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ORGANIZATION WITHIN LAST FIVE YEARS
Our present business structure is the result of an acquisition
agreement between a Nevada corporation, Big Tex Enterprises, Inc. ("Big Tex"),
and a Delaware corporation, Kanakaris InternetWorks, Inc. ("KIW"). Big Tex was
originally organized in November of 1991 and had been a non-operating company
prior to the acquisition of KIW on November 25 1997. After the acquisition, we
changed our name to Kanakaris Communications, Inc. Our common stock trades on
the NASDAQ OTC Bulletin Board under the symbol "KKRS." We acquired all of the
outstanding stock of Desience Corporation ("Desience"), a privately held
computer workstation and furniture manufacturer in operation for over fifteen
years.
Since November of 1997 when the Company established its current
organizational structure as a Nevada corporation with two wholly owned
subsidiaries (Desience and KIW), we have been engaged in the development and
operation of two primary business: (i) the manufacture and sale of custom
computer command centers through our Desience division and (ii) development of
Internet content and commerce sites focused on downloadable video, music and
literary content through our Kanakaris InternetWorks division.
We are focused on developing proprietary web sites and downloadable
Internet content and anticipate that these components of our business will be a
major portion of our Internet business. See "Management Discussion and Analysis
of Financial Condition and Results of Operations."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following is a discussion of certain factors affecting our
results for the two fiscal years ending September 30, 1998, and the interim
financial period ending March 31, 1999, and our liquidity and capital
resources. This discussion should be read along with our consolidated
financial statements and their notes, which can be found beginning at page
F-1 of this Prospectus. As a reminder, our fiscal year ends on the Saturday
that falls closest to September 30. Unless otherwise stated, the years
mentioned throughout this Prospectus are fiscal years.
Results of Operations
Comparison of 1997 and 1998
Net Sales. Our net sales increased from $8,475 in 1997 to $919,905 in
1998, primarily as the result of the acquisition of our Desience division which
manufactures and sells computer control centers. We believe that we benefited
from this acquisition during the year but we cannot assure that this trend will
continue or that the net sales increase will be repeated.
Gross Profit. Our gross profit increased from $8,474 in 1997 to
$438,556 in 1998, primarily as a result of the acquisition of our Desience
division. We believe that we benefited from this acquisition during the year
but we cannot assure that this trend will continue or that the net sales
increase will be repeated.
Operating Expenses. Our operating expenses increased from $282,818 in
1997 to $1,094,760 in 1998, largely as a result of the Desience acquisition and
increased spending related to developing the InternetWorks division.
Income from Operations. Our income from operations resulted in a net
loss of $269,208 in 1997 which increased to a net loss of $647,729 in 1998.
This increase in net loss was primarily the result of an increase in
operating expenses which was not covered by increased revenues from
operations. We will need to increase revenues from operations in order to
attain profitability.
Interest Expense. Our interest expenses have increased from 1997 to
1998, primarily as the result of our acquisition and utilization of a credit
facility and the issuance of a convertible debenture. The may continue to rely
upon its credit facilities which will continue to increase our interest expense
as a whole and as a percentage of sales.
Liquidity and Capital Resources
Funds from Equity Placements
Our primary source of cash has been from sales of equity securities to
investors through private placement transactions. We also have available a
working capital line with a commitment of $1.2 million, which is reduced to the
extent that we draw down the line.
Debt Securities
In addition to our sale of equity securities, we have issued a debt
security in the form of a Convertible Debenture to a single investor. The
proceeds from the Convertible Debenture will be up to $1,200,000, if the full
funding is completed. The note is convertible into up to 2 million Shares of
the Company's common stock which has registration rights pursuant to the
terms of the Convertible Debenture Agreement.
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Debt Risk
The Company has a high level of debt. Although the net proceeds of
this Offering will increase our stockholder's equity and reduce our
indebtedness. If we cannot pay our debts on time or obtain acceptable
alternative terms, there would be a material adverse effect to us and our
shareholders. To understand the possible consequences of our debt level, see
"Risk Factors - Risks Associated with Our Financial Condition."
Liquidity and Capital Resources
Our primary source of cash is funds from equity sales by the
Company, proceeds from the Company's line of credit with Alliance Equities
and subsidiary operations from the Desience division. The Company's working
capital line has a current commitment of $1.2 million, which is reduced to
the extent that the facility is drawn upon. The Company has risks associated
with its high level of debt in relation to its operating income and assets.
See "Risk Factors." The Company intends to increase its net capital
expenditures in the upcoming fiscal year.
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DESCRIPTION OF THE BUSINESS
Our General Business Strategy
We operate within two major divisions, Kanakaris InternetWorks and Desience.
Kanakaris InternetWorks division is dedicated to the Internet (design and
hosting of Web sites, proprietary Web sites, Internet content and commerce) and
Desience is dedicated to the installation of computer command center solutions.
Internet service includes the design and hosting of Web show, corporate web
sites, digital book publishing, themed content commerce sites, downloadable
music Web sites and online advertising. Command center solutions include the
design, manufacture and installation of ergonomic solutions for the utilization
of computers and peripherals in governmental agency and Fortune 500 company
environments.
The following is a more detailed description of our divisions.
Kanakaris InternetWorks Division ("Kanakaris")
Kanakaris is positioned to become "The Internet World Downloadable Leader."
KKRS.Net is the portal to all propriety content and websites of Kanakaris
Communications. We are currently focused on four (4) key areas of direct
delivery of eCommerce content and we believe we possess unique technology
combinations available for each.
Kanakaris believes it is the first company to allow a single digital content
source - a book, a movie, or music in a way so that it can be replicated online
as little or as many times as needed to fulfill orders. Kanakaris believes it
has maintained proprietary secure technology for content that is directly
delivered over the Internet. Kanakaris has established NetBooks.com as the
leading example of online delivery of books and offers publishers a combination
of features unavailable anywhere else: Secure online rental, secure online
purchase, downloadable purchase and print-on-demand. See "Risk Factors"
regarding the name "Netbooks". Kanakaris is developing proprietary secure
downloadable movie technology through an alliance with GEO Interactive.
Kanakaris has identified several potential revenue sources pertaining to our
Internet business which if developed properly could help us grow. These include
direct over-the-Internet delivery of academic and professional books, trade
books,
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online events, online research reports and corporate profiles, online
music singles and albums, online movie sales and rental, and the sale of
Internet lifestyle related low end, mid value, and high end items as well as
online banner advertising on proprietary sites.
Online Books
The NetBooks.com portion of KKRS.Net is establishing itself as a leading web
site offering secure online delivery of books with proprietary ION Technology.
Book publishing in the United States has shown a steady increase over the past
several years. As a result, the emerging on-line bookselling industry is
expecting to grow from $630 million in 1998 to $3 billion in 2003, according to
Forrester Research Inc., a Cambridge, Mass., research group.
Currently, online booksellers account for about three percent of the market for
online books and this share is growing. There is an estimated 500 bookstore
titles available electronically on the web today. Industry experts believe that
as many as 50,000 titles will be available electronically in the next two years.
Kanakaris content is downloadable in real-time which means there is not a
significant delay in the display of text or images. We believe that our site is
secure to preserve the author's rights to ownership. We believe that Kanakaris
is the only on-line Internet publisher that provides real-time secure
fulfillment from one source file.
We have entered into an exclusive alliance with ION Systems for use of their
secure on-line download technologies. Using this new, innovative software, we
can rent or sell books on-line while allowing authors and publishers to retain
control of their content. Kanakaris allows documents, books, and manuals to be
sold for permanent access, rented by the hour, or pay per view according to the
author's wishes. The text cannot be copied, printed, or extracted using optical
character recognition software. The software prevents temporary Internet files
from storing usable text. The software allows any book or document to be read
page by page. The reader has total control over the size of the print-type with
just the click of a mouse. None of these features require any special user
software other than a JAVA-enabled browser.
There are many web sites today that allow you to download books. Because of our
alliance with ION Systems, we believe we have an advantage.
The following is a summary of the sources from which we intend to generate
revenue:
> Purchase the Download Version - The user purchases the download version
thus enabling them to use the document for off-line reading in unlimited
sessions for an unlimited amount of time. The copyright will state that they
cannot duplicate the book.
> Purchase Access - The user purchases the online book. This gives them a
password enabling them to read the online version for five years for any number
of sessions.
> Per Minute Access - The user can rent the online book on a per hour basis.
If the publisher has opted to apply a percentage of the online rental fees
towards the purchase price, then the user earns credits towards purchase of
that book as a permanent online access or download format. Eventually credits
can be applied to the print version as well. |
