered under this
prospectus were issued or are issuable upon exercise of warrants or options or
upon conversion of debentures that the selling security holders acquired from us
in the following private placement transactions:
o 33,784 shares of common stock were issued to one investor upon
conversion of our 10% convertible subordinated debentures due
August 4, 2000;
o 1,009,043 shares of common stock were issued to three investors
upon conversion of our 10% convertible debentures due May 1, 2002,
or May 2000 debentures, which debentures were issued to four
investors in April and August 2000 and have, with respect to May
2000 debentures held by three investors, an adjusted per share
conversion price equal to the lesser of $0.10 and 50% of the
average of the three lowest intraday trading prices during the 20
trading days immediately preceding the conversion date and, with
respect to a May 2000 debenture held by one investor, a per share
conversion price equal to the lesser of $0.97 and 66.66% of the
average of the closing bid prices for a share of our common stock
during the 20 trading days immediately preceding the conversion
date, multiplied by an anti-dilution adjustment factor of 0.88116.
o Five-year warrants to purchase up to 320,224 shares of common
stock, or February 2000 warrants, were issued to three investors in
connection with our sale of 10% convertible debentures due February
1, 2001 and have, with respect February 2000 warrants held by two
investors, an adjusted per share exercise price equal to the lesser
of $0.0584 and the average of the three lowest intraday trading
prices during the 20 trading days immediately preceding the
exercise date and, with respect to February 2000 warrants held by
one investor, an adjusted per share exercise price of $1.54;
o 18,833,240 shares of common stock are issuable to four investors
upon conversion of our May 2000 debentures;
o Five-year warrants to purchase up to 1,441,009 shares of common
stock, or May 2000 warrants, were issued to four investors in
connection with our sale of May 2000 debentures and have, with
respect to May 2000 warrants held by three investors, an adjusted
per share exercise price equal to the lesser of $0.0584 and the
average of the three lowest intraday trading prices during the 20
trading days immediately preceding the exercise date and, with
respect to May 2000 warrants held by one investor, an adjusted per
share exercise price of $1.54;
o 976,274 shares of common stock are issuable upon conversion of our
12% convertible debentures due January 5, 2002, or January 2001
debentures, which debentures were issued to four investors in
January 2001 and have an adjusted per share conversion price equal
to the lesser of $0.10 and 50% of the average of the lowest three
intraday trading prices of our common stock during the 20 trading
days immediately preceding the conversion date;
o Five-year warrants to purchase up to 3,900,000 shares of common
stock, or January 2001 warrants, were issued to four investors in
connection with the sale of our January 2001 debentures and have,
with respect to January 2001 warrants held by three investors, an
adjusted per share exercise price equal to the lesser of $0.0584
and the average of the three lowest intraday trading prices during
the 20 trading days immediately preceding the exercise date and,
with respect to January 2001 warrants held by one investor, an
adjusted per share exercise price of $1.54;
12
o 2,011,675 shares of common stock were issued to four investors upon
conversion of our 12% convertible debentures due March 9, 2002, or
March 2001 debentures, which debentures were issued to four
investors in March 2001 and have an adjusted per share conversion
price equal to the lesser of $0.10 and 50% of the average of the
lowest three intraday trading prices of our common stock during the
20 trading days immediately preceding the conversion date;
o 1,114,219 shares of common stock are issuable to four investors
upon conversion of our March 2001 debentures;
o Options to purchase up to 100,000 shares of common stock at an
exercise price of $0.30 per share, or February 1999 options, were
issued to a consultant in connection with a February 1999 license
agreement and are exercisable through December 31, 2005;
o Options to purchase up to 175,000 shares of common stock at an
exercise price of $0.01 per share, or March 1999 options, were
issued to a consultant in March 1999 in connection with the first
amendment to our February 1999 license agreement and are
exercisable through May 1, 2003; and
o Options to purchase up to 87,500 shares of common stock at an
exercise price of $1.295 per share, or May 2000 options, were
issued under our 2000 Stock Option Plan to a consultant in May 2000
in connection with the second amendment to our February 1999
license agreement and are exercisable through May 1, 2003.
We have agreed to pay 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 under the rules and
regulations of the Securities Act of 1933 to keep it effective until the earlier
of:
o The date that 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, under Rule
144 under the Securities Act; and
o The date that all shares of common stock offered under this
prospectus have been resold.
13
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
Shares of Class Shares of
Beneficially Class Being Shares of Class
Name and Address of Title of Owned Prior Offered Under Beneficially Owned
Beneficial Owner(1) Class to this Offering this Prospectus After this Offering(2)
----------------- ----- ------------------- ------------------ ------------------------
Number Percent Number Percent
------ ------- ------ -------
AJW Partners, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 42,104,804(3) 35.84% 9,664,818(4) 32,439,986 30.12%
New Millennium Capital Partners II, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 42,104,804(3) 35.84% 9,664,818(4) 32,439,986 30.12%
Bristol Investment Fund, Ltd.
c/o Olympia Capital (Cayman) Limited
Williams House
20 Reid Street
Hamilton HM 11, Bermuda...............Common 24,757,875(5) 24.95% 5,615,065(6) 19,142,810 20.12%
Equilibrium Equity, LLC
155 First Street, Suite B
Mineola, NY 11501.....................Common 14,236,838(7) 15.82% 4,020,534(8) 10,216,304 11.85%
Alex F. Kanakaris.....................Common 13,669,546(9) 17.28% - 13,669,546 17.28%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
Alliance Equities
12147 NW 9th Drive
Coral Springs, FL 33071..............Common 5,216,031(10) 6.48% 33,784 5,182,247 6.44%
Branch Lotspeich......................Common 2,997,595(11) 3.88% - 2,997,595 3.88%
Bank Insinger de Beaufort
Heregracht 551
1017 BW Amsterdam
Netherlands...........................Common 2,797,622(12) 3.55% 640,449(13) 2,157,173 2.76%
John Robert McKay.....................Common 1,025,500(14) 1.34% - 1,025,500 1.34%
Lisa Lawrence.........................Common 720,000(15) * - 720,000 *
ION Systems, Inc......................Common 362,500(16) * 362,500(16) - -
Patrick McKenna.......................Common 300,000(17) * - 300,000 *
Rose Forbes...........................Common 100,000 * - 100,000 *
Robert Wood...........................Common 100,000 * - 100,000 *
Jeff Hall.............................Common 80,000(18) * - 80,000 *
Thomas S. Hughes......................Common 50,000 * - 50,000 *
Van Holster...........................Common 30,000 * - 30,000 *
David T. Shomaker.....................Common 15,000 * - 15,000 *
Charles Moore.........................Common - - - - -
All directors and executive
officers as a group
(12 persons).......................Common 19,087,641(19) 23.50% - 19,087,641 23.50%
Class A Convertible
Preferred 1,000,000 100.00% - 1,000,000 100.00%
14
- ---------------
* Less than 1%.
(1) The address of each director and executive officer named in this table
is c/o Kanakaris Wireless, 65 Enterprise, Aliso Viejo, California
92656. Mr. Kanakaris, Mr. Lotspeich, Mr. McKay and Mr. Holster are
directors and executive officers of Kanakaris Wireless. Ms. Lawrence,
Mr. McKenna, Ms. Forbes, Mr. Hall, Mr. Hughes, Mr. Moore and Mr. Wood
are directors of Kanakaris Wireless. Mr. Shomaker is Acting Chief
Financial Officer of Kanakaris Wireless and an advisor to our board of
directors.
(2) Assumes all shares of class being offered are sold.
(3) Consists of 629,109 shares of common stock issued and outstanding,
2,184,041 shares of common stock issuable upon exercise of warrants and
39,291,654 shares of common stock issuable upon conversion of
debentures.
(4) Consists of (a) 193,461 shares of common stock that were issued upon
conversion of March 2001 debentures and as payment of interest on
those debentures, (b) 80,056 shares of common stock issuable upon
exercise of February 2000 warrants, (c) 400,280 shares of common stock
issuable upon exercise of May 2000 warrants, (d) 624,750 shares of
common stock issuable upon exercise of January 2001 warrants, (e)
7,797,481 shares of common stock issuable upon conversion of May 2000
debentures and as payment of interest on those debentures, (f) 139,947
shares of common stock issuable upon conversion of March 2001
debentures and as payment of interest on those debentures and (g)
428,843 shares of common stock that were issued upon conversion of May
2000 debentures and as payment of interest on those debentures.
(5) Consists of 1,534,126 shares of common stock issued and outstanding,
20,618,082 shares of common stock issuable upon conversion of
debentures and 2,605,667 shares of common stock issuable upon exercise
of warrants.
(6) Consists of (a) 2,400,000 shares of common stock issuable upon exercise
of January 2001 warrants, (b) 957,107 shares of common stock issuable
upon conversion of January 2001 debentures and as payment of interest
on those debentures, (c) 723,832 shares of common stock issuable upon
conversion of March 2001 debentures and as payment of interest on those
debentures and (d) 1,534,126 shares of common stock that were issued
upon conversion of March 2001 debentures and as payment of interest on
those debentures.
(7) Consists of 241,984 shares of common stock issued and outstanding,
600,123 shares of common stock issuable upon exercise of warrants and
13,394,731 shares of common stock issuable upon conversion of
debentures and as payment of interest on those debentures.
(8) Consists of (a) 151,357 shares of common stock that were issued upon
conversion of May 2000 debentures and as payment of interest on those
debentures, (b) 160,112 shares of common stock issuable upon exercise
of May 2000 warrants, (c) 250,500 shares of common stock issuable upon
exercise of January 2001 warrants, (d) 3,238,278 shares of common stock
issuable upon conversion of May 2000 debentures and as payment of
interest on those debentures, (e) 19,167 shares of common stock
issuable upon conversion of January 2001 debentures and as payment of
interest on those debentures, (f) 110,493 shares of common stock
issuable upon conversion of March 2001 debentures and as payment of
interest on those debentures and (g) 90,627 shares of common stock that
were issued upon conversion of March 2001 debentures.
(9) Consists of 10,569,546 shares of common stock issued and outstanding,
1,000,000 shares of common stock issuable upon conversion of Class A
Convertible Preferred Stock and 2,100,000 shares of common stock
issuable upon exercise of options.
(10) Consists of 789,784 shares of common stock issued and outstanding,
300,000 shares of common stock issuable upon exercise of warrants and
4,126,247 shares of common stock issuable upon conversion of
debentures.
15
(11) Consists of 1,772,595 shares of common stock issued and outstanding, of
which 25,000 are held by Mr. Lotspeich's spouse, and 1,200,000 shares
of common stock issuable upon exercise of options.
(12) Consists of 1,228,506 shares of common stock issuable upon exercise of
warrants and 1,569,116 shares of common stock issuable upon conversion
of debentures and as payment of interest on those debentures.
(13) Consists of (a) 160,112 shares of common stock issuable upon exercise
of February 2000 warrants and (b) 480,337 shares of common stock
issuable upon exercise of May 2000 warrants.
(14) Consists of 680,500 shares of common stock issued and outstanding and
345,000 shares of common stock issuable upon exercise of options.
(15) Consists of 445,000 shares of common stock issued and outstanding and
275,000 shares of common stock issuable upon exercise of options.
(16) Consists of 100,000 shares of common stock issuable upon exercise of
February 1999 options, 175,000 shares of common stock issuable upon
exercise of March 1999 options and 87,500 shares of common stock
issuable upon exercise of May 2000 options. Prior to May 2, 2002,
holders of February 1999 options, March 1999 options and May 2000
options may not in the aggregate sell or transfer more than 45,000
shares issued upon exercise of those options in any period of one
calendar month.
(17) Consists of 50,000 shares of common stock issued and outstanding and
250,000 shares of common stock issuable upon exercise of options.
(18) Consists of 50,000 shares of common stock issued and outstanding and
30,000 shares of common stock issuable upon exercise of options.
(19) Consists of 13,887,641 shares of common stock issued and outstanding,
4,200,000 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.
16
THE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SECTION IS REVISED TO
DELETE THE LAST TWO PARAGRAPHS OF THAT SECTION AND TO INCLUDE THE FOLLOWING
IN CHRONOLOGICAL ORDER:
- -----------------------------------------------------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 25, 1999, we entered into a memorandum of agreement with
Alliance Equities, Inc. that provided that Alliance Equities will
provide ongoing consulting services to us including, but not limited to,
strategic growth advice and introductions, marketing advice, and business ideas.
Alliance Equities will be compensated for these services, at our option, in
cash, through the issuance of our common stock or as credit towards the
purchase of our common stock. Since August 1999 and as of June 30, 2001, we
had issued to Alliance Equities 3,000,000 shares of our common stock valued at
approximately $2,290,400 for consulting services rendered under the agreement.
On March 19, 1999, we issued 5,000 shares of common stock valued
at $5,850 to Van Holster as compensation for services rendered.
On August 5, 1999, we issued an aggregate of $520,000 of 10%
convertible subordinated debentures due August 4, 2000 in a private offering
to Alliance Equities. The debentures were convertible into shares of
common stock at $0.60 per share and provided for the issuance of additional
shares in excess of those issuable based on a conversion price of $0.60 per
share if the stock price declined below 150% of the conversion price.
On December 10, 1999, we entered into a Revolving Line of Credit
Agreement with Alliance Equities, which agreement expires December 10,
2001. Under the terms of the agreement, Alliance Equities has made
available a $7 million revolving line of credit with interest on the unpaid
principal at 10% per annum. Under the terms of the agreement, we may draw up
to $500,000 per month on the total line of credit upon our written request.
Additionally, we have agreed that any portion of the indebtedness may be paid
back either with cash or by the issuance of our common stock. As of June 30,
2001, no amounts were outstanding under this line of credit.
In January 2000, we also issued an aggregate of 866,667 shares of
common stock to Alliance Equities upon conversion of an aggregate of
$520,000 in principal amount of the debentures purchased by it in our August
1999 debenture offering.
On April 18, 2001, we issued 25,000 shares of common stock valued at
$2,500 to Van Holster as compensation for services rendered.
In May 2001, we issued an aggregate of 733,249 shares of common stock
to Bank Insinger de Beaufort upon conversion by it of $50,000 in principal
amount plus interest on the debentures purchased by it in the April 2000
offering.
In June 2001, we issued an aggregate of 498,584 shares of common stock
to Bank Insinger de Beaufort upon conversion by it of $50,000 in principal
amount plus interest on the debentures purchased by it in the April 2000
offering. Also, we issued an aggregate of 629,345 shares of common stock to
Bristol Investment Fund, Ltd. upon conversion by it of $50,000 in principal
amount plus interest on the debentures purchased by it in the January 2001
offering. Finally, we issued an aggregate of 502,685 shares of common stock, of
which 213,641 shares were issued to each of AJW Partners and New Millennium upon
conversion by each of them of $17,000 in principal amount plus interest on the
debentures each of them purchased in the March 2001 offering, and of which
75,403 shares were issued to Equilibrium Equity upon conversion of $6,000 in
principal amount plus interest on the debenture it purchased in the March 2001
offering.
On June 29, 2001, we issued an aggregate of $500,000 of 12% convertible
debentures due June 29, 2002 in a private offering. AJW Partners and New
Millennium, each purchased $200,000 of the debentures and Alliance Equities
purchased $100,000 of the debentures. The debentures initially are convertible
into shares of common stock at the lesser of $0.10 per share and 50% of the
average of the lowest three intraday trading prices of a share of common stock
during the 20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of
common stock at an initial exercise price equal to the lesser of $0.0584 and the
average of the three lowest intraday trading prices during the 20 trading days
immediately preceding the exercise date. The warrants and debentures contain
anti-dilution provisions that may result in an increase in the number of shares
of common stock underlying the warrants and/or a decrease in the exercise or
conversion prices of the warrants and debentures. The net proceeds of that
offering, after payment of related expenses, were approximately $420,000. We are
in the process of registering for resale by the purchasers shares of common
stock underlying these debentures and warrants.
17
As of June 29, 2001, we entered into a letter agreement with some of
our debenture holders. The agreement provided various anti-dilution adjustments
to the debentures and warrants issued in April and August 2000 and in January
and March 2001. These adjustments were made partly in lieu of other adjustments
that would have been imposed under the terms of the debenture offering
documents. As a result of these adjustments, the initial conversion prices for
the debentures issued to these holders in April and August 2000 and in January
and March 2001 were reduced to the lesser of $0.10 per share and 50% of the
average of the three lowest intraday trading prices of a share of our common
stock for the 20 trading days immediately preceding the conversion of the
debentures. In addition, the exercise prices of the warrants issued to these
holders in connection with the offering of the debentures in April and August
2000 and in January and March 2001 were reduced to the lesser of $0.0584 per
share and the average of the three lowest intraday trading prices of a share of
our common stock for the 20 trading days immediately preceding the exercise of
the warrants.
In July 2001, we issued an aggregate of 536,330 shares of common stock,
of which 21,472 shares were issued to Bank Insinger de Beaufort, 212,373 shares
were issued to each of AJW Partners and New Millennium, and 90,112 shares were
issued to Equilibrium Equity as payment of interest owed on the debentures
purchased by the Bank, AJW Partners, New Millennium and Equilibrium Equity in
the April 2000 offering. Also, we issued an aggregate of 113,536 shares of
common stock, of which 95,737 shares were issued to Bristol Investment Fund,
Ltd., 6,805 shares were issued to each of AJW Partners and New Millennium, and
4,189 shares were issued to Equilibrium Equity as payment of interest owed on
the debentures purchased by Bristol Investment Fund, AJW Partners, New
Millennium and Equilibrium Equity in the January 2001 offering. Additionally, we
issued an aggregate of 288,561 shares of common stock, of which 191,474 shares
were issued to Bristol Investment Fund, Ltd., 39,987 shares were issued to each
of AJW Partners and New Millennium, and 17,113 shares were issued to equilibrium
Equity as payment of interest owed on the debentures purchased by Bristol
Investment Fund, AJW Partners, New Millennium and Equilibrium Equity in the
March 2001 offering. Also, we issued an aggregate of 2,233,736 shares of common
stock, of which 1,117,321 shares were issued to Bristol Investment Fund upon
conversion by it of $50,000 in principal amount plus interest on the debentures
purchased by it in the March 2001 offering, and of which 474,476 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 each of them
purchased in the March 2001 offering, and of which 167,463 shares were issued to
Equilibrium Equity upon conversion of $7,500 in principal amount plus interest
on the debenture it purchased in the March 2001 offering.
As of August 28, 2001, we issued in August 2001, an aggregate of
6,840,135 shares of common stock, of which 3,137,321 shares were issued to
Bristol Investment Fund upon conversion by it of $64,000 in principal amount
plus interest on the debenture it purchased in the March 2001 offering and
$18,000 in principal amount plus interest on the debenture it purchased in the
January 2001 offering, and of which 1,573,695 shares were issued to each of AJW
Partners and New Millennium upon conversion by each of them of $38,250 in
principal amount plus interest on the debentures each of them purchased in the
April 2000 offering, and of which 555,424 shares were issued to Equilibrium
Equity upon conversion of $13,500 in principal amount plus interest on the
debenture it purchased in the April 2000 offering.
As of April 30, 2001, $1,848,500 of the original $4,500,000 principal
balance of 10% Convertible Debentures due May 1, 2001 remained outstanding. As
of April 30, 2001, we entered into an agreement with the holders of these
debentures to extend the due date of these debentures to May 1, 2002. In
consideration for the extension, we granted to New Millennium, AJW Partners,
Bank Insinger de Beaufort and Equilibrium Equity warrants to purchase up to an
aggregate of 1,350,000 shares of common stock at an initial exercise price equal
to the lesser of $0.06 and the and the average of the lowest three intraday
trading prices of a share of common stock during the 20 trading days immediately
preceding exercise of the warrants. The warrants contain anti-dilution
provisions that may result in an increase in the number of shares of common
stock underlying the warrants and/or a decrease in the exercise price of the
warrants. As of August 28, 2001, $1,658,500 of the original $4,500,000 principal
balance of these debentures remained outstanding.
18
INDEX TO FINANCIAL STATEMENTS
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Balance Sheet at June 30, 2001......................F-1
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended June 30, 2001 and 2000..........................F-3
Condensed Consolidated Statements of Comprehensive Loss for the Three
Months and Nine Months Ended June 30, 2001 and 2000...................F-4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2001...................................................F-5
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the Nine Months Ended June 30, 2001..................F-7
Notes to Condensed Consolidated Financial Statements.......................F-8
19
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Balance Sheet
June 30, 2001
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,664
Accounts receivable 35,197
Inventories 1,960
Current maturities of note and loan receivable - net 106,745
Current maturities of notes receivable -
stockholders and related parties 74,530
Interest receivable 26,603
Prepaid expenses 93,672
Advances to suppliers 700
------------
Total current assets 341,071
------------
Property and equipment, net of accumulated
depreciation and amortization 53,568
------------
Other assets:
Investments 153,600
Notes receivable - stockholders and
related parties - noncurrent 36,280
Note and loan receivable - noncurrent 51,255
Film library - net of amortization 410,122
Goodwill - net of amortization 328,303
Other 7,285
------------
Total other assets 986,845
------------
Total assets $ 1,381,484
============
See accompanying notes to condensed consolidated financial statements.
F-1
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Balance Sheet
June 30, 2001
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 1,151,816
Due to former stockholder of subsidiary 97,199
Convertible debentures 3,088,500
-------------
Total current liabilities 4,337,515
Stockholders' deficiency:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; 1,000,000 Class A Convertible issued
and outstanding 10,000
Common stock, $0.001 par value; 100,000,000
shares authorized; 68,520,847 issued and
outstanding 68,521
Additional paid-in capital 28,037,111
Accumulated deficit (28,476,449)
Deferred expenses (1,155,554)
Less subscription receivable
(1,260,000 shares, common) (501,260)
Comprehensive loss (938,400)
-------------
Total stockholders' deficiency (2,956,031)
-------------
Total liabilities and
stockholders' deficiency $ 1,381,484
=============
See accompanying notes to condensed consolidated financial statements.
F-2
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales $ 388,106 $ 51,970 $ 1,472,369 $ 253,112
Cost of sales (117,536) 26,508 457,375 204,419
------------- ------------- ------------- -------------
Gross profit 270,570 25,462 1,014,994 48,693
------------- ------------- ------------- -------------
Operating expenses:
Executive compensation 460,535 130,268 1,223,585 326,380
Salaries 121,596 62,526 384,742 174,988
Payroll taxes and employee benefits 11,837 24,766 33,573 50,973
Consulting services 348,745 677,460 1,602,934 2,583,195
Royalties - - - 2,333
Travel and entertainment 35,601 59,400 138,104 144,332
Telephone and utilities 12,511 17,331 42,281 42,784
Marketing, advertising and investor relations 73,446 1,204,538 626,703 2,093,300
Professional fees 226,632 219,356 656,752 1,335,014
Rent 46,967 7,761 82,263 19,540
Office and other expenses 32,205 13,250 187,874 31,871
Equipment rental and expense 671 713 2,529 2,932
Insurance 19,166 18,184 56,301 38,341
Depreciation and amortization 37,153 13,413 109,627 35,803
Taxes - other 1,909 383 4,309 6,436
Bank charges 508 1,127 1,321 2,411
Website development 4,464 - 42,609 -
Miscellaneous 12,224 27,247 20,879 77,191
------------- ------------- ------------- -------------
Total operating expenses 1,446,170 2,477,723 5,216,386 6,967,824
------------- ------------- ------------- -------------
Loss before interest and other income
(expense) (1,175,600) (2,452,261) (4,201,392) (6,919,131)
Financing and other income (expense), net (1,786,739) (2,406,405) (2,934,211) (3,377,491)
------------- ------------- ------------- -------------
Net loss $ (2,962,339) $ (4,858,666) $ (7,135,603) $(10,296,622)
============= ============= ============= =============
Net loss per common share -
basic and diluted $ (.06) $ (.18) $ (.14) $ (.35)
============= ============= ============= =============
Weighted average common shares
outstanding - basic and diluted 53,753,463 28,069,151 49,752,754 29,326,819
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
F-3
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss $(2,962,339) $ - $(7,135,603) $ -
Other comprehensive loss:
Unrealized loss on securities (880) - (938,400) -
------------ ------------ ------------ ------------
Comprehensive loss $(2,963,219) $ - $(8,074,003) $ -
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-4
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
------------- -------------
Cash flows from operating activities:
Net loss $ (7,135,603) $(10,296,622)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of goodwill 8,463 19,975
Depreciation and amortization 88,323 15,828
Write off of organizational costs - 1,451
Netbooks.com settlement 3,750 -
Income from judgment - (250,000)
Deferred income realized (1,092,000) -
Compensation, consulting, marketing and
professional services, incurred in exchange
for common stock 1,991,283 4,157,650
Consulting services incurred in exchange
for stock options 334,706 -
Convertible debt - marketing cost 190,100 520,000
Convertible debt - financing cost 2,621,018 2,977,500
Convertible debt - interest cost 254,863 128,625
Changes in assets and liabilities (increase) decrease in:
Accounts receivable 267,049 109,715
Inventory 2,495 (2,784)
Prepaid expenses 71,362 (183,407)
Advances to suppliers and security deposits (6,585) -
Interest receivable (16,534) 1,041
Increase (decrease) in:
Accounts payable and accrued expenses 350,001 (491,107)
Royalties payable 12,841 46,526
Other current liabilities 3,823 -
------------- -------------
Net cash used in operating activities (2,050,645) (3,245,609)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (17,824) (26,671)
Loans to stockholders and related parties - (175,000)
Decrease in notes receivable -
stockholders and related parties 234,529 61,694
Proceeds from notes receivable - other 47,000 -
Proceeds from judgement receivable - 45,000
Acquisition of film library (31,397) (242,563)
------------- -------------
Net cash provided by (used in)
investing activities 232,308 (337,540)
------------- -------------
Cash flows from financing activities:
Payment to former stockholder of subsidiary (5,000) -
Proceeds from notes payable - stockholder - 54,500
Payments on notes payable - stockholder - (54,500)
Proceeds from convertible debt 1,109,900 3,817,500
Proceeds from sale of common stock 100,000 416
Proceeds from additional paid in capital - 152,584
------------- -------------
Net cash provided by financing activities 1,204,900 3,970,500
------------- -------------
Net increase (decrease) in cash and cash equivalents (613,437) 387,351
Cash and cash equivalents, beginning of period 615,101 155,063
------------- -------------
Cash and cash equivalents, end of period $ 1,664 $ 542,414
============= =============
See accompanying notes to condensed consolidated financial statements.
F-5
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Statements of Cash Flows (Continued)
For the Nine Months Ended June 30, 2001 and 2000
(Unaudited)
Supplemental disclosure of non-cash investing and financing activities:
During the nine months ended June 30, 2001, the Company issued 15,865,568 shares
of common stock for consulting, compensation and professional services having a
fair value of $1,991,283.
During 2000, the Company issued 500,000 stock options to a consultant for
current and future services having a fair value of $125,407, of which $94,055
has been expensed in the current nine month period and $31,352 has been
included in equity as a deferred expense.
During the nine months ended June 30, 2000, the Company issued 3,354,752 shares
of common stock for consulting, marketing and professional services having a
fair value of $4,113,250.
During the nine months ended June 30, 2000, the Company distributed 99,024 of
shares of treasury stock and issued 10,000 shares of common stock for
compensation of $32,000 and $12,400, respectively.
During the nine months ended June 30, 2000, the Company recorded a judgment
receivable in the amount of $250,000 which represented a legal settlement.
See accompanying notes to condensed consolidated financial statements.
F-6
KANAKARIS WIRELESS AND SUBSIDIARIES
(formerly known as Kanakaris Communications, Inc.)
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
For the Nine Months Ended June 30, 2001
(Unaudited)
Common Stock Issued Preferred Stock
---------------------------- ---------------------------- Accumulated
Shares Amount Shares Amount APIC Deficit
------------- ------------- ------------- ------------- ------------- -------------
Balances
September 30, 2000 34,597,678 $ 34,598 1,000,000 $ 10,000 $ 19,178,359 $(21,340,846)
Stock issued for cash: 566,667 567 - - 99,433 -
Stock issued for:
Compensation 11,747,619 11,747 - - 1,817,127 -
Consulting services 3,217,949 3,218 - - 1,061,394 -
Marketing, advertising
and investor relations 600,000 600 - - 177,400 -
Professional
services 300,000 300 - - 43,700 -
Netbooks.com settlement 25,000 25 - - 3,725 -
Converted debentures 17,465,934 17,466 - - 2,668,897 -
Convertible debt
financing costs - - - - 2,621,018 -
Issuance of 500,000 common
stock options to a consultant - - - - 366,058 -
Unrealized loss on
investment - - - - - -
Net (loss) - - - - - (7,135,603)
------------- ------------- ------------- ------------- ------------- -------------
Balances
June 30, 2001 68,520,847 $ 68,521 1,000,000 $ 10,000 $ 28,037,111 $(28,476,449)
============= ============= ============= ============= ============= =============
continued below:
continued from previous page - continuation of statement.
Deferred Stock Comprehensive
Expenses Subscriptions Loss Total
------------- ------------- ------------- -------------
Balances
September 30, 2000 $ $ (1,260) $ - $ (2,119,149)
Stock issued for cash: - - - 100,000
Stock issued for:
Compensation (1,124,202) - - 704,672
Consulting services (31,352) - - 1,033,260
Marketing, advertising
and investor relations - - - 178,000
Professional
services - - - 44,000
Netbooks.com settlement - - - 3,750
Converted debentures - (500,000) - 2,186,363
Convertible debt
financing costs - - - 2,621,018
Issuance of 500,000 common
stock options to a consultant - - - 366,058
Unrealized loss on
investment - - (938,400) (938,400)
Net (loss) - - - (7,135,603)
------------- ------------- -------------
Balances
June 30, 2001 $ (1,155,554) $ (501,260) $ (938,400) $ (2,956,031)
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
F-7
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation
- ---------------------
The condensed consolidated financial statements included herein have been
prepared by Kanakaris Wireless, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
Kanakaris Wireless believes that the disclosures are adequate to make the
information presented not misleading when read in conjunction with its financial
statements for the year ended September 30, 2000. The financial information
presented reflects all adjustments, that are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented.
The results of operations for the nine months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year ending
September 30, 2001, or any other period.
The accounting policies followed by Kanakaris Wireless and other information are
contained in the notes to the Kanakaris Wireless financial statements filed as
part of the Kanakaris Wireless annual report on Form 10-KSB for the fiscal year
ended September 30, 2000. This quarterly report should be read in conjunction
with such annual report.
Business Organization and Activity
- ----------------------------------
Kanakaris Wireless (formerly Big Tex Enterprises, Inc.) (the "Company") was
incorporated in the State of Nevada on November 1, 1991. The Company provides
online delivery of films and books and offers Internet business services
including encoding, hosting and transport/bandwidth. In addition, the Company
designs, manufactures and installs ergonomic data control console systems for
high-end computer command centers.
Business Combinations
- ---------------------
On October 10, 1997 (the "Acquisition Date"), Kanakaris Internetworks, Inc.
("KIW") consummated a Stock Purchase Agreement with the stockholder (the
"Seller") of Desience Corporation ("Desience") to purchase 10,000 common shares
representing 100% of its issued and outstanding common stock in exchange for a
4% royalty on the gross sales (after collection) of Desience subsequent to the
acquisition date, to be paid monthly for as long as Desience remains in business
or its products are sold. Pursuant to APB 16, since the Seller has no continuing
affiliation with the Company, the 4% royalty is accounted for as an increase to
goodwill at the date the amount is determinable. KIW will hold harmless the
Seller from any claims, causes of action, costs, expenses, liabilities and prior
stockholder advances. Immediately following the exchange, Desience became a
wholly-owned subsidiary of KIW.
F-8
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On November 25, 1997, KIW and its stockholders (the ("Stockholders") consummated
an acquisition agreement with Big Tex Enterprises, Inc. ("Big Tex"), an inactive
public shell with no recent operations at that time, whereby the stockholders
sold all of their preferred and common stock, which represented 100% of KIW's
issued and outstanding capital stock, to Big Tex in exchange for 7,000,000
shares (6,000,000 common, 1,000,000 preferred) of Big Tex's restricted stock,
representing 66.67% of the issued and outstanding common stock and 100% of the
issued and outstanding preferred stock of Big Tex, aggregating 75% of the total
voting rights (the "Exchange"). Big Tex was founded in 1991 for the purpose of
lawful business or enterprise, but had been inactive since 1991. Immediately
following the exchange, the Company changed its name to Kanakaris
Communications, Inc., which was subsequently changed to Kanakaris Wireless on
June 2, 2000.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiaries Kanakaris Internetworks, Inc. and
Desience Corporation. All significant intercompany balances and transactions
have been eliminated in consolidation.
Inventories
- -----------
Inventories at June 30, 2001 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.
Earnings Per Share
- ------------------
Earnings per share are computed using the weighted average of common shares
outstanding as defined by Financial Accounting Standards No. 128, "Earnings Per
Share".
COMMITMENTS AND CONTINGENCIES
- -----------------------------
Legal Actions
- -------------
On August 5, 1999, the Company filed a complaint in the Los Angeles Superior
Court against its former securities attorney along with 20 unnamed defendants
claiming damages for breach of contract, conversion, fraud and deceit and
negligence. The complaint arose out of the alleged transfer of certain funds
without the Company's authorization to an unknown entity by the defendants. In
January 2000, the claims were settled for $250,000, receivable by the Company
over a three year period, at $5,694 per month.
F-9
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On September 15, 1999, an individual filed a complaint against the Company and
the executive who is the Chairman of the Board, President and Chief Executive
Officer in Los Angeles Superior Court alleging breach of contract and fraud. The
fraud claim was based primarily on alleged misrepresentation and concealment
involving a consulting agreement between the Company and the individual. The
individual alleged that he is entitled to certain stock options, of which 75% of
the option price allegedly is already deemed paid in exchange for services
allegedly rendered to the Company. The individual is attempting to exercise the
options for the purchase of a certain number of shares to which he claims to be
entitled pursuant to the agreement. The claim against the Company executive was
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
in exchange for dismissal with prejudice of the entire action after the three
payments have been made. As of June 30, 2001, the first two payments of $8,000
each were made leaving a balance of $8,000. One additional payment of $8,000 was
due on July 1, 2001. The financial statements include $8,000 of accounts payable
attribute to this settlement. The final payment was made in July 2001, and the
Company presently is awaiting an order from the court dismissing the case.
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 counterclaimed and commenced a third-party action against affiliates
of the Illinois corporation. The Illinois corporation and its affiliates filed a
separate action in Utah, but the Utah court stayed that action in favor of the
action pending in Illinois.
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 each laid 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, was issued and was to remain issued in the name
of the United States District Court until the dispute is resolved.
F-10
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 26, 2001, the parties involved entered into a Settlement Agreement and
Mutual Release of Claims. Under that agreement, the Company agreed to release
all of its claims and to direct the court to execute an assignment of the stock
at issue and deliver the stock to Alpha Tech for reissuance to various
designated parties in exchange for releases of all claims by parties adverse to
the Company in the case and dismissal of the actions in Illinois and Utah. The
Company presently is awaiting orders from the courts in Illinois and Utah
dismissing the actions.
Dataview Consoles, Inc., a California corporation dba Swanson Engineering &
Manufacturing Company, commenced an action against the Company and the Company's
subsidiary, Desience Corporation, in the Los Angeles Superior Court on February
14, 2001. The complaint alleged that the Company and Desience owed Dataview
$104,601 under several invoices for equipment manufactured for Desience by
Dataview in 1997. Concurrently with the filing of the complaint, Dataview filed
an application for a right to attach order against the Company and Desience to
secure repayment of the debt alleged in the complaint. Effective as of April 3,
2001, the parties to the dispute entered into a settlement agreement under which
the Company and Desience paid Dataview $63,584 and agreed to pay Dataview an
additional $42,000 in twelve monthly installments of $3,500 beginning May 1,
2001. The settlement agreement also provides that the Company will be entitled
to file a request for dismissal after the Company has made all of the
installment payments in accordance with the settlement agreement. The settlement
agreement also provides that the Company and Desience, on the one hand, and
Dataview and its related party, on the other hand, shall all retain the
unrestricted right to market, sell, distribute and manufacture or have
manufactured under their own respective names all of the data control console
products that Dataview had been manufacturing for Desience.
The Company is subject to certain legal proceedings, claims and litigation
arising in the ordinary course of business. While the amounts claimed may be
substantial, the ultimate liability cannot presently be determined because of
considerable uncertainties that exist. Therefore, it is possible the outcome of
such legal proceedings, claims and litigation could have a material effect on
quarterly or annual operating results or cash flows when resolved in a future
period. However, based on facts currently available, management believes such
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
F-11
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
License Agreement
- -----------------
On February 18, 1999, the Company entered into a License Agreement ("Agreement")
with ION Systems, Inc. ("ION"), a Missouri corporation. The Agreement is through
December 31, 2004, and thereafter will be renewed automatically for additional
renewal terms of five years each, ending on December 31 of each fifth year.
Under the terms of the Agreement, ION grants to the Company a license to use its
products, the E*Web and the X*Maker computer software enabling the secure
downloading and viewing of web sites, for or in connection with the Company's
web sites. The two parties agreed that the software may be used solely for the
publishing, displaying, promoting, marketing, offering and selling for a fee of
certain specified book categories as well as of products or services listed in
the books published. The aforementioned activities are meant to be offered
directly to customers and end users using the facilities of a web site. No
geographic or territorial restrictions apply to the use of the software. The
agreed fee for each book conversion performed by ION will be $100, and the
royalties for each book sale and product sale shall be 12% and 5%, respectively,
of the gross revenue. Furthermore, ION shall have the right to buy 100,000
shares of the Company's common stock at a price of $0.30 per share at any time
between June 1, 1999 and December 31, 2005, 175,000 shares at $.01 until May 1,
2003, and 87,500 shares at $1.295 until May 1, 2003.
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
each member of its subscriber and web partner base with a message provided by
eConnect and include information about eConnect's eCash pad products in trade
magazine advertisements. Additionally, the Company plans to provide, through a
hyperlink included on eConnect's web site, access to several video feature films
so that it may demonstrate the eCash pad ordering system.
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. As of June 30, 2001, the stock was valued at $.072 per share and
the Company recorded an unrealized loss on investment of $942,400. This amount
is included in the Company's statement of comprehensive loss.
F-12
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Service Agreements
- ------------------
The Company signed an agreement with ValueClick in January 2000 whereby
ValueClick will drive advertisers to the Kanakaris web site. The Company
receives $.20 each time a customer clicks on a ValueClick-served ad. The Company
will also receive $.03 per click whenever a customer clicks on a Company
referred web site.
On May 3, 2001, the Company entered into a service agreement with Collectible
Concepts, a publicly traded corporation. The Company performed various
technological services in exchange for $92,000 in the form of Collectible
Concepts restricted stock valued at the closing price of $.023 per share on May
3, 2001, amounting to 4,000,000 shares. As of June 30, 2001, the stock was
valued at $.024 per share and the Company recorded an unrealized gain on
investment of $4,000. This amount is included in the Company's statement of
comprehensive loss.
Internet Data Center Services Agreements
- ----------------------------------------
Effective August 9, 1999, the Company entered into an agreement with Microsoft
Corporation whereby Microsoft will promote certain of the Company's web sites in
consideration for the Company's promotion of specified Microsoft Windows Media
Technology on the Company's web sites through December 30, 2001. No expense or
income has been recorded by the Company relating to this agreement because under
APB No. 29, Accounting For Non-monetary Transactions, the fair values of such
web site promotions are not determinable within reasonable limits.
On November 17, 1999, and effective December 7, 1999, the Company entered into
an agreement with Microsoft Corporation ("Microsoft"). Microsoft is assisting
the Company with the development of an audio/video enhanced web site which
delivers timely and relevant audio-visual content using Windows Media
technologies in a broadband network infrastructure.
On March 6, 2000, the Company entered into a one year Jumpstart Program
Agreement with Microsoft whereby Microsoft is assisting the Company with the
development of an audio/video enhanced web site which delivers timely and
relevant audio/visual content. No expense or income has been recorded by the
Company relating to this agreement because under APB No. 29, Accounting For
Non-monetary Transactions, the fair values of such web site promotions are not
determinable within reasonable limits.
On April 20, 2000, the Company entered into a distribution agreement with John
Clark for the Internet distribution rights to his book "Dead Angel" which
pertain to Clark's relationship to Jerry Garcia. In consideration for this,
Clark agreed to pay to the Company in perpetuity a 50% royalty on the gross
sales of the book over the Internet and for two years to pay to the Company 50%
of all royalties generated by the book, and the interview and party video, as
well as all other ancillary rights.
F-13
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 (16) two (2) minute duration episodes of a project known as Paris Falls.
The $100,000 payment has been accounted for as a prepaid expense. As of June 30,
2001, $50,000 is still prepaid and $12,500 was expensed during the nine months
ended June 30, 2001.
Also, in May 2000, the Company paid MRMG $100,000 for a 90 minute filmed version
of a project known as the L.A. River Story. As of June 30, 2001, the Company and
MRMG are still in the process of editing this film.
On April 9, 2001, the Company entered into a 36 month agreement with S4R. Based
upon the terms of the contract, S4R is to provide web site hosting and managed
services to the Company.
On May 1, 2001, The Company signed a Memorandum of Understanding with Ricoh
Business Systems whereby Ricoh will provide its technology commonly described as
"print on demand" services to the Company for purposes of delivering printed
copies of books via the Company's WordPop.com web site. Based upon the terms of
the agreement, the Company will pay a certain percentage of the sales price of
the books as compensation to Ricoh.
CONSULTING AGREEMENT
- --------------------
On June 7, 2001, the Company entered into a one year consulting agreement with
Peter Benz. Based upon the terms of the agreement, the Company granted to Peter
Benz 1,000,000 shares of the Company's common stock valued at $165,000 plus the
option to purchase 2,000,000 shares of the Company's common stock at an exercise
price of $.10 per share. As of June 30, 2001, Peter Benz had exercised the
option as to 500,000 shares.
F-14
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
REVOLVING LINE OF CREDIT
- ------------------------
On February 25, 1999, the Company entered into a Revolving Line of Credit
Agreement ("the Agreement") with Alliance Equities Inc. ("Alliance"), a
Florida-based venture capital firm, which Agreement expires December 10, 2001.
Under the terms of the Agreement, Alliance has made available a $7 million
revolving line of credit with interest on the unpaid principal at 10% per annum.
The funds from the line of credit could enable the Company to pursue current
Internet opportunities and e-commerce development. Under the terms of the
Agreement, the Company may draw up to $500,000 per month on the total line of
credit upon written request by the Company to the Lender. Additionally, the
parties have agreed that any portion of the indebtedness may be paid back by the
Company either with cash or by the issuance of common stock. As of June 30,
2001, no amounts were outstanding under this line of credit. 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. As of June 30, 2001, the Company had issued to Alliance
1,600,000 shares of the Company's common stock valued at approximately $554,400
for consulting services.
STOCK OPTION PLAN
- -----------------
In May 2000, the Company's board of directors and stockholders approved a stock
option plan (the "2000 Plan"). The 2000 Plan was designed to offer an
incentive-based compensation system to employees, officers and directors of the
Company, and to employees of companies which do business with the Company. The
2000 Plan provided for the grant of incentive stock options and non-qualified
stock options. A total of 3,000,000 shares of common stock were authorized for
issuance under the Plan. Effective March 14, 2001, the Company's board of
directors approved a motion to cancel 2,537,500 of the 3,000,000 options
previously granted to various officers, directors and employees, with the
consent of those officers, directors and employees.
DEBENTURE INVESTORS
- -------------------
In order to provide working capital and financing for the Company's expansion,
on various dates during 2000, the Company entered into several agreements with
four accredited investors the ("Purchasers") whereby the Purchasers acquired
aggregates of $1,000,000 and $4,500,000 of the Company's 10% Convertible
Debentures, due February 1, 2001 and May 1, 2001, respectively.
The Purchasers converted portions of the 2000 debentures and accrued interest
into shares of common stock of the Company at various times. The initial
conversion price of these debentures 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.
F-15
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Also, in order to provide 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 "Purchasers") for the purchase of the Company's 12% Convertible
Debentures due January 5, 2002 and March 9, 2002.
The Purchasers made investments in tranches, the first in the aggregate amount
of $650,000, which was received upon signing of the definitive investment
agreements and the second, in the aggregate amount of $650,000, which was
received in March 2001.
Upon the issuance of the first $650,000 of convertible debentures, the
Purchasers received five-year term warrants to purchase three shares of the
Company's common stock for each $1.00 invested or which may have been invested
in the two $650,000 tranches of convertible debentures. The initial exercise
price of the warrants was 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 preceding the exercise date. For all debentures issued in January
and March 2001, interest is 12% per annum, payable quarterly in common stock or
cash at the option of the Purchasers.
The debentures are immediately convertible into shares of the Company's common
stock. The initial conversion price for the January and March 2001 debentures
was equal to the lesser of (i) $0.15 and (ii) the average of the lowest three
intraday trading prices during the twenty trading days immediately prior to the
conversion date, discounted by 37.5%.
As of April 30, 2001, $1,848,500 of the original $4,500,000 principal balance of
10% Convertible Debentures due May 1, 2001 remained outstanding. As of April 30,
2001, the Company entered into an agreement with the holders of these debentures
to extend the due date of these debentures to May 1, 2002. In consideration for
the extension, the Company granted to the holders warrants to purchase up to an
aggregate of 1,350,000 shares of common stock at an initial exercise price equal
to the lesser of the average of the lowest three intraday trading prices during
the 20 trading days immediately preceding the grant of the warrants, discounted
by 37.5%, and the average of the lowest three intraday trading prices of a share
of common stock during the 20 trading days immediately preceding exercise of the
warrants.
F-16
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In order to provide working capital and financing for the Company's expansion,
as of June 29, 2001, the Company entered into a securities purchase agreement
and related agreements with three accredited investors (the "Purchasers") for
the purchase of $500,000 of the Company's 12% Convertible Debentures due June
29, 2002. The debentures bear interest at a rate of 12% per annum, payable
quarterly in common stock or cash at the option of the Purchasers.
The debentures initially are convertible into shares of common stock at the
lesser of $.10 per share and 50% of the average of the lowest three intraday
trading prices of a share of common stock during the trading days immediately
preceding conversion.
Upon the issuance of the issuance of the June 2001 debentures, the Purchasers
received five-year term warrants to purchase three shares of the Company's
common stock for each $1.00 invested. The initial exercise price of the warrants
was equal to the lesser of $0.0584 and the average of the lowest three intraday
trading prices of a share of common stock during the 20 trading days immediately
preceding exercise.
Pursuant to the rules and regulations of the SEC regarding beneficial conversion
features, the Company 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 approximately $1,014,000 for the nine months
ended June 30, 2001. There was no amortization period for these financing costs
since the debentures were convertible immediately upon issuance.
The Company's convertible debentures and related warrants contain anti-dilution
provisions whereby, if the Company issues common stock or securities convertible
into or exercisable for common stock at a price less than the conversion or
exercise prices of the debentures or warrants, the conversion and exercise
prices of the debentures or warrants shall be adjusted as stipulated in the
agreements governing such debentures and warrants.
As of June 29, 2001, the Company entered into a letter agreement with certain
of its debenture investors, which letter agreement which provided various
anti-dilution adjustments to the debentures and warrants issued in the April
2000, January 2001 and March 2001 debenture offerings. These adjustments were
made partly in lieu of other adjustments that would have been imposed under the
terms of the April 2000, January 2001 and March 2001 debenture offering
documents. As a result of these adjustments, the conversion prices for the
debentures held by these entities and issued in the April 2000, January 2001 and
March 2001 offerings were reduced to the lesser of (i) $.10 per share, and (ii)
50% of the average of the three lowest intraday trading prices of a share of our
common stock for the 20 trading days immediately preceding the conversion of the
debentures. In addition, the exercise prices of the warrants issued in
connection with the April 2000, January 2001 and March 2001 offerings were
reduced to the lesser of (i) $0.0584 per share, and (ii) the average of the
three lowest intraday trading prices of a share of our common stock for the 20
trading days immediately preceding the exercise of the warrants.
The Company recorded financing costs of approximately $1,607,000 for the
nine months ended June 30, 2001 in connection with the repricing of
existing debentures and warrants that occurred as a result of the June 29,
2001 debenture offering.
F-17
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the nine months ended June 30, 2001, the Company issued an aggregate of
17,465,934 shares of common stock to five accredited investors in connection
with regular interest payments and upon conversion of an aggregate of $2,668,897
of principal plus related interest on the Company's convertible debentures.
As of June 30, 2001, the Company was indebted for an aggregate of $3,088,500 on
these convertible debentures. To the extent debentures issued by the Company are
converted into shares of common stock, the Company will not be obligated to
repay the converted amounts.
RELATED PARTY TRANSACTIONS
- --------------------------
During the nine months ended June 30, 2001, the Company issued 12,222,619 shares
of its common stock to officers, directors, accountants and consultants who
subsequently became directors, having an aggregate fair market value of
$1,935,250.
F-18
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEGMENT INFORMATION
Internet Modular
Commerce Consoles Total
------------- ------------- --------------
For the nine months ended June 30:
2000
- ----
Revenues $ 16,843 $ 236,269 $ 253,112
Segment profit (loss) (10,209,535) (87,087) (10,296,622)
Total assets 1,983,588 39,238 2,022,826
Additions to long-lived assets 24,515 2,156 26,671
Depreciation and amortization 13,533 2,295 15,828
2001
- ----
Revenues $ 1,147,847 $ 324,522 $ 1,472,369
Segment profit (loss) (7,123,954) (11,649) (7,135,603)
Total assets 1,459,891 (78,407) 1,381,484
Additions to long-lived assets 17,824 - 17,824
Depreciation and amortization 100,623 187 100,810
For the three months ended June 30:
2000
- ----
Revenues $ 5,835 $ 46,135 $ 51,970
Segment profit (loss) (4,815,727) (42,939) (4,858,666)
Total assets 1,983,588 39,238 2,022,826
Additions to long-lived assets 16,680 2,156 18,836
Depreciation and amortization 8,141 1,530 9,671
2001
- ----
Revenues $ 369,383 $ 18,723 $ 388,106
Segment profit (loss) (2,904,216) (58,123) (2,962,339)
Total assets 1,459,891 (78,407) 1,381,484
Additions to long-lived assets 4,070 - 4,070
Depreciation and amortization 28,273 63 28,336
F-19
KANAKARIS WIRELESS AND SUBSIDIARIES
(FORMERLY KNOWN AS KANAKARIS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PREFERRED STOCK
- ---------------
At a special meeting of the Company's stockholders held on March 14, 2001, the
holders of 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 twenty non-cumulative votes per share, voting together with the
common stock on all matters on which the holders of common stock are entitled to
vote, to 100 non-cumulative votes per share on such matters. On May 2, 2001, the
Company filed the amendment to its articles of incorporation. As a result of
this increase in voting rights and as a result of his ownership of shares of
common stock and preferred stock, the Company's Chairman of the Board, President
and Chief Executive Officer became entitled to exercise voting control over the
Company.
COMMON STOCK
- ------------
On May 2, 2001, the Company filed an amendment to its articles of incorporation
that increased the number of shares of common stock authorized from 100,000,000
shares to 250,000,000 shares.
F-20