COMMISSION FILE NO. 333-113196
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FONEFRIEND, INC.
(NAME OF SMALL BUSINESS ISSUER IN OUR CHARTER)
Delaware
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
4813 33-0611753
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
14545 Friar Street, Suite 103
Van Nuys, California 91411
(818) 376-1616
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Jackelyn Giroux
President
FoneFriend, Inc.
14545 Friar Street, Suite 103
Van Nuys, California 91411
(818) 376-1616
(NAME, ADDRESS AND TELEPHONE OF AGENT FOR SERVICE)
COPIES TO:
Harold H. Martin, Esquire
Law Offices of Harold H. Martin, P.A.
17111 Kenton Drive, Suite 204B
Cornelius, North Carolina 28031
(704) 894-9760 Office
(704) 894-9759 Fax
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act of 1933 registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Title of
Each class Proposed Proposed
of Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Share (1) Offering Price(1) Fee (1)
---------- ---------- --------------- ---------------- ------------
Common Stock 17,950,000 $.17 $3,051,500 $386.63
($.001 par (2)
value)
---------- ---------- --------------- ---------------- ------------
Totals 17,950,000 $3,051,500 $386.63
(3)
---------- ---------- --------------- ---------------- ------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended (the "Securities
Act"), based upon the average of the bid and asked price for the common
stock of $.17, as reported on the OTC Bulletin Board at February 26, 2004.
(2) Pursuant to Rule 416(a) of the Securities Act this registration statement
shall be deemed to cover additional securities that may be offered or
issued to prevent dilution resulting from stock splits, stock dividends or
similar transactions.
(3) Registration Fee paid to the Commission in connection with the filing of
the Company's Registration Statement on Form S-3, Commission File No.
333-113196.
The information in this prospectus is not complete and may be changed. Our
company and the selling shareholders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
We hereby amend this registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a) may determine.
--The rest of this page is intentionally left blank--
17,750,000 SHARES
FONEFRIEND, INC.
COMMON STOCK
This prospectus relates to the offering for sale of up to 17,750,000 shares of
our common stock, par value $.001, by the selling shareholders identified in
this prospectus. The common stock covered by this prospectus includes up to
15,000,000 shares of common stock issuable from time to time to Dutchess Private
Equities Fund, L.P. ("Dutchess"), which will become a shareholder pursuant to an
Investment Agreement. The prices at which all selling shareholders may sell
their shares will be determined by the prevailing market price for the shares or
through negotiated transactions. We are not selling any securities in this
offering and therefore will not receive any of the proceeds from the sale of the
shares. We will, however, receive proceeds from the sale of securities under
the Investment Agreement, also referred to as an Equity Line of Credit, that we
have entered into with Dutchess, which permits us to "put" up to $3 million
dollars in shares of common stock to Dutchess. At no time will Dutchess own
shares sufficient to make it an "affiliate" of our company within the meaning of
the Securities Act of 1933, as amended. In addition, we may receive proceeds
from the exercise of options to purchase 350,000 shares of our common stock of
which 200,000 shares may be purchased by Compass Capital Group, Inc. ("Compass
Capital") at an exercise price of $.20 per share, and 150,000 shares may be
purchased by Equity Market Information Systems at an average exercise price of
$.583 per share, all of which shares are being registered under this prospectus.
All costs associated with this registration will be borne by us.
The selling stockholders consist of:
Compass Capital Group, Inc. 700,000
Danzig, Ltd. 150,000
Dutchess Private Equities Fund, L.P. 15,000,000
Lothar Elsaessar 300,000
Greentree Financial Group, Inc. 250,000
Hans Georg Huetter 300,000
Equity Market Information Systems, Inc. 650,000
RR Inv Holdings * 400,000
----------
17,750,000
* The Company has cancelled its agreement with RR Inv Holdings. However,
400,000 shares that were previously issued to RR Inv Holdings are the
subject of a dispute.
Our common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol FFRD.OB. On May 13, 2004, the last reported sale price of our common
stock was $0.07 per share.
Dutchess is an "underwriter" within the meaning of the Securities Act of 1933,
as amended, in connection with the resale of common stock under the Investment
Agreement. Dutchess will pay us 94% of the lowest closing bid price of the
common stock during the five consecutive trading day period immediately
following the date of our notice to them of our election to put shares pursuant
to the Equity Line of Credit. The shares to be issued to Compass Capital and
registered hereunder represent shares issuable upon conversion of a $100,000
convertible promissory note and issuable upon the exercise of 200,000 warrants
to purchase shares of our common stock at an exercise price of $.20 per share.
The shares to be issued to Equity Market Information Systems, Inc. and
registered hereunder represents 500,000 shares of common stock issuable as
compensation for their services and 150,000 shares issuable upon the exercise of
150,000 warrants to purchase shares of our common stock at an exercise prices
ranging from $.25 per share to $1.00 per share. The shares issued to Danzig,
Ltd., Lothar Elsaessar, Greentree Financial Group, Inc. and Hans George Huetter
were issued in earlier private placements. The selling shareholders will receive
all of the amounts received upon any sale by them of the common stock, less any
brokerage commissions or other expenses incurred by them.
THE SHARES HAVE NOT BEEN REGISTERED FOR SALE UNDER THE SECURITIES LAWS OF ANY
STATE OR JURISDICTION AS OF THE DATE OF THIS PROSPECTUS. BROKERS OR DEALERS
EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THE REGISTRATION OF THE
SHARES UNDER THE SECURITIES LAWS OF THE STATE IN WHICH SUCH TRANSACTIONS OCCUR,
OR THE EXISTENCE OF ANY EXEMPTIONS FROM SUCH REGISTRATION.
----------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SECURITIES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
SUBJECT TO COMPLETION, THE DATE OF THIS PROSPECTUS IS MAY 17, 2004.
----------------
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS:
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS DEAL WITH OUR CURRENT PLANS,
INTENTIONS, BELIEFS AND EXPECTATIONS AND STATEMENTS OF FUTURE ECONOMIC
PERFORMANCE. STATEMENTS CONTAINING TERMS SUCH AS "BELIEVES," "DOES NOT BELIEVE,"
"PLANS," "EXPECTS," "INTENDS," "ESTIMATES," "ANTICIPATES" AND OTHER PHRASES OF
SIMILAR MEANING ARE CONSIDERED TO CONTAIN UNCERTAINTY AND ARE FORWARD LOOKING
STATEMENTS.
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES
WHICH MAY CAUSE OUR ACTUAL RESULTS IN FUTURE PERIODS TO DIFFER MATERIALLY FROM
WHAT IS CURRENTLY ANTICIPATED. WE MAKE CAUTIONARY STATEMENTS IN CERTAIN
SECTIONS OF THIS PROSPECTUS, INCLUDING UNDER "RISK FACTORS." YOU SHOULD READ
THESE CAUTIONARY STATEMENTS AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS, IN THE MATERIALS REFERRED TO
IN THIS PROSPECTUS, IN THE MATERIALS INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS, OR IN OUR PRESS RELEASES.
NO FORWARD-LOOKING STATEMENT IS A GUARANTEE OF FUTURE PERFORMANCE, AND YOU
SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD LOOKING STATEMENT.
TABLE OF CONTENTS
PART I
PROSPECTUS SUMMARY 7
RISK FACTORS 11
USE OF PROCEEDS 27
DETERMINATION OF OFFERING PRICE 28
DILUTION 28
CAPITALIZATION 30
DIVIDEND POLICY 31
ORGANIZATION WITHIN LAST FIVE YEARS 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 34
DESCRIPTION OF BUSINESS 39
DESCRIPTION OF PROPERTY 56
MANAGEMENT 57
LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY; THE POSITION
OF THE COMMISSION ON INDEMNIFICATION 60
EXECUTIVE COMPENSATION 62
RELATED PARTY TRANSACTIONS 65
MARKET FOR OUR COMMON STOCK AND RELATED MATTERS 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 67
THE SELLING STOCKHOLDERS 69
DESCRIPTION OF SECURITIES 70
PLAN OF DISTRIBUTION 71
LEGAL PROCEEDINGS 73
LEGAL MATTERS 74
EXPERTS 74
ADDITIONAL INFORMATION 74
FINANCIAL STATEMENTS 76
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 99
PART II
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 101
RECENT SALES OF UNREGISTERED SECURITIES 101
INDEMNIFICATION OF DIRECTORS AND OFFICERS 104
EXHIBIT INDEX 104
UNDERTAKINGS 106
SIGNATURES 107
POWER OF ATTORNEY 108
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPREARING ELSWHERE IN THIS
PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
YOU SHOULD CONSIDER BEFORE MAKING AN INVESTMENT DECISION.
OUR COMPANY
Our primary business is to market an Internet telephony device and related
services to consumers and businesses worldwide, called the "FoneFriend." The
underlying technology of the FoneFriend has been licensed by the Company from
FoneFriend Systems, Inc. ("FSI"), and will enable the Company's subscribers to
make and receive unlimited, long-distance telephone calls over the Internet by
using their standard residential telephone set (without the need for a computer
or any software), for a low monthly fee of $9.95. Due to the low cost of
transmitting calls over the Internet, the Company anticipates that it will
realize significant profit margins in excess of those realized in the
traditional telecommunications industry.
Once funding is obtained, the Company will focus its efforts towards
establishing contractual relationships with third party suppliers to provide the
infrastructure necessary to support operations of the FoneFriend product, to
handle customer relationship management and product fulfillment, and towards the
development and implementation of a high profile marketing campaign to advertise
the FoneFriend product through direct response television marketing and
coordinated radio and print advertising, which is designed to quickly penetrate
targeted markets and create substantial consumer awareness and stimulate
consumer demand for the FoneFriend product. Accordingly, the Company intends to
allocate a large portion of the proceeds from any sale of its securities to fund
marketing activities, to purchase infrastructure required to support the
FoneFriend product, and corporate overhead.
In addition, information not published by the Company regarding the FoneFriend
product can be viewed on the Internet at: "www.fonefriend.com", a web site that
is currently maintained and operated by FSI, the licensor of the FoneFriend
technology. The Company has a conditional option to acquire all rights to this
web site. However, to date the Company does not control the information content
on this web site. Accordingly, no information contained on such web site is to
be attributed to the Company and should not constitute a part of this
Registration Statement.
HOW TO CONTACT US
We are a Delaware corporation and our principal executive offices are located at
14545 Friar Street, Suite 103, Van Nuys, California 91411. Our telephone
number is (818) 376-1616. Our web site address on the Internet is
http://www.myfonefriend.com.
----------------------------
THE OFFERING
This prospectus relates to the resale of up to 17,750,000 shares of our common
stock by eight entities: six current stockholders, Dutchess Private Equities
Fund, L.P., which will become a stockholder pursuant to a put right under an
Investment Agreement that we have entered into with Dutchess, and Compass
Capital Group, Inc., which will become a stockholder upon the conversion of a
convertible note which it holds or the exercise of warrants to purchase our
common stock which it holds.
The table below sets forth the shares that we are registering pursuant to the
Registration Statement to which this prospectus is a part:
Shareholder Number of Shares
----------------------------------------------------------------
Compass Capital Group, Inc. 700,000 (1)
Danzig, Ltd. 150,000
Dutchess Private Equities Fund, L.P. 15,000,000 (2)
Lothar Elsaessar 300,000
Greentree Financial Group, Inc. 250,000
Hans Georg Huetter 300,000
Equity Market Information Systems, Inc. 650,000 (3)
RR Inv Holdings 400,000 (4)
--------------
Total Common Stock Being Registered 17,750,000
(1) Assumes that Compass Capital elects to convert the entire amount of
principal and interest owing under its promissory note into 500,000 shares,
based upon an assumed market value of approximately $0.27, per share, at
the time of conversion. Further, assumes that Compass Capital exercises its
warrant to purchase an additional 200,000 shares of our common stock at a
fixed price of $0.20 per share.
(2) Assumes that we put 15,000,000 shares of common stock to Dutchess during
the term of the Investment Agreement.
(3) Assumes that Equity Market Information Systems, Inc. performs under the
terms of their agreement with the Company earning 500,000 shares and that
they exercise their stock option to acquire 150,000 shares of common stock.
(4) We had previously entered into agreements with RR Inv Holdings, Inc. and
The Bulletin Board Productions, LLC., wherein we issued a total of
1,250,000 shares into an escrow account to ensure their performance. These
shares were to be registered hereunder. However, these agreements have been
cancelled by the Company and 850,000 shares have been returned to treasury
and 400,000 shares issued to RR Inv Holdings remains the subject of a
dispute.
We have entered into an Investment Agreement with Dutchess Private Equities
Fund, L.P. ("Dutchess"), also referred to as an Equity Line of Credit. This
agreement provides that, following notice to Dutchess, we may put to Dutchess up
to $3 million in shares of our common stock for a purchase price equal to 94% of
the Best Bid (as defined) price determined in accordance with the Agreement. The
amount that the Company shall be entitled to put to Dutchess in any single
transaction pursuant to the Investment Agreement will be equal to, at the
Company's election, either: (A) 200% of the average daily volume in the U.S.
market of the common stock for the 20 trading days prior to the notice of our
put, multiplied by 94% of the average of the three daily closing Best Bid prices
immediately preceding the date of the put, or (B) $25,000; provided that in no
event shall the amount of any single put be more than $1,000,000. In turn,
Dutchess has indicated that it will resell those shares in the open market, or
resell our shares to other investors through negotiated transactions, or hold
our shares in its portfolio. This prospectus covers the resale of our stock by
Dutchess either in the open market or to other investors through negotiated
transactions. All references to the terms of the Investment Agreement are
qualified in their entirety by language of such Agreement, a copy of which is
incorporated by reference in this Registration Statement.
Dutchess will only purchase shares when we meet the following conditions:
o a registration statement has been declared effective and remains effective
for the resale of the common stock subject to the Equity Line of Credit;
o our common stock has not been suspended from trading for a period of five
consecutive trading days and we have not have been notified of any pending
or threatened proceeding or other action to delist or suspend our common
stock;
o we have complied with our obligations under the Investment Agreement and
the Registration Rights Agreement;
o no injunction has been issued and remains in force, or action commenced by
a governmental authority which has not been stayed or abandoned,
prohibiting the purchase or issuance of our common stock;
o the registration statement does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or which
would require public disclosure or an update supplement to the prospectus;
o we have not filed a petition in bankruptcy, either voluntarily or
involuntarily, and there shall not have commenced any proceedings under any
bankruptcy or insolvency laws.
The Investment Agreement will terminate when any of the following events occur:
o Dutchess has purchased an aggregate of $3,000,000 of our common stock;
o 36 months after the SEC declares this registration statement effective;
o we file or otherwise enter an order for relief in bankruptcy;
o trading of our common stock is suspended for a period of 5 consecutive
trading days; or
o our common stock ceases to be registered under the Securities Exchange Act.
We are also registering for resale 700,000 shares of common stock which may be
issuable to Compass Capital Group, Inc. ("Compass Capital"). In December, 2003,
Compass lent us $100,000 pursuant to the terms of a convertible note, bearing an
interest rate of 15% per annum, which may be converted into common stock at a
25% discount to the closing price of our stock. In addition, Compass has the
right to exercise 200,000 warrants to purchase shares of our common stock at an
exercise price of $.20 per share, and we are registering the shares of common
stock issuable upon such exercise.
We are also registering for resale 650,000 shares of common stock which may be
issuable to Equity Market Information Systems, Inc. ("EMIS"). We recently
entered into an agreement with EMIS to assist us in our efforts to create market
awareness for our company. Pursuant to the terms of our agreement with EMIS,
they will earn 500,000 shares and be granted a 36-month option to acquire an
additional 150,000 shares. Their option entitles them to purchase 50,000 shares
at $.25 per share, 50,000 shares at $.50 per share, and 50,000 shares at $1.00
per share.
In addition, we are registering 1,000,000 shares of outstanding common stock
which were previously issued in a private placement to Danzig, Ltd., Lothar
Elsaessar, Greentree Financial Group, Inc. and Hans George Huetter prior to the
filing of the registration statement of which this prospectus is a part. We had
previously entered into agreements with RR Inv Holdings, Inc. and The Bulletin
Board Productions, LLC., wherein we issued a total of 1,250,000 shares into an
escrow account to ensure their performance. These agreements have been cancelled
by the Company and 850,000 shares have been returned to treasury and 400,000
shares issued to RR Inv Holdings remains the subject of a dispute.
As of March 31, 2004 there were 19,260,944 issued and outstanding shares of our
common stock. Our shares of common stock trade on the Over-The-Counter Bulletin
Board with the symbol FFRD.OB.
We will not receive any proceeds from the sale of any shares by the selling
shareholders. However, we will receive the proceeds of any "put" of our shares
to Dutchess under the Investment Agreement and the proceeds of any exercise of
warrants held by Compass Capital Group, Inc.
OUR CAPITAL STRUCTURE BEFORE AND AFTER THE OFFERING
Common Stock outstanding:
Before the offering 19,260,944
After the offering 35,610,944 (1)
(1) Assumes that Compass Capital elects to convert all amounts due under its
promissory note into 500,000 shares, based upon an assumed market value of
approximately $0.27, per share, at the time of conversion. Further, assumes
that Compass Capital exercises its warrant to purchase an additional
200,000 shares of our common stock at a fixed price of $0.20 per share and
that Equity Market Information Systems is issued 500,000 shares and elects
to exercise its option to purchase 150,000 shares of our common stock at an
average price of $.583. In addition, this assumes that we put 15,000,000
shares of common stock to Dutchess during the term of the Investment
Agreement.
SUMMARY FINANCIAL INFORMATION
The following summary financial information has been derived from our
financial statements and should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this prospectus.
March 31, 2003 March 31, 2004
(audited) (unaudited)
---------------- ----------------
Balance Sheet Data:
Total Assets $ 1,350,514 $ 1,406,902
Total Liabilities $ 90,606 $ 394,002
Total Stockholders' Equity $ 1,259,908 $ 1,012,900
11 Months Ended 12 Months Ended
March 31, 2003 March 31, 2004
(audited) (unaudited)
---------------- ----------------
Statement of Operations:
Revenues $ 0 $ 0
Expenses $ 1,605,464 $ 728,502
Other Income $ 0 $ 0
Net Income (Loss) $ (1,605,464) $ (728,502)
Income (Loss) Per Share $ (.17) $ (.04)
Shares Used in Computing
Net Income (Loss) Per Share (1) 9,291,361 19,260,944
(1) On a fully diluted basis, the Company had 8,471,000 shares of common stock
issued and outstanding and 820,361 shares of convertible preferred stock
outstanding as of March 31, 2003. In addition, the Company had 9,556,000
shares of common stock issued and outstanding and 820,361 shares of
convertible preferred stock outstanding as of December 31, 2003. As of
March 31, 2004, all of the shares of preferred stock were converted into
common stock and the Company had a total of 19,260,944 shares of common
stock issued and outstanding as of the date of this prospectus.
RISK FACTORS
THIS OFFERING INVOLVES MATERIAL RISK. PLEASE CAREFULLY READ THE FOLLOWING RISK
FACTORS IN ADDITION TO THE OTHER INFORMATION INCLUDED AND INCORPORATED BY
REFERENCE IN THIS PROSPECTUS BEFORE INVESTING. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
Risks Relating To Our Status As A Development Stage Company
-----------------------------------------------------------
OUR LACK OF AN OPERATING HISTORY CREATES SUBSTANTIAL UNCERTAINTY ABOUT FUTURE
RESULTS.
We are a development stage company with no operating history. We are just
beginning to test market an internet based telecommunications system and our
system is not yet fully operational. As a result of our lack of operating
history, prospective investors have no operating and financial data about us on
which to base an evaluation of our performance and an investment in our stock.
Our ability to provide integrated telecommunications services on a widespread
basis and to generate operating profits and positive operating cash flow will
depend on our ability, among other things, to:
o market our Internet telephony services and generate demand for them among
our targeted client categories;
o develop, enhance, promote and carefully manage our brand;
o respond appropriately and timely to competitive developments;
o develop our operational support and other back office systems;
o attract and retain an adequate client base;
o secure additional financing;
o attract and retain qualified personnel; and
o enter into and implement long term agreements for leased capacity and other
services with established telephone companies on satisfactory terms.
We cannot assure you that we will be able to achieve any of these objectives,
generate sufficient revenue to achieve or sustain profitability, meet our
working capital requirements or compete successfully in the telecommunications
industry.
In addition, our success will be particularly dependent on our ability to make
further enhancements to our products and services, and to market such products
and services in a commercially viable manner, as to which there can be no
assurance. Unanticipated problems, expenses and delays are frequently
encountered in establishing a new business, including, but not limited to, lack
of client acceptance, competition and inadequate marketing. Our failure to
raise the maximum amount of funds through this Equity Line of Credit will likely
hinder our efforts to fully implement our planned marketing activities in
connection with our initial product, the FoneFriend. As a result we would be
required to reduce or curtail operations. We can make no assurance that we will
be able to generate a profit.
WE HAVE A HISTORY OF LOSSES FROM DEVELOPMENT STAGE OPERATIONS AND NEGATIVE CASH
FLOWS, AND WE ANTICIPATE OUR LOSSES TO INCREASE AND CONTINUE FOR THE FORESEEABLE
FUTURE.
We have incurred significant losses from development stage operations and
negative cash flows each year since inception. Through March 31, 2004, we had
an accumulated deficit of $3,219,253. During the fiscal year ended March 31,
2003, we incurred net losses from development stage operations of $1,605,464 and
sustained negative cash flows of $207,789, resulting in a loss of $0.19 per
share applicable to our common stockholders. During the fiscal year ended March
31, 2004, we incurred net losses from development stage operations of $728,502
and sustained negative cash flows of $15,353, resulting in a net loss of $0.04
per share applicable to our common stockholders. We expect to make significant
expenditures in connection with the development of our business, the
acquisition, development and expansion of our Internet telephony infrastructure,
and the deployment of our services and systems. As a result, we expect our
losses to continue and increase in the foreseeable future, and we expect to
incur significant future losses from development stage operations and negative
cash flows from our activities.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
Our consolidated financial statements have been prepared assuming we will
continue as a going concern. During the year ended March 31, 2003, we
experienced a net loss from development stage operations of $1,605,464 and had
negative cash flows of $207,789. During the year ended March 31, 2004, we
experienced a net loss from development stage operations of $728,502 and had
negative cash flows of $15,353. In addition, we had substantial shareholders'
equity operating deficits at March 31, 2003 and March 31, 2004 of $2,490,751 and
$3,219,253, respectively. Lastly, we have significant present and future working
capital demands, which will require substantial equity and debt financing which,
with the exception of the Equity Line of Credit with Dutchess, have not yet been
secured. These factors, among others, raise substantial doubt about our ability
to continue as a going concern. Our independent auditors have also expressed
doubt as to our ability to continue as a going concern. The consolidated
financial statements included elsewhere herein do not include any adjustments
that might result from the outcome of this uncertainty.
In an effort to reverse the negative financial conditions noted above, we have
entered into the Equity Line of Credit with Dutchess, which is expected to raise
$3 Million dollars in equity capital during the years 2004 through 2005. We
believe this financing will help us to further develop our business and
facilitate our development of an operating presence in the Internet telephony
market.
There can be no assurances that we will be able to successfully implement our
plans, including generating profitable operations, generating positive cash
flows from operations and obtaining additional capital to meet present and
future working capital demands.
WE MAY BE FORCED TO CURTAIL OR DISCONTINUE OUR BUSINESS DEVELOPMENT IF WE ARE
UNABLE TO SECURE ADDITIONAL FUNDS TO FINANCE OUR WORKING CAPITAL AND OTHER
REQUIREMENTS AND THE COSTS ASSOCIATED WITH THE DEVELOPMENT AND EXPANSION OF OUR
BUSINESS ENTERPRISE.
Due to our lack of an operating history and the nature of our industry, we will
have substantial future capital needs. Additional capital may be required to
fund some of all of the following:
o day to day working capital needs;
o unanticipated opportunities;
o potential acquisitions;
o changing business conditions; and
o unanticipated competitive pressures.
We may need to forego business opportunities relating to the above events if we
do not obtain additional financing. Obtaining additional financing will be
subject to a number of factors, including market conditions, our operating
performance and investor sentiment. These factors may make the timing, amount,
terms and conditions of additional financings unattractive to us. If we are
unable to raise additional capital, our business development may be impeded.
WE ARE A START UP VENTURE WITH HIGH DEVELOPMENT COSTS, AND ESTIMATE THAT WE WILL
NEED A CUSTOMER BASE OF AT LEAST 20,000 SUBSCRIBERS GENERATING REVENUES OF
$10.00 PER MONTH FOR A ONE YEAR PERIOD OF TIME IN ORDER TO ACHIEVE ANY MEASURE
OF PROFITABILITY. WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO ACCOMPLISH THIS.
We have never been profitable due to the nature of our start up and
infrastructure development expenses. If we continue to incur losses, we may not
be able to finance the commercial deployment of our products and services. We
estimate that we will need a customer base of at least 20,000 subscribers, that
will generate revenues of $10.00 per month for a one-year period in order to
achieve any measure of profitability. There can be no assurances that we will
be able to do so. Even if we do achieve profitability, we cannot assure you
that we will be able to sustain or increase profitability on a quarterly or
annual basis in the future.
THE TECHNOLOGY THAT ALLOWS VOICE COMMUNICATIONS OVER THE INTERNET IS IN ITS
INFANCY, AND THE QUALITY OF INTERNET TELEPHONE CALLS NEEDS IMPROVEMENT. CALLERS
COULD EXPERIENCE DELAYS, ERRORS IN TRANSMISSIONS OR OTHER INTERRUPTIONS IN
SERVICE, ALL OF WHICH COULD NEGATIVELY IMPACT OUR FUTURE REVENUES, REPUTATION
AND BRAND.
The technology that allows voice communications over the Internet is still in
its infancy. Historically, the sound quality of Internet telephone calls was
poor. As the industry has grown, sound quality has improved, but the technology
requires additional refinement. Additionally, the Internet's capacity
constraints may impede the acceptance of Internet telephony. Callers could
experience delays, errors in transmissions or other interruptions in service
that are beyond our control. The quality issues inherent in Internet telephony
could negatively impact our future revenues, reputation and brand. Furthermore,
the FoneFriend technology that we have licensed is unproven and has not been
tested in a commercial environment. Therefore, there can be no assurances that
our product will function as anticipated when we are able to commence sales.
OUR FUTURE PERFORMANCE WILL DEPEND, IN PART, ON OUR ABILITY TO MANAGE OUR
BUSINESS GROWTH EFFECTIVELY. THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO
SUCCESSFULLY GROW OR MANAGE SUCH GROWTH.
Our future performance will depend, in part, on our ability to manage our
business growth effectively. Towards that end, we will have to undertake the
following tasks, among others:
o effectively develop our operating, administrative, financial and
accountings systems and controls;
o establish and continuously improve coordination among our engineering,
accounting, finance, marketing and operations personnel; and
o develop and continuously enhance our management information systems
capabilities.
If we cannot accomplish these tasks, our chances of achieving profitability may
be diminished.
Risks Relating To Our Competitive Strategy
------------------------------------------
OUR STRATEGY FOR SUCCESS IS BASED PARTLY ON OUR ABILITY TO PROVIDE DISCOUNTED
DOMESTIC AND INTERNATIONAL LONG DISTANCE COMMUNICATIONS SERVICES WITH THE COST
SAVINGS OF CARRYING VOICE TRAFFIC OVER THE INTERNET, AS COMPARED TO CARRYING
CALLS OVER TRADITIONAL LONG DISTANCE NETWORKS. THE PRICE OF LONG DISTANCE CALLS
MAY DECLINE TO A POINT WHERE WE NO LONGER HAVE SUCH A COST ADVANTAGE, WHICH WILL
BE DETRIMENTAL TO OUR BUSINESS PROSPECTS.
Our strategy for success is based partly on our ability to provide discounted
domestic and international long distance communications services with the cost
savings of carrying voice traffic over the internet, as compared to carrying
calls over traditional long distance networks, such as those owned by AT&T, MCI
and Sprint. In recent years, the price of long distance calls has fallen,
especially in the U.S. In response, we may lower the price of our service
offerings. AT&T, MCI and Sprint have adopted pricing plans in which the rates
that they charge for U.S. domestic long distance calls are not always
substantially higher than the rates that we intend to charge for our domestic
service. The price of long distance calls may decline to a point where we no
longer have a price advantage over these traditional long distance services.
Also, other providers of long distance services may begin, or have begun to
offer unlimited or nearly unlimited use of some of their services for an
attractive monthly rate. We would then have to rely on factors other than price
to differentiate our product and service offerings, which we may not be able to
do.
COMPETITION COULD REDUCE ANY MARKET SHARE THAT WE MAY BE ABLE TO ACQUIRE IN THE
FUTURE AND DECREASE OUR REVENUES.
The market for Internet telephony services is extremely competitive. Many
companies offer products and services similar to ours, which are directly
competitive to our product and services in our target markets, and many of these
companies have a substantial presence in the markets we plan to serve. In
addition, many of these companies are larger than we are and have substantially
greater financial, distribution and marketing resources than we do. We
therefore may not be able to compete successfully with these companies. If we
do not succeed in competing with these companies, we may not be able to
efficiently acquire customers or we could likely lose any customers acquired and
any potential revenue will be substantially reduced.
COMPETITORS MAY BE ABLE TO BUNDLE SERVICES AND PRODUCTS THAT WE DO NOT INTEND TO
OFFER TOGETHER WITH LONG DISTANCE OR INTERNET TELEPHONY SERVICES, WHICH WOULD
SIGNIFICANTLY REDUCE OUR POTENTIAL TO GENERATE REVENUES AND WOULD DAMAGE ANY
BRAND AND NAME RECOGNITION WE MAY BE ABLE TO ESTABLISH IN THE FUTURE.
Competitors may be able to bundle services and products that we do not intend to
offer together with long distance or Internet telephony services. These
services could include wireless communications, voice and data services,
Internet access and cable television. This form of bundling would put us at a
competitive disadvantage if these providers can combine a variety of service
offerings at a single attractive price. In addition, some of the
telecommunications and other companies that compete with our proposed product
and services may be able to provide customers with lower communications costs or
other packaged incentives with their services, reducing the overall cost of
their communications packages, and significantly increasing pricing pressures on
the product and services we intend to offer. This form of competition could
significantly reduce our potential to generate revenues. Furthermore, if our
potential customers do not perceive our services to be effective or of high
quality, any brand and name recognition we may be able to establish in the
future would suffer.
WE MAY NOT BE ABLE TO ESTABLISH, MAINTAIN OR PROTECT THE QUALITY REPUTATION THAT
WE BELIEVE OUR PRODUCT AND SERVICES MAY BE ABLE TO ENJOY IN A COMPETITIVE
MARKETPLACE IN WHICH MARKETING AND ADVERTISING EXPENDITURES ARE CRUCIAL. WE DO
NOT CURRENTLY HAVE THE FUNDS TO PAY FOR THE REQUISITE LEVEL OF MARKETING AND
ADVERTISING SUPPORT, AND OUR CHANCES TO ESTABLISH ANY BRAND AND NAME RECOGNITION
MAY SUFFER.
We believe that establishing and maintaining brand and name recognition is
critical for attracting and expanding our targeted client base. We also believe
that the importance of reputation and name recognition will increase as
competition in our markets increases. Promotion and enhancement of our name will
depend on the effectiveness of our marketing and advertising efforts and on our
potential success in attempting to provide a high quality product and related
services, neither of which can be assured. We do not currently have the funds
to pay for the requisite level of marketing and advertising support. In
addition, our plan to provide both domestic and international communications
services will require us to rely on third party distributors to promote and
market our product and services. We cannot be assured that these third parties
will provide the same level of effort as we believe will be necessary to
establish and maintain a quality reputation for our product and services. If
they do not, our reputation may be tarnished.
OUR POTENTIAL FOR SUCCESS DEPENDS GREATLY ON OUR ABILITY TO HANDLE A LARGE
NUMBER OF SIMULTANEOUS CALLS, WHICH OUR NETWORK SYSTEMS MAY NOT BE ABLE TO
ACCOMMODATE. THIS COULD HURT OUR REPUTATION AND WE COULD LOSE CUSTOMERS.
We expect the volume of simultaneous calls to be quite significant as we
commence our operations. Our potential for success will depend greatly on our
ability to handle a large number of simultaneous calls. Our proposed network
hardware and software may not be able to accommodate this volume. If we fail to
maintain an appropriate level of operational performance, or if our service is
disrupted, our reputation could be hurt and we could lose customers.
Additionally, our management team does not have experience with deployment of
hardware and software systems of this nature and intends to rely on third
parties for their expertise.
OUR INABILITY TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE FOR OUR SERVICES AT
DESIRED PRICING LEVELS COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS.
Prices for telecommunications services have historically fallen and we expect
this trend to continue. Consequently, we cannot predict to what extent we may
need to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services or
similar services at lower prices. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to generate
revenues, which would harm our business, financial condition and operating
results.
WE INTEND TO RELY UPON SEVERAL UNAFFILIATED, THIRD PARTY COMPANIES FOR COMPUTER
EQUIPMENT AND SOFTWARE, NETWORK SERVICES, COMPONENT PARTS, MANUFACTURING,
SYSTEMS INTEGRATION AND OPERATIONAL ASPECTS OF OUR BUSINESS. OUR INABILITY TO
MAINTAIN RELATIONSHIPS WITH, OR THE LOSS OF ONE OR MORE OF THESE UNAFFILIATED
COMPANIES, OR THE FAILURE OF THEIR SUBCONTRACTORS OR SUPPLIERS TO MEET OUR
OPERATIONAL REQUIREMENTS MAY FORCE US TO REDUCE OR ELIMINATE EXPENDITURES FOR
DEVELOPING OUR INFRASTRUCTURE, RESEARCH AND DEVELOPMENT, MARKETING OF OUR
PRODUCT OR OTHERWISE CURTAIL OR DISCONTINUE OPERATIONS, ALL OF WHICH MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATION.
The Company intends to rely upon several unaffiliated, third party companies,
for computer equipment and software, network and telecommunications services,
component parts, manufacturing, systems integration and operational aspects of
our business. This outsourcing strategy involves certain risks, including the
potential lack of adequate capacity and reduced control over delivery schedules,
manufacturing yield, quality, and costs. In the event that any significant
subcontractor were to become unable or unwilling to continue to supply,
manufacture or maintain our product or related services in the required volumes,
we would have to identify and qualify acceptable replacements. Finding
replacements could take time, and management cannot be sure that additional
sources would be available on a timely basis. As a result, we are subject to
the risk of interruptions in operations or supplies due to changes in market
demand, servicing costs, and competitors' prices. Our ability to maintain
relationships with, or the loss of, these unaffiliated companies, or the failure
of their subcontractors or suppliers to meet our operational requirements may
require us to reduce or eliminate expenditures for developing our
infrastructure, research and development, marketing of our product or otherwise
curtail or discontinue operations, all of which may have a material adverse
affect on out business, financial condition and results of operations.
Risks Relating To Doing Business In Foreign Countries
-----------------------------------------------------
MONOPOLISTIC TELEPHONE PROVIDERS IN FOREIGN COUNTRIES MAY CHARGE US ARTIFICIALLY
HIGH RATES OR DEMAND TERMS THAT ARE UNSATISFACTORY, ALL OF WHICH MAY MAKE OUR
EFFORT TO PROVIDE SERVICE IN SUCH COUNTRIES UNPROFITABLE.
In many foreign jurisdictions in which we plan to conduct business, the primary
provider of significant in-country transmission facilities is the national
telephone company, which may be the only provider in that country. As a result,
we may have to lease transmission capacity or other services at artificially
high rates from such a monopolistic provider, and we may not be able to generate
a profit on those calls. In addition, national telephone companies may not be
required by law to lease necessary services to us or, if applicable law requires
national telephone companies to lease facilities to us, we may encounter delays
in negotiating leases and interconnection agreements and commencing operations.
Additionally, disputes may result with respect to pricing, billing or other
terms of these agreements, and these disputes could affect our ability to
commence operations or continue to operate in these countries.
REGULATION OF INTERNET TELEPHONY OUTSIDE THE U.S. VARIES FROM COUNTRY TO
COUNTRY. WE CANNOT PREDICT HOW A REGULATORY OR POLICY CHANGE IN A PARTICULAR
COUNTRY MIGHT AFFECT THE FUTURE PROVISION OF OUR SERVICES. SUCH REGULATORY
UNCERTAINTY COULD ADVERSELY IMPACT OUR ABILITY TO PROVIDE INTERNET TELEPHONY
SERVICES IN A NUMBER OF FOREIGN COUNTRIES.
Some foreign countries currently impose little or no regulation on Internet
telephony services, as in the United States. Other countries, including those
in which the governments prohibit or limit competition for traditional voice
telephony services, generally do no permit Internet telephony services or
strictly limit the terms under which those services may be provided. Still
other countries regulate Internet telephony services like traditional voice
telephony services, requiring Internet telephony companies to make universal
service contributions and pay other taxes.
While some countries subject Internet telephony providers to strict regulations,
others have moved towards liberalization of the Internet telephony providers
sector and have lifted bans on provision of Internet telephony services. We
cannot predict how a potential regulatory or policy change in a particular
country might affect the future provision of our services. This regulatory
uncertainty could adversely impact our ability to provide Internet telephony
services in foreign countries.
OUR PLANNED EXPANSION IN INTERNATIONAL MARKETS IS SUBJECT TO A VARIETY OF RISKS
ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY, ANY OF WHICH COULD
SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS.
Our initial efforts, with respect to the FoneFriend product, are subject to a
variety of risks associated with conducting business internationally, any of
which could seriously harm our business, financial condition, and results of
operation. The risks include: (1) import or export licensing and product
certification requirements; (2) tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers imposed by foreign
countries, especially on technology; (3) potential adverse tax consequences,
including restrictions on repatriation of earnings; (4) seasonal reductions in
business activity in certain parts of the world; (5) fluctuations in foreign
currency exchange rates, which could make our product relatively more expensive
in foreign markets; (6) changes in regulatory requirements; (7) burdens of
complying with and enforcing a wide variety of foreign laws, particularly with
respect to intellectual property and license requirements; (8) difficulties and
costs of staffing and managing foreign operations; (9) political instability;
and (10) the impact of recessions in economies outside of the United States.
There can be no assurance that fluctuating international market factors will not
adversely effect our plan to implement operations in such markets.
Risks Relating To Our Common Stock And The Equity Line Of Credit With Dutchess
------------------------------------------------------------------------------
OUR COMMON STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE AND YOU MAY FIND
IT DIFFICULT TO SELL YOUR SHARES FOR A PROFIT.
The trading price of our common stock has been and is likely to continue to be
highly volatile. For example, during the 52-week period ended March 31, 2004,
the closing price of our common stock ranged from $0.12 to $4.00 per share. Our
stock price could be subject to wide fluctuations in response to factors such
as:
o actual or anticipated variations in quarterly operating results;
o announcements of technological innovations, new products or services by us
or our potential competitors;
o changes in our financial estimates or recommendations by securities
analysts regarding us or our potential competitors;
o the addition or loss of strategic relationships or relationships with our
potential customers, partners or consultants;
o announcements by us or our potential competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o legal, regulatory or political developments;
o additions or departures of key personnel;
o sales of our common stock by insiders or stockholders; and
o general market conditions.
In addition, the stock market in general, and the Over-The-Counter Bulletin
Board, as well as the market for Internet telephony services and
telecommunications related companies have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. These broad market and industry factors may
reduce our stock price, regardless of our operating performance.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THIS OFFERING.
The sale of shares pursuant to our Investment Agreement with Dutchess may have a
dilutive impact on our shareholders. As a result, our potential net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price at the time we exercise
our "put" options, the more shares we will have to issue to Dutchess to draw
down on the full equity line with Dutchess. If our stock price decreases, then
out existing stockholders would experience greater dilution.
DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
WHICH MAY CAUSE OUR STOCK PRICE TO DECREASE.
Pursuant to our Investment Agreement, we will issue our common stock at a 6%
discount to the lowest closing bid price of our common stock during the five day
period following our notice to Dutchess of our election to exercise our "put"
right. These discounted sales could cause the price of our common stock to
decline.
OUR COMMON STOCK IS A "PENNY STOCK," AND COMPLIANCE WITH REQUIREMENTS FOR
DEALING IN PENNY STOCKS MAY MAKE IT DIFFICULT FOR HOLDERS OF OUR COMMON STOCK TO
RESELL THEIR SHARES.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00, other than securities registered on
certain national securities exchanges or quoted on NASDAQ, provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or system. Prior to a transaction in a penny stock, a
broker-dealer is required to:
o deliver a standardized risk disclosure document prepared by the SEC;
o provide the customer with current bid and offer quotation for the penny
stock;
o explain the compensation of the broker-dealer and its salesperson in the
transaction;
o provide monthly account statements showing the market value of each penny
stock held in the customer's account;
o make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's approval; and
o provide a written agreement for the transaction.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for our stock. Because our shares are subject to the
penny stock rules, you may find it more difficult to sell your shares.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP.
Our common stock trades on the Over-The-Counter Bulletin Board. Our common
stock is thinly traded compared to larger, more widely known companies in our
industry. Thinly traded common stock can be more volatile than common stock
trading in an active public market. We cannot predict the extent to which an
active public market for the common stock will develop or be sustained after
this offering.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND YOU MAY NEVER RECEIVE
DIVIDENDS. THERE IS A RISK THAT AN INVESTOR IN OUR COMPANY WILL NEVER SEE A
RETURN ON INVESTMENT AND THE STOCK MAY BECOME WORTHLESS.
We have never paid dividends on our common stock. We intend to retain earnings,
if any ever arise, to finance the development and expansion of our business.
Future dividend policy will be at the discretion of the Board of Directors and
will be contingent upon future earnings, if any, our financial condition,
capital requirements, general business conditions and other factors. Future
dividends may also be affected by covenants contained in loan or other financing
documents, which may be executed by us in the future. Therefore, there can be no
assurance that cash dividends of any kind will ever be paid. If you are counting
on a return on your investment in the common stock, the shares are a risky
investment.
Risks Relating To Our Relationship With FoneFriend Systems, Inc.
----------------------------------------------------------------
THE PATENTS, SERVICE MARKS, TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL
PROPERTY RIGHTS LICENSED FROM FONEFRIEND SYSTEMS, INC. ("FSI") ARE CRUCIAL TO
OUR SUCCESS. IF FSI DEFAULTS IN ITS OBLIGATIONS TO GIVE SUPPORT TO THE
FONEFRIEND TECHNOLOGY, WE MAY NOT SUCCEED OR BE FORCED TO FIND AN ALTERNATIVE
INTERNET VOICE TRANSMISSION DEVICE OR TECHNOLOGY AT A PROHIBITIVE COST. IN
ADDITION, THE TWO FSI PRINCIPALS HAVE INFORMED US THAT THEY MAY NOT CONTINUE
THEIR ASSOCIATION WITH EACH OTHER, WHICH COULD CAUSE SIGNIFICANT COMMERCIAL
DAMAGE TO OUR COMPANY.
We regard FSI's patents, service marks, trademarks, trade secrets and other
intellectual property as crucial to our success. If FSI defaults in its
obligations to give support to the FoneFriend technology, we may not succeed or
be forced to find an alternative Internet device or technology, which could be
prohibitively expensive. FSI founders, Mr. John Wimsatt and Dr. Faramarz
Vaziri, have informed us that they may not continue their association with each
other. If further difficulties arise between the two principals, it may cause
significant economic or commercial damage to our Company.
FSI HAS GRANTED AND MAY CONTINUE TO GRANT ADDITIONAL LICENSES OF ITS TECHNOLOGY
TO ONE OR MORE THIRD PARTIES AND/OR POTENTIAL COMPETITORS, WHICH MAY ADVERSELY
IMPACT OUR BUSINESS AND OUR POTENTIAL TO CAPTURE ANY MARKET SHARE IN THE
INTERNET TELEPHONY MARKETPLACE.
FSI informs us that, presently, we are the only licensee of the FoneFriend
technology in the world. However, FSI has the right to grant other licenses at
any time, if it desires to do so. If FSI does grant additional licenses of the
FoneFriend technology, this may adversely impact our business and our potential
to capture any market share in the Internet telephony marketplace. We are aware
of two companies who have each tendered a substantial sum of money for a license
or other right to use or market the FoneFriend technology. Both of these
companies, Iglo-Tel, Inc. (a U.S. company), and Credit Phone International (an
Italian company), have defaulted on and lost their licenses to use the
FoneFriend technology issued by FSI. Should either of these companies re-instate
their license with FSI, this could adversely impact our exploitation of the
Internet telephony business with FoneFriend technology.
OUR CONTRACTS WITH DR. FARAMARZ VAZIRI AND WINSONIC HOLDINGS, LTD., FOR
TECHNICAL SUPPORT SERVICES RELATING TO THE FONEFRIEND TECHNOLOGY ARE PRESENTLY
IN DEFAULT, ALTHOUGH THE PARTIES CONTINUE TO NEGOTIATE IN GOOD FAITH TO RESOLVE
ALL ISSUES OF CONTENTION. WE BELIEVE THAT IT IS CRUCIAL TO OUR SUCCESS TO
RETAIN THE SERVICES OF DR. FARAMARZ VAZIRI, WHO IS THE INVENTOR OF THE
FONEFRIEND TECHNOLOGY AND CO-FOUNDER OF FONEFRIEND SYSTEMS, INC., THE PATENT
HOLDER, AND TO MAINTAIN A GOOD WORKING RELATIONSHIP WITH WINSONIC HOLDINGS.
Our contracts with Dr. Faramarz Vaziri and Winsonic Holdings, Ltd., for
technical support services relating to the FoneFriend technology are presently
in default for lack of timely payments. However, the parties have continue to
work and negotiate in good faith to resolve such default in anticipation of
future payments conditioned upon the Company's receipt of proceeds from its
Equity Line of Credit from Dutchess. We believe it is crucial to our success to
retain the services of Dr. Faramarz Vaziri, who is the inventor of the
FoneFriend technology and co-founder of FoneFriend Systems, Inc., the patent
owner and licensor of the technology rights to the Company. In addition, it
would be expensive to obtain alternative services currently provided by Winsonic
Holdings, Ltd. However, we have been able to maintain a good working and
professional relationship with Dr. Vaziri, who is our senior technology
consultant and Winston Johnson, who is the president of Winsonic Holdings and
our chief technology consultant.
THE UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE
OUR BUSINESS AND HINDER OUR EFFORTS TO ESTABLISH A BRAND NAME FOR OUR PRODUCT.
IN ADDITION, PROSECUTING CLAIMS OR DEFENDING AGAINST INTELLECTUAL PROPERTY
INFRINGEMENT CLAIMS COULD BE EXPENSIVE TO FSI, AND COULD DISRUPT OUR BUSINESS.
We rely on trademark and copyright law, trade secret protection and
confidentiality agreements with our employees, partners potential third party
suppliers and others to protect our intellectual property rights licensed from
FSI. Despite our precautions, it may be possible for third parties to obtain
and use our intellectual property without authorization. Furthermore, the laws
of some foreign countries may not protect intellectual property rights to the
same extent as do the laws of the United States. The unauthorized use of our
intellectual property by third parties may damage our business and hinder
efforts or all together prevent us from establishing a brand name or product
recognition for our product and services. In addition, defending against
intellectual property infringement claims could be expensive to FSI, and could
disrupt our business. In addition, successful infringement claims against FSI
may result in substantial monetary liability or may materially disrupt the
conduct of our business.
OUR SOLE PROPRIETARY RIGHTS ARE REPRESENTED BY OUR ACQUIRED INTEREST IN THE
FONEFRIEND TECHNOLOGY AND ITS NAME. THE COSTS OF OBTAINING AND ENFORCING
PATENTS AND TRADEMARKS AND OF PROTECTING OUR LICENSED PROPRIETARY TECHNOLOGY (IN
CONTRAST TO THE COSTS TO FSI WITH RESPECT TO SUCH TECHNOLOGY) MAY INVOLVE A
SUBSTANTIAL COMMITMENT OF OUR RESOURCES AND DIVERT RESOURCES FROM OUR OTHER
OPERATIONS.
We own no proprietary rights other than our acquired interest in the FoneFriend
technology and its name which we obtained through our license agreement with
FSI. The key FoneFriend technologies acquired by us are described in the U.S.
and international patent applications by FSI to the U.S. Patent and Trademark
Office ("PTO"). These patents make approximately 60 separate claims, the most
significant of which are: (1) the ability to switch from the PSTN to the
Internet without making an initial PSTN toll connection; (2) utilizing a
proprietary server and telephone numbers to make an Internet call connection,
and (3) the dynamic packet adjustment features utilized by the Internet phone
network. To date, and to the best of our knowledge, FSI has had no opposing
claims filed with the PTO or received any other opposing claims. The costs of
obtaining and enforcing patents and trademarks and of protecting proprietary
technology may involve a substantial commitment of our resources and divert
resources from our other operations. Infringement claims against us, even if
without merit, may be time-consuming, result in costly litigation, or require us
to enter into royalty or licensing agreements that may or may not be available
on terms acceptable to us. There can be no assurance that (i) litigation will
not be commenced seeking to challenge our or our licensors' patents or that such
challenges will not be successful, (ii) processes or products of ours do not or
will not infringe upon the patents or copyrights of third parties, (iii) the
scope of patents that will be licensed to us will successfully prevent third
parties from developing similar or competitive products, or (iv) that we or our
licensors' patents or patent applications will issue or, if issued, will not be
reexamined, opposed, challenged, invalidated or circumvented, or that the rights
granted thereunder will provide sufficient protection or competitive advantages
to us.
Certain Legal And Regulatory Risks
----------------------------------
THE LEGAL AND REGULATORY ENVIRONMENT RELATED TO OUR BUSINESS IS UNCERTAIN AND
CHANGING RAPIDLY, AND IT COULD NEGATIVELY IMPACT OUR PROPOSED BUSINESS. NEW
REGULATIONS COULD INCREASE OUR ANTICIPATED COSTS OF DOING BUSINESS AND PREVENT
US FROM DELIVERING OUR PRODUCT AND SERVICES IN PARTICULAR MARKETS, WHICH WOULD
ADVERSELY AFFECT OUR POTENTIAL CUSTOMER BASE AND OUR REVENUE. IN ADDITION, THE
GROWTH OF THE INTERNET MAY BE SIGNIFICANTLY SLOWED BY NEW REGULATIONS, WHICH
COULD DELAY GROWTH IN DEMAND FOR OUR PRODUCT AND SERVICES. FURTHER, REGULATORY
TREATMENT OF INTERNET TELEPHONY OUTSIDE THE UNITED STATES VARIES FROM COUNTRY TO
COUNTRY AND IS SUBJECT TO CHANGE.
The legal and regulatory environment related to our business is uncertain and
changing rapidly, and it could negatively impact our proposed plan of business.
New regulations could increase our anticipated costs of doing business and
prevent us from delivering our product and services in particular markets,
including foreign countries and over the Internet, which would adversely affect
our potential customer base and our revenue. In addition, the growth of the
Internet may be significantly slowed by new regulations, which could delay
growth in demand for our product and services. Further, regulatory treatment of
Internet telephony outside the United States varies from country to country and
is subject to rapid changes which may or may not be favorable to our intended
plan of business. We cannot predict how the laws and regulations will develop
with regard to Internet telephony. New laws and regulations may address issues
that include:
o sales and other taxes;
o interstate access charges;
o user privacy
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o contributions to the Universal Service Fund, which is funded by
telecommunications carriers for the purpose of supporting local telephone
service in rural and high cost areas;
o cross-border commerce;
o copyright, trademark and patent infringement; and
o other claims based on the nature and content of Internet materials.
To date, governmental regulations have not materially restricted use of the
Internet in Internet telephony markets. However, the legal and regulatory
environment that pertains to the Internet is uncertain and may change. On April
10, 1998, the FCC issued a Report to Congress indicating its intent to regulate
certain Internet service providers that use Internet protocols to provide
Internet telephony as subject to telecommunications regulation. According to
the FCC, Internet phone-to-phone services bear the characteristics of
telecommunications, not of an enhanced information service, which has been
historically exempt from the payment of access charges to local exchange
carriers for originating and terminating calls over the public switched
telephone network. While neither Congress nor the FCC has yet formally adopted
laws or regulations based on the 1998 FCC Report, several Bell Operating
Companies have acted to apply access charges to Internet telephony providers.
THE LAW RELATING TO THE LIABILITY OF ONLINE SERVICES COMPANIES AND INTERNET
ACCESS PROVIDERS FOR DATA AND CONTENT CARRIED ON OR DISSEMINATED THROUGH THEIR
NETWORKS IS CURRENTLY UNSETTLED.
It is possible that claims could be made against online services companies and
Internet access providers under United States and/or foreign law for defamation,
negligence, copyright or trademark infringement, or other theories based on data
or content disseminated through their networks, even if a user independently
originated this data or content. Several private lawsuits seeking to impose
liability on online services companies and Internet access providers have been
filed in U.S. and foreign courts. While the United States has passed laws
protecting Internet access providers from liability for actions by independent
users in limited circumstances, this protection may not apply in any particular
case at issue. In addition, some countries, such as China, regulate or restrict
the transport of voice and data traffic in their jurisdiction. The risk to us,
as an Internet access provider, of potential liability for data and content
carried on or disseminated through our system could require us to implement
measures to reduce our exposure to this liability. This may require us to expend
substantial resources or to discontinue some of our services. Our ability to
monitor, censor or otherwise restrict the types of data or content distributed
through our network is limited. Failure to comply with any applicable law or
regulations in particular jurisdictions could result in fines, penalties or the
suspension or termination of our services in these jurisdictions. The negative
attention focused on liability issues as a result of these lawsuits and
legislative proposals could adversely the growth of public Internet use. The
imposition of any liability could harm our business and prospects.
THE FCC AND STATE REGULATIONS MAY LIMIT THE SERVICES WE CAN OFFER AND RESTRICT
OUR INTENDED OPERATION AND DEVELOPMENT OF OUR BUSINESS.
Our intended Internet telephony operations are not currently subject to direct
regulation by the FCC or any federal, state or local governmental agency, other
than regulations applicable to businesses generally. However, the FCC recently
indicated that the regulatory status of some services offered over the Internet
may have to be re-examined. New laws or regulations relating to Internet
services, or existing laws found to apply to them, may have a material adverse
effect on our intended plan of business, financial condition or results of
operations.
Our planned provision of Internet telephony services could become subject to
significant regulation at the federal, state and local levels. The costs of
complying with these regulations and the delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect on our business, financial condition and
operating results.
We cannot assure you that the FCC or state commissions will continue to refrain
from taking regulatory action against us upon commencement of our business. If
they do, we must fully comply with the rules of the FCC or state regulatory
agencies, or face challenges to our authority to do business. Such challenges
could cause us to incur substantial legal and administrative expenses.
OUR DIRECTORS AND OFFICERS ARE INDEMNIFIED AGAINST CERTAIN LIABILITIES THAT THEY
MAY INCUR IN CONNECTION WITH ACTIONS TAKEN ON OUR BEHALF. SUCH INDEMNIFICATION
COULD REDUCE THE LEGAL REMEDIES AVAILABLE TO US AND OUR SHAREHOLDERS AGAINST OUR
DIRECTORS AND OFFICERS ARISING OUT OF THEIR ACTIONS.
We have executed indemnification agreements that will indemnify each director
and officer against certain liabilities that they may incur, and, in addition,
our By-Laws provide that our directors and officers are indemnified against
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended, to the fullest extent provided by the law of the State of
Delaware. Each of these measures could reduce the legal remedies available to
us and our shareholders against such individuals.
WE DO NOT HAVE PRODUCT LIABILITY INSURANCE AND, AS A RESULT, WE COULD BE
SUBJECTED TO CLAIMS FOR PRODUCT LIABILITY RESULTING FROM THE USE OF OUR
PRODUCTS.
We do not have product liability insurance and, as a result, we could be
subjected to claims for product liability resulting from the use of our
products. In the event product liability claims are filed, they could have a
material adverse effect on our financial condition and on the marketability of
any affected products. Although we intend to acquire adequate liability
insurance, the cost of such insurance may be prohibitive and we may not be able
to purchase such insurance. Even if we do purchase the insurance, there is no
assurance that any potential claims will not exceed the insurance coverage or
that all claims will be within the coverage afforded.
Other Business Risks
--------------------
INTERNET TELEPHONY IS AT AN EARLY STAGE OF DEVELOPMENT, AND IT IS DIFFICULT TO
PREDICT THE SIZE OF THIS MARKET AND ITS GROWTH RATE. WE BELIEVE THAT OUR
INTENDED BUSINESS WILL NOT GROW WITHOUT INCREASED USE OF THE INTERNET. DEMAND
AND MARKET ACCEPTANCE FOR RECENTLY INTRODUCED PRODUCTS AND SERVICES OVER THE
INTERNET ARE STILL UNCERTAIN. THE INTERNET MAY NOT PROVE TO BE A VIABLE
COMMERCIAL MARKETPLACE FOR A NUMBER OF REASONS, ANY OF WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.
Internet telephony is at an early stage of development, and it is hard to
predict the size of this market and its growth rate. We believe that our
intended business will not grow without increased use of the Internet. Demand
and market acceptance for recently introduced products and services over the
Internet are still uncertain. We cannot predict whether potential customers
will be willing to shift their traditional international or long distance
calling activities to an Internet based solution like we intend to offer. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including:
o concerns about security;
o Internet congestion;
o inconsistent service; and
o lack of cost-effective, high-speed access.
If the use of the Internet as a commercial marketplace does not continue to
grow, we may not be able to grow our customer base, which could prevent us from
increasing revenues or achieving profitability.
OUR BUSINESS PROSPECTS MAY SUFFER IF WE ARE NOT ABLE TO KEEP UP WITH THE RAPID
TECHNOLOGICAL DEVELOPMENTS IN OUR INDUSTRY.
The communications industry is subject to rapid and significant technological
changes, such as continuing developments of alternative technologies for
providing high-speed voice communications. We cannot predict the effect of
technological changes on our intended plan of business. We may rely in part on
third parties, including some of our potential competitors, for the development
of and access to communications technologies. We expect that new services and
technologies applicable to our proposed markets will emerge. New products and
technologies may be superior and/or render obsolete the products and
technologies that we currently intend to use to deliver our services. Our future
success will depend, in part, on our ability to anticipate and adapt to
technological changes and evolving industry standards. We may be unable to
obtain access to new technologies on acceptable terms or at all, and we may be
unable to obtain access to new technologies and offer services in a competitive
and/or efficient manner. Any new products and technologies may not be compatible
with our technologies and intended business plan. We believe that the global
communications industry should set standards to allow for the compatibility of
various products and technologies. The industry, however, may not set standards
on a timely basis or at all.
WE DEPEND ON THE SERVICES OF OUR SENIOR MANAGEMENT TEAM AND KEY CONSULTANTS.
Our future success depends to a significant extent on the continued services of
our senior management, particularly Jackelyn Giroux, our President, and Gary A.
Rasmussen, our business consultant, as well as Dr. Faramarz Vaziri, our
technology consultant. The loss of the services of any of these executives or
consultants, or any other present or future key employee, could have a material
adverse effect on the management of our intended business. We do not maintain
"key person" life insurance for any of our personnel or consultants.
COMPETITION FOR HIGHLY-SKILLED PERSONNEL IS INTENSE AND THE SUCCESS OF OUR
FUTURE BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MANAGE KEY
PERSONNEL.
The success of our future business depends on our continuing ability to attract,
retain and motivate highly-skilled employees. As we start to grow, we will need
to hire additional personnel in all areas. Competition for personnel throughout
the voice communications industries is intense. We may be unable to attract or
retain key employees or other highly qualified employees in the future. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
sufficient new personnel or retaining and motivating our current personnel, our
ability to provide our services could be adversely affected.
OUR PRINCIPAL STOCKHOLDERS CONTROL OUR BUSINESS AFFAIRS IN WHICH CASE YOU WILL
HAVE LITTLE OR NO PARTICIPATION IN OUR BUSINESS AFFAIRS.
Currently, our principal stockholders, Jackelyn Giroux, Gary A. Rasmussen and
Dennis Johnston, own or control approximately 42% of our common stock. In
addition, the Company's agreements with Jackelyn Giroux and Gary A. Rasmussen,
as amended, contain anti-dilution clauses which entitle them to maintain their
equity positions in the Company at 21.2% and 25%, respectively. As a result,
these individuals, have significant influence over all matters requiring
approval by our stockholders without the approval of minority stockholders. In
addition, they are able to elect all of the members of our Board of Directors,
which allows them to significantly control our affairs and management. They are
also able to affect most corporate matters requiring stockholder approval by
written consent, without the need for a duly noticed and duly-held meeting of
stockholders. Accordingly, you will be limited in your ability to affect change
in how we conduct our business.
OUR INABILITY TO DEVELOP OR FINANCE STRATEGIC ALLIANCES OR ACQUISITIONS NEEDED
TO COMPLEMENT OUR INTENDED PLAN OF BUSINESS COULD IMPEDE OUR ABILITY TO EXPAND
AND HARM OUR FUTURE BUSINESS.
As part of our growth strategy, we may seek to develop strategic alliances and
to make investments or acquire assets or other businesses that will relate to
and complement our intended plan of business. We are unable to predict whether
or when any strategic alliance will occur or the likelihood of a material
transaction being completed on favorable terms and conditions. Our ability to
finance acquisitions and strategic alliances may be constrained by our degree of
leverage at the time of such acquisition.
We cannot assure you that any acquisition will be made or that we will be able
to obtain the funds necessary to finance the costs associated with any such
acquisition. We currently have no definitive agreements with respect to any
material acquisition, although from time to time we may have discussions with
other companies and assess strategic alliances and acquisition opportunities on
an ongoing basis. However, there can be no assurance that we will complete
successfully any or all of the such activities being contemplated or what the
consequences thereof would be.
Risks Arising Out of the Merger of FoneFriend, Inc. with
Universal Broadband, Inc.
--------------------------------------------------------
THE LIQUIDATING TRUSTEE UNDER THE PLAN OF REORGANIZATION AND SUBSEQUENT MERGER
OF FONEFRIEND, INC. WITH UNIVERSAL BROADBAND, INC. MAY HAVE THE RIGHT TO REQUIRE
THE COMPANY TO REDEEM ITS 5% SHAREHOLDER INTEREST IN THE COMPANY AT ITS OPTION,
AT ANY TIME, FOR $3.0 MILLION. SUCH A REDEMPTION MAY HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY AND FORCE IT TO SEEK PROTECTION UNDER THE BANKRUPTCY LAWS.
The Liquidating Trustee under the Plan of Reorganization and subsequent merger
of FoneFriend, Inc. with Universal Broadband, Inc. may have the right to require
the Company to redeem its 5% shareholder interest in the Company at its option,
at any time, for $3.0 million. Such a redemption may have a material adverse
effect on the Company and force it to seek protection under the bankruptcy laws.
Furthermore, the Company may have an obligation to issue additional shares to
the Liquidating Trustee pursuant to an anti-dilution provision contained in the
Plan of Reorganization. This may cause additional dilution to purchasers of
shares in this offering. Finally, all of the shares in the possession of the
Liquidating Trustee may be deemed to be "free trading" within the meaning of the
Securities Act of 1933, as amended. Accordingly, such shares would trade in the
open market and the dilutive effect could have a negative impact on the market
for the Company's common stock. The Company intends to contest the position of
the Liquidating Trustee and the terms of the Plan of Reorganization, and
believes that the Liquidating Trustee is only entitled to a redemption out of
surplus capital. In addition, Section 160(a) of the Delaware General
Corporation Law prohibits redemptions of capital stock when the capital of the
corporation is impaired or when such purchase or redemption would cause any
impairment of the capital of the corporation. This statute has been interpreted
by the courts to mean that a corporation can only purchase its own stock out of
surplus. Currently, the Company does not have any surplus, and a redemption of
its common stock at this point in time would be prohibited as a matter of law.
See Section entitled "Legal Proceedings".
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive
proceeds from the sale of shares of common stock in this offering. However, we
will receive the proceeds from the sale of shares of common stock to Dutchess
under the Investment Agreement. The purchase price of the shares purchased
under the Investment Agreement will be equal to 94% of the lowest closing bid
price of our common stock on the Over-The-Counter Bulletin Board for the five
days immediately following the date of our notice of election to exercise our
put.
For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the
Investment Agreement. The table assumes estimated offering expenses of $25,000.
Proceeds Proceeds
If 100% Sold If 50% Sold
------------ -----------
Gross Proceeds $ 3,000,000 $ 1,500,000
Estimated remaining
accounting, legal and
associated expenses of Offering $ 25,000 $ 25,000
------------ -----------
Net Proceeds $ 2,975,000 $ 1,475,000
============ ===========
Use of Use of
Proceeds Proceeds
------------ -----------
Deployment of Technology &
Infrastructure $ 600,000 $ 300,000
Product Inventory & Manufacturing $ 600,000 $ 600,000
General Marketing $ 1,000,000 $ 300,000
Working capital and general
corporate expense $ 775,000 $ 275,000
------------ -----------
$ 2,975,000 $ 1,475,000
============ ===========
The amounts set forth above indicate our proposed use of the proceeds we may
receive from our equity credit line with Dutchess. However, our actual
expenditures may vary substantially depending on various factors, many of which
cannot be predicted at this date. Accordingly, we reserve the right to
reallocate all or a substantial portion of any part of the proceeds as our
management deems appropriate to meet future business conditions.
Proceeds of the offering which are not immediately required for the purposes
described above will be invested in United States government securities,
short-term certificates of deposit, money market funds or other high-grade
short-term interest-bearing investments.
DETERMINATION OF OFFERING PRICE
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-The-Counter Bulletin Board or in
negotiated transactions during the term of this offering. These prices will
fluctuate based on the demand for the shares.
DILUTION
Our net tangible book value as of March 31, 2004 was $1,012,900 or about $.05
per share of common stock on a fully diluted basis. As of March 31, 2004, we had
19,260,944 shares of common stock outstanding and had granted options to acquire
an additional 1,350,000 shares of common stock. Net tangible book value is
determined by dividing our tangible book value (total tangible assets less total
liabilities and preferred stock) by the number of outstanding shares of our
common stock.
Since this offering is being made solely by the selling stockholders and none of
the proceeds will be paid to us, our net tangible book value will be unaffected
by this offering. Our net tangible book value, however, will be impacted by the
common stock to be issued under our Investment Agreement with Dutchess. Higher
offering prices result in increased dilution to new investors. The amount of
dilution will depend on the offering price and number of shares to be issued
under the Investment Agreement.
For example, if we were to issue 15,000,000 shares of common stock under the
Investment Agreement at an assumed average offering price of $.20 per share
(less offering expense of $25,000, or a net of $2,975,000), plus an additional
700,000 shares issued to Compass Capital at an assumed price of $.20 per share
(increasing our book value by $140,000), and if Equity Market Information
Systems exercised their option to acquire 150,000 shares of common stock for a
total of $87,500, our pro forma book value adjusted as of March 31, 2004, would
have been $4,215,400, or about $.12 per share (assuming a total of 35,610,944
shares of common stock outstanding after this offering). This example would
represent an immediate increase in our pro forma book value to our existing
shareholders of $.07 per share and an immediate dilution to new shareholders of
about $.08 per share, or 40%.
The following table illustrates the per share dilution based on this example:
Assumed Average Offering Price Per Share $ .20
Net Tangible Book Value Per Share Before This Offering (1) $ .05
Increase Attributable To New Investors (2) $ .07
-------
Net Tangible Book Value Per Share After This Offering $ .12
-------
Dilution Per Share To New Shareholders $ .08
-------
_______________
(1) Assumes 20,610,944 shares of common stock outstanding on a fully diluted
basis (i.e., 19,260,944 shares issued and outstanding as of March 31, 2004,
plus 1,350,000 shares issued pursuant to options and warrants granted) and
an unaudited book value of $1,012,900 on March 31, 2004.
(2) Assumes a net increase of $4,215,400 in pro forma adjusted book value
(attributable to new shares issued to Dutchess, Compass Capital and Equity
Market Information Systems) and 35,610,944 shares outstanding after this
offering.
The offering price of our common stock is based on the then-existing market
price. In order to give prospective investors an idea of the dilution per share
they may experience, we have prepared the following table showing the dilution
per share assuming the Company receives the maximum amount of proceeds from the
Investment Agreement with Dutchess and at various assumed trading prices (i.e.,
94% of the lowest closing prices during the applicable five day pricing period):
Assumed Per Share Number Of Dilution Per Share
Offering Price Shares To Be Issued (1) To New Investors (2)(3)
------------------- ------------------------ -----------------------
$ .05 60,000,000 $.00
$ .10 30,000,000 $.02
$ .15 20,000,000 $.05
$ .20 15,000,000 $.09
$ .25 12,000,000 $.12
$ .30 10,000,000 $.17
$ .40 7,500,000 $.25
$ .50 6,000,000 $.35
$ .75 4,000,000 $.58
$1.00 3,000,000 $.83
_______________
(1) We currently have no intent to exercise the put right in a manner that
would result in the issuance of more than 15,000,000 shares, but if we were
to exercise the put right in such a way that would exceed 15,000,000
shares, we would be required to file another registration statement in
order to register additional shares.
(2) Assumes a pro forma, net tangible book value of $1,012,900, or about $.05
per share (adjusted for 20,610,944 shares outstanding) before this
offering, and a pro forma, net tangible book value of $4,215,400 after this
offering.
(3) Assumes that Compass Capital is issued 700,000 shares at $.20 per share and
Equity Market Information Systems, inc. is issued 500,000 shares plus
exercises its option to purchase 150,000 shares at an average price of
$.583.
CAPITALIZATION
The following table sets forth our pro forma capitalization as of March 31,
2004, which information includes and accounts for the effects of the anticipated
results of the completion of the sale of 7,500,000 shares of our common stock,
in the event that we realize 50% of the $3 Million credit line under our
Investment Agreement with Dutchess, on the one hand, and 15,000,000 shares of
our common stock, in the event that we realize 100% of the $3 Million credit
line under our Investment Agreement with Dutchess, on the other hand, both
scenarios of which are presented at an assumed offering price of $.20 per share
(after deduction of the estimated expenses of the offering).
This table should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements in the accompanying notes and other financial information in this
prospectus.
50% or 100% or
7,500,000 15,000,000
shares shares
---------------- ----------------
March 31, 2004 March 31, 2004
---------------- ----------------
Cash $ 1,479,868 $ 2,979,868
Liabilities:
Current Liabilities 342,049 342,049
Total Liabilities 394,002 394,002
Shareholders' Equity:
Preferred Stock, 50,000,000
shares authorized: None 0 0
Common Stock, 200,000,000
shares authorized:
26,760,944 and 34,260,944,
respectively, issued 26,761 34,261
Accumulated deficit (1,744,253) (244,253)
Total shareholders' equity 2,487,900 3,987,900
Total capitalization $ 5,712,892 $ 7,212,892
DIVIDEND POLICY
We do not pay dividends on our common stock and we do not anticipate paying
dividends on our common stock in the foreseeable future. We intend to retain
our future earnings, if any, to finance the growth of our business.
ORGANIZATION WITHIN LAST FIVE YEARS
We are a development stage company which currently has no revenues. Our primary
business is to market an Internet telephony device and related services to
consumers and businesses worldwide, called the "FoneFriend." The underlying
technology of the FoneFriend device has been licensed by the Company from
FoneFriend Systems, Inc., and will enable the Company's subscribers to make and
receive unlimited, long-distance telephone calls over the Internet by using
their standard residential telephone set.
We were originally incorporated in 1992 in Delaware under the name Picometrix
Inc, and soon thereafter became a publicly traded company. In 1997, Picometrix,
Inc. merged with another business and changed its name IJNT.Net, and finally to
Universal Broadband Networks, Inc. ("UBN"). On October 31, 2000, UBN filed a
voluntary petition for reorganization pursuant to Chapter 11, Title 11 of the
United States Code, 11 U.S.C. 101 et seq., in the United States Bankruptcy
Court for the District of Eastern California. Pursuant to an Amended and
Restated Plan of Merger dated as of June 12, 2002, between FoneFriend, Inc., a
Nevada corporation founded in April, 2001 ("FoneFriend Nevada") and UBN, which
was approved by the Bankruptcy Court and on November 21, 2002, UBN completed its
acquisition of all the assets of FoneFriend Nevada. Subsequent to this
acquisition, FoneFriend Nevada was dissolved and UBN, a Delaware corporation,
changed its name to FoneFriend Inc.
On November 20, 2002, we issued 4,600,000 shares for cash consideration of
$4,600 to two executive officers and a consultant. These shares were acquired by
the individuals in connection with their agreements to provide personal services
to the Company.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
On November 20, 2002, we issued 423,000 shares to Dennis Johnston, our Director
and Secretary, as consideration for his services in connection with the merger.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
On November 20, 2002, pursuant to the terms of a statutory merger, we issued
2,200,000 shares of common stock and 820,361 shares of preferred stock (each
share of which was convertible into one share of common stock) to FoneFriend,
Inc., a Nevada corporation, in exchange for all of its assets. The Nevada
corporation then distributed these shares, on a pro-rata basis, to about 300
shareholders. The Nevada corporation was then liquidated. Also, pursuant to the
merger, we issued 423,000 shares of common stock to the Liquidating Trust for
the benefit of creditors of Universal Broadband Networks, Inc., a Delaware
corporation of which we are the successor.
Pursuant to U.S. Bankruptcy Code Section 1145(a), the shares of common stock we
issued in connection with the bankruptcy have been ordered exempt from Section 5
of the Securities Act of 1933 and any State or local law requiring registration
for the offer or sale of a security or registration or licensing of an issuer
of, underwriter of, or broker or dealer in, a security. In addition, all of the
shares were issued to "accredited investors" within the meaning of Rule 501 of
the Securities Act of 1933, and the issuance met the other requirements of, and
therefore qualifies as, an exempt private placement pursuant to Rule 506 of the
Securities Act of 1933.
In July, 2003, we issued 60,000 shares of common stock to an option holder of
our predecessor company to settle litigation.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
In December, 2003, we issued 70,000 shares of common stock to a consultant in
exchange for personal services provided to the Company which we valued at
$3,500.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
In January, 2004, we issued 1,000,000 shares of common stock for cash
consideration of $1,000 to our President, Jackelyn Giroux, to cure a breach of
her employment agreement. In addition, in January, 2004, we issued 3,000,000
shares of common stock for cash consideration of $3,000 to our Chairman and
consultant, Gary Rasmussen, to cure a breach of his consulting agreement.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales of the securities acquired.
In January, 2004, we issued a total of 2,443,083 shares of common stock as a
special dividend on our Series A Convertible Preferred stock. Further, the
preferred stock was converted into 814,361 shares of common stock.
The Company believes that the special dividend on our Series A Convertible
Preferred stock was exempt from registration by reason of the provisions of Rule
144 under the Securities Act. In addition, the Company believes the conversion
of preferred stock into common stock was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In January, 2004, we also issued 12,500 shares to Dutchess Advisors, LLC., for
legal services rendered in connection with the financing agreement entered into
with Dutchess.
In January, 2004, we also issued 150,000 shares to Danzig, Ltd., for consulting
services to be rendered to us in connection with finding financing and
implementing financial strategies and planning.
In January, 2004, we also issued 250,000 shares to Greentree Financial Group,
Inc. for professional services to be rendered to us in connection with this
offering, the preparation of a registration statement, review of quarterly
reports, edgarizing of all filings with the Commission and general consultation
on securities matters.
In January, 2004, we also issued 900,000 shares to RR Inv Holdings, Inc. for
services to be rendered to us in connection with our securities markets,
research reports, investor relations and public relations. The Company has
recently cancelled its agreement with RR Inv Holdings, Inc. and all except
400,000 shares have been returned to treasury. The 400,000 shares is the subject
of a dispute between the Company and RR Inv Holdings.
In January, 2004, we also issued 350,000 shares to The Bulletin Board
Productions, LLC for marketing and media production services to be rendered to
us in connection with creating television commercials and purchasing of
air-time. The Company has recently cancelled its agreement with The Bulletin
Board Productions, LLC, and all 350,000 shares have been returned to treasury.
In January, 2004, we also issued 300,000 shares to Lothar Elsaessar for
consulting services to be performed for us in Europe relating to marketing.
In January, 2004, we also issued 300,000 shares to Hans Georg Huetter for
consulting services to be performed for us in Europe relating to business
development.
In January, 2004, we also issued 170,000 shares to Winston Johnson for services
performed as our technology consultant for the 3-month period from November 1,
2003 through January 31, 2004.
The Company believes that all of the above-listed issuances in January, 2004 of
shares of common stock were exempt from registration under the Securities Act by
reason of Section 4(2) thereof and/or Regulation D under the Securities Act as a
non-public sale of securities due to the absence of a general solicitation, the
general nature and circumstances of the sale, including the qualifications of
the purchasers, and the restrictions on resales of the securities acquired.
Sales of Unregistered Securities by Predecessor Company
From May, 2001, through May, 2002, the Company's predecessor, FoneFriend, Inc.,
a Nevada corporation, conducted a limited, private offering of its common stock,
intended to comply with Rule 506 of Regulation D, to accredited investors only.
No sales were made to any non-accredited investors. This offering raised a total
of $3,439,945 in gross proceeds from the sale of 687,989 shares of common stock
to approximately 280 investors. The Company believes that the offering was
exempt from registration under the Securities Act as these prior sales were
conducted in reliance upon exemptions set forth under Sections 3(B), 4(2), 4(6)
and Regulation D of the Securities Act as an exempt sale of securities due to
the general nature and circumstances of the sale, including the qualifications
of the purchasers, and the restrictions on resales of the securities acquired.
During the calendar year of 2003, Jackelyn Giroux, the Company's President,
along with a member of her family, and Gary Rasmussen, then a consultant to the
Company, made several short term loans of various amounts to the Company to
cover its operating expenses. The aggregate amount of such loans did not total
over $60,000 and were repaid to these individuals without interest in December,
2003. The effects of imputed interest on the shareholders loans were
immaterial.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion contained in this prospectus contains "forward-looking
statements" that involve risk and uncertainties. These statements may be
identified by the use of terminology such as "believes", "expects", "may",
"should", or "anticipates", or expressing this terminology negatively or similar
expressions or by discussions of strategy. The cautionary statements made in
this prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this prospectus. Our actual
results could differ materially from those discussed in this prospectus.
Important factors that could cause or contribute to such differences include
those discussed under the caption entitled "risk factors," as well as those
discussed elsewhere in this prospectus.
Overview
--------
We are a development stage company which currently has no revenues. Our primary
business is to market an Internet telephony device and related services to
consumers and businesses worldwide, called the "FoneFriend." The underlying
technology of the FoneFriend device has been licensed by the Company from
FoneFriend Systems, Inc., and will enable the Company's subscribers to make and
receive unlimited, long-distance telephone calls over the Internet by using
their standard residential telephone set (without the need for a computer), for
a low monthly fee of $9.95. Due to the low cost of transmitting calls over the
Internet, the Company anticipates that it may realize significant profit
margins, in excess of those in the traditional telecommunications industry.
However, there can be no assurance that these profit margins, or any profit
margin, will ever be realized.
We were originally incorporated in 1992 in Delaware under the name Picometrix
Inc, and soon thereafter became a publicly traded company. In 1997, Picometrix,
Inc. merged with another business and changed its name IJNT.Net, and finally to
Universal Broadband Networks, Inc. ("UBN"). On October 31, 2000, UBN filed a
voluntary petition for reorganization pursuant to Chapter 11, Title 11 of the
United States Code, 11 U.S.C. 101 et seq., in the United States Bankruptcy
Court for the District of Eastern California. Pursuant to an Amended and
Restated Plan of Merger dated as of June 12, 2002, between FoneFriend, Inc., a
Nevada corporation founded in April, 2001 ("FoneFriend Nevada") and UBN, which
was approved by the Bankruptcy Court and on November 21, 2002, UBN completed its
acquisition of all the assets of FoneFriend Nevada. Subsequent to this
acquisition, FoneFriend Nevada was dissolved and UBN, a Delaware corporation,
changed its name to FoneFriend Inc.
Our plan of operations is to grow our development stage company to the point
where we can sell the FoneFriend device to consumers and generate revenue from
operations. The timing and feasibility of this plan will depend primarily on
the availability of capital to finance our growth, and we can make no assurances
that our plan of operations will ever be realized. Our strategy for
implementing our plan includes the following:
1. Depending on the availability of financing, we plan to order and initiate
the manufacturing of the first 10,000 FoneFriend units over the next 12
months, at a total cost of approximately $600,000.
2. Depending on the availability of financing, we plan to build out a
technological infrastructure for our company, including software and
hardware that will efficiently operate and service our customers. We
estimate this will cost approximately $300,000 for software and $150,000
for Dr. Vaziri to provide, among other things, engineering support in
building the infrastructure, product enhancements and integration of
software to our hardware. In addition, depending on the availability of
financing, we may spend approximately $150,000 or more in hardware
purchases, such as servers and gateways.
3. Depending on the availability of financing, we plan to concentrate on
marketing our product. We will produce TV and radio commercials and acquire
air time. We have already contracted with a media production and consulting
firm to handle this work in exchange for 350,000 shares of our common
stock. We will also develop other channels of marketing such as resellers
and affinity groups. Initial marketing efforts will start in the U.S. and
spread to foreign markets such as Europe, where the consumer opportunity
also looks promising. Depending upon cash flow, product acceptance and/or
financing options available to us, we estimate spending $1,000,000, or more
on marketing and product promotion over the next 12 to 24 months. We have
also hired two business consultants to help establish marketing channels
through strategic partners or resellers internationally.
4. Depending on the availability of financing, we plan to spend approximately
$800,000 for General & Administrative Expenses over the next 12 months as
we commence and expand operations and personnel.
5. We plan to pursue equity financings, equity participation arrangements and
debt financings to cover our marketing expenses and business expansion. We
estimate that we will require a minimum of approximately $2,000,000 in
financing to actively pursue our intended strategy over the next 12 months.
We are actively seeking various financing alternatives for manufacturing,
development of our infrastructure, marketing, equipment purchases and
overhead. In this regard, we recently entered into an Equity Line of Credit
with Dutchess Private Equities Fund, L.P., whereby we can "put" to them up
to $3 million in our common stock over a three year period of time for
cash. This equity financing will increase our chances of succeeding at our
growth plans. However, there is no assurance that we will be able to "put"
shares under this Equity Line of Credit once this registration statement is
declared effective by the Commission, or at what level we will be able to
"put" shares, since there are numerous conditions precedent for each "put"
of our shares to Dutchess, all of which has been described elsewhere in
this prospectus. Therefore, we continue to explore additional equity and
debt financings, vendor financing programs, letters of credit for
manufacturing, leasing arrangements for our product and equity
participation for media purchases that will advertise our product. Also, we
believe that marketing and consumer awareness is central to generating
monthly revenues. And, we believe that our product may have greater appeal
to foreign consumers due to the greater amount of savings they may realize
over typically expensive rates of foreign telephone companies.
Results of Operations.
------------------------
The Company had no revenues for the twelve month period ended March 31, 2004 and
the eleven month period ended March 31, 2003.
Sales.
------
We are a development stage company. Since inception, we have not had any sales.
Cost of Goods Sold.
----------------------
We are a development stage company. We do not have a Cost of Goods Sold
inasmuch as we have not sold any products to date.
Expenses.
---------
Expenses from Development Stage Operations for the twelve months ended March 31,
2004 and the eleven months ended March 31, 2003 were $728,502 and $1,605,464,
respectively, a decrease of $876,962. The decrease in expenses was primarily
attributable to an elimination of the write-down of carrying value of previously
capitalized development costs during the 2004 period. During the period ended
March 31, 2004, we paid no salaries and payroll expense compared to $100,890 for
the period ended March 31, 2003; however, we had $570,405 in consulting fees for
the period ended March 31, 2004, compared to $323,422 for the period ended March
31, 2003. This increase was primarily attributed to issuance of stock to
consultants for their services which were expensed at the value of such
services.
Expenses from Development Stage Operations for the eleven month period ended
March 31, 2003 and for the twelve month period ended April 30, 2002 were
$1,605,464 and $885,288, respectively, an increase of $720,176. The increase
was primarily attributable to the write down in carrying value of previously
capitalized development costs of $865,108. Other notable expense account
differences included the following: (i) a decrease in rent expense of $86,244,
and (ii) a decrease in telephone expense of $69,275.
Our other Expenses from Development Stage Operations remained either fixed or
relatively constant during the year ended March 31, 2004.
We expect increases in expenses through the fiscal year 2005 as we move towards
implementing our plan of operations. We expect the increase to be primarily in
marketing related expenses, such as advertising and consultant's fees, and
additional salary expense as we increase our personnel commensurate with the
growth of our operations.
Income / Losses.
------------------
Net loss for the twelve months ended March 31, 2004 was $728,502 versus a loss
of $1,605,464 for the eleven months ended March 31, 2003, a decrease of
$876,962. The decrease was primarily attributable to an elimination of the
write-down of carrying value of previously capitalized development costs.
Net loss for the eleven month period ended March 31, 2003 was $1,605,464 versus
a loss of $885,288 for the year ended April 30, 2002, an increase of $720,176.
The increase was also primarily attributable to the write down in carrying value
of previously capitalized development costs. We expect to continue to incur
losses at least through the fiscal year 2005.
Impact of Inflation.
----------------------
We believe that inflation has had a negative impact on our results of operations
since inception. Until we are able to sell products and generate revenue we will
be unable to pass on inflationary increases in our Expenses from Development
Stage Operations through increases in revenue.
Liquidity and Capital Resources.
-----------------------------------
Cash flows used in operations were $119,153 for the twelve months ended March
31, 2004, versus cash used in operations of $880,310 for the eleven months ended
March 31, 2003. Net cash flows for 2004 were primarily from $91,590 from loans
from officers and others offset by the cash used for the period of $6,539. Net
cash flows for the eleven months ended March 31, 2003, were primarily
attributable to proceeds of $865,108 from a write-down of capitalized
development cost, offset by increases in cash used in operations of $320,165.
Cash flows used in operations were $880,310 for the eleven month period ended
March 31, 2003, versus $2,350,128 for the year ended April 30, 2002. Cash flows
used in operations for both periods were primarily attributable to our net loss
from operations partially offset by funds raised through the sale of common
stock.
Cash flows provided by financing activities were $103,800 for the twelve months
ended March 31, 2004, versus $672,521 during the eleven month period ended March
31, 2004.
Cash flows generated from financing activities were $672,521 for the eleven
month period ended March 31, 2003 versus $3,078,138 for the year ended April 30,
2002. Cash flows for the eleven month period ended March 31, 2003 included
$671,701 in proceeds from sales of common stock to various investors pursuant to
limited, private offerings.
Going Concern Opinion.
------------------------
As shown in our accompanying financial statements, our independent auditors have
stated that our losses from initial startup costs and our lack of substantial
capital raise doubt about our ability to continue as a going concern. The
ability of our Company to continue as a going concern is dependent on obtaining
new capital, developing our operations, implementing our marketing plan,
building our infrastructure, containing our costs and generating revenues from
the sale of our product and services. Management intends to undertake the
following to address these issues: (1) endeavor to obtain equity funding from
new investors to alleviate our capital deficiency, (2) obtain debt funding from
new investors to alleviate our capital deficiency, (3) seek vendor financing
programs for equipment and services, (4) pursue letters of credit for
manufacturing, (5) implement leasing arrangements to finance the cost of placing
our product in the market, and (6) structure equity participation arrangements
with vendors and suppliers in exchange for their services.
We estimate we will need at least $2,000,000 in additional capital during the
next 12 months to actively pursue our intended plan of business. This offering
is intended to address that problem. If we develop revenues from operations
during our fiscal year ending March 31, 2005, the need for capital at the
projected level will decrease.
Overall, we have funded our cash needs from inception through March 31, 2004,
with a series of debt and equity transactions. We are attempting to raise
capital through an Equity Line of Credit. The failure of this equity financing
to materialize as anticipated could have a material adverse effect on our
operations and financial condition.
We had cash on hand of $4,868 and negative working capital of $334,681 at March
31, 2004, compared to cash on hand of $20,221 and negative working capital of
$50,385 at March 31, 2003. We have accumulated aggregate net losses from the
inception of business through March 31, 2004, of $3,219,253. Our current working
capital deficit is primarily due to current obligations in accounts payable and
accrued consulting expense.
The Company's cash portion is currently not sufficient to fund working capital
requirements, and, moreover, we have no immediate access to additional capital
although the Company is in the process of raising additional capital through
various means, including its agreement with Dutchess. Although we have received
about $172,000 in loans from officers and various third parties through March
31, 2004, those funds are not expected to last indefinitely and may be
completely expended by June, 2004. We can not yet, and may never be able to,
rely on the existence of revenue from our business.
On a long-term basis, liquidity is dependent on continuation of successful
financing activities. The funds raised from this offering will also be used to
market our product as well as expand operations and contribute to working
capital. However, there can be no assurance that we will be able to obtain
additional equity or debt financing in the future, if at all. If we are unable
to raise additional capital, our growth potential will be adversely affected and
we will have to significantly modify our plans. For example, if we unable to
raise sufficient capital to develop our business plan, we may need to:
- Curtail our product launch
- Forego or postpone marketing expenditures
- Limit our future marketing efforts to areas that we believe would be the
most efficient and profitable.
- Outsource goods and services as much as possible.
Demand for our product and services will be dependent on, among other things,
market acceptance of our product, our ability to build consumer awareness and
stimulate consumer purchases, the internet telephony market in general, and
general economic conditions, all of which are cyclical in nature. Overall, our
success will be dependent upon implementing our plan of operations in a timely
fashion, managing the risks associated with our business, contain our expenses
and generate revenues and profits from the sale of our product and related
services.
DESCRIPTION OF BUSINESS
ORGANIZATION
FoneFriend, Inc. ("FoneFriend" or the "Company") is a development stage company
and currently has no revenues. It was originally incorporated in 1992 in
Delaware under the name Picometrix, Inc., doing business in an industry other
than Internet telephony. The Company merger with IJNT.Net, which was engaged in
the provision of wireless communications services, including Internet access
services. Soon thereafter, it became a publicly traded company under the name
IJNT.Net. In 1997, it acquired another business and changed its name to
Universal Broadband Networks, Inc. ("UBN"), whose primary business was the
provision of Internet and related services using microwave technology. On
October 31, 2000, UBN filed a voluntary petition for reorganization pursuant to
Chapter 11, Title 11 of the United States Code, 11 U.S.C. 101 et seq., in
the United States Bankruptcy Court for the District of Eastern California.
Pursuant to an Amended and Restated Plan of Merger dated June 12, 2002, between
FoneFriend, Inc. a Nevada corporation founded in April, 2001 ("FoneFriend
Nevada") and UBN, which was approved by the Bankruptcy Court and, on November
21, 2002, UBN completed its acquisition of all the assets of FoneFriend Nevada.
Subsequent to this acquisition, FoneFriend Nevada was dissolved and UBN, a
Delaware corporation, changed its name to FoneFriend Inc. ("FoneFriend Delaware"
or the "Company"). Shares of FoneFriend's common stock are currently quoted in
the Over-The-Counter Bulletin Board market under the stock symbol "FFRD.OB".
The Company maintains its corporate office in the State of California at 14545
Friar Street, Suite 103, Van Nuys, California 91411. The Company's telephone
number is: (818) 376-1616. The corporate e-mail address is:
mail@fonefriend.biz.
Pursuant to the express terms of the Plan of Merger:
1. All of UBN's previously issued and outstanding shares of capital stock were
cancelled and extinguished and the stockholders of UBN prior to the Merger
shall have no further interest or rights in UBN.
2. The Company issued 2,200,000 shares of newly created common stock in favor
of FoneFriend Nevada, in exchange for all of FoneFriend Nevada's assets and
115,750 shares of newly created common stock in favor of a Liquidating
Trust. As a result, the Company had a total of 2,315,750 shares of newly
created common stock issued and outstanding of which former shareholders of
the dissolved FoneFriend Nevada owned ninety-five percent (95%) and J.
Michael Issa, Esq., as Trustee of the Liquidating Trust (which was created
under the Plan), owned five percent (5%).
3. Additionally, the Liquidating Trust was granted a conditional put option
under the Plan whereby it could sell its shares back to the Company for up
to $3 Million dollars, under certain circumstances. See "Legal
Proceedings".
4. FoneFriend Nevada's management distributed the Company's shares received,
to its shareholders, on a pro-rata basis. Each shareholder of FoneFriend
Nevada received one (1) share of the Company's common stock for every four
(4) shares of FoneFriend Nevada common stock held by him or her.
5. Immediately subsequent to the merger, the Company authorized and issued of
820,361 shares of a newly created Series A Preferred Stock (each share of
which is convertible into one share of common stock) to those FoneFriend
Nevada shareholders who held shares of preferred stock prior to the merger.
6. The Company then issued additional shares of common stock to various
personnel in management and consultant positions in order to hire and/or
retain their services.
7. Following the merger transaction on November 21, 2002, and pursuant to the
Plan of Merger, the Company had 7,646,000 shares of common stock and
820,361 shares of Series A preferred stock (convertible into common stock
on a one for one basis) issued and outstanding.
8. As of March 31, 2004, the Company had 19,260,944 shares of common stock
outstanding and no shares of preferred stock outstanding. On November 22,
2003, the 820,361 shares of Series A preferred stock were converted into
shares of common stock pursuant to the provisions thereof.
PURPOSE AND GOAL
The Company is in the process of becoming a provider of Internet-based
telecommunications services in the U.S. and worldwide by seizing on the current
and future opportunities in Voice-over-Internet-Protocol ("VoIP") telephony
technology and voice-data integrated communications services in the e-commerce
market place.
The management believes it has the vision, insight, and expertise to develop a
unique, highly profitable venture in the Internet telephony marketplace. The
Company seeks to raise additional capital, using this Registration Statement for
funding its continued operation, as well as its growth/capital needs.
Subsequent to this Offering, the Company may raise additional funding through
succeeding public offerings of its securities, or other sources of private
capital and/or debt financing, in the event a further need is discerned.
BUSINESS OF THE COMPANY
OVERVIEW
The primary business of the Company is to market an Internet telephony device
and related services to consumers and businesses worldwide, called the
"FoneFriend." The underlying technology of the FoneFriend device has been
licensed by the Company from FoneFriend Systems, Inc., and will enable the
Company's subscribers to make and receive unlimited, long-distance telephone
calls over the Internet by using their standard residential telephone set
(without the need for a computer or any software), for a low monthly fee of
$9.95. Due to the low cost of transmitting calls over the Internet, the Company
anticipates that it will realize significant profit margins in excess of those
in the traditional telecommunications industry.
Once funding is obtained, the Company will focus its efforts towards
establishing contractual relationships with third party suppliers to provide the
infrastructure necessary to support operations of the FoneFriend product,
suppliers to handle customer relationship management and product fulfillment,
and the development and implementation of a high profile marketing campaign to
advertise the FoneFriend product through direct response television marketing
and coordinated radio and print advertising, to quickly penetrate targeted
markets and create substantial consumer awareness, stimulating demand for the
FoneFriend. Accordingly, the Company intends to allocate a large portion of the
proceeds from the sale of its its common stock to fund marketing activities, to
purchase infrastructure required to support the FoneFriend product, and
corporate overhead.
In addition, information regarding the FoneFriend product can be viewed on the
Internet at: "www.fonefriend.com", a web site that is currently maintained and
operated by FoneFriend Systems, Inc. The Company has a conditional option to
acquire all rights to this web site. No information contained on such web site
shall constitute a part of this Registration filing.
TECHNOLOGY LICENSE AGREEMENT
Shortly after formation of FoneFriend Nevada in 2001, that company entered into
a certain "Technology License Agreement", dated April 30, 2001, with FoneFriend
Systems, Inc., a District of Columbia corporation ("FSI"), wherein it acquired a
license to manufacture, market, sell and utilize in any manner, a proprietary,
patented technology which is commonly referred as the "FoneFriend." Pursuant to
said agreement, FSI agreed to provide selected support services, related to the
operation of the FoneFriend product, as well as assist the Nevada company in
arranging third party suppliers to provide infrastructure services for the
FoneFriend product, such as internet service providers (ISP) and connectivity to
long distance carriers to enable the FoneFriend product to place "gateway" type
calls. Additionally, FSI agreed to provide access to its global network
servers, which connect FoneFriend-to-FoneFriend calls over the Internet, and
coordinate the manufacturing, procurement and quality assurance of the
FoneFriend Internet telephone devices. This Technology License Agreement was
among the assets of FoneFriend Nevada which were acquired by the Company for
stock in a merger completed on November 21, 2002. The Company also has the
right to develop its own brand of Internet telephony appliance using the
licensed technology.
AGREEMENT WITH DR. VAZIRI.
The Company has recently entered into a six-month consulting services agreement,
commencing January 30, 2004, with Dr. Faramarz Vaziri to assist FoneFriend in:
(i) deploying its technology infrastructure, (ii) making strategic design
modifications to the FoneFriend product, and (iii) implementing improvements to
the FoneFriend technology and ongoing developments. Dr. Vaziri is the inventor
of the "FoneFriend" and co-patent holder of the technology. Dr. Vaziri will, in
turn, contract with a team of three additional professional engineers who were
instrumental in creating the FoneFriend technology while employed at FSI, the
licensor of the technology.
Pursuant to this agreement, the Company is obligated to pay Dr. Vaziri $15,000
per month, for the term of the agreement. In addition, the Company issued Dr.
Vaziri 50,000 shares of registered common stock under the terms of its 2002
Stock Plan. The Company has not made any cash payments due and owing under the
agreement due to financial constraints. However, the agreement provides that the
stock compensation will be given in consideration of late payments until the
Company obtains sufficient financing to make these payments.
Dr. Faramarz Vaziri is a veteran architect and designer of telecommunication
systems. He holds a Ph.D. in Electrical Engineering and is a tenured professor
at the State University of New York, teaching Telecommunications and Digital
Signal Processing. He is the co-founder of FSI and holds two U.S. and
international patents in telephone switching and VOIP.
Other members of the team assembled by Dr. Vaziri pursuant to the agreement
include Jeffrey Paige, B.S. in Electrical Engineering from the State University
of New York, Kevin Zheng, M.S. in Electrical Engineering from the State
University of New York, and Herb Graefe, B.S. in Electrical Engineering from the
State University of New York, New Paltz. However, the Company is not obligated
to these other team members for compensation, as their services are under
contract to Dr. Vaziri.
Jeff Paige is the Senior Hardware Design Engineer and FoneFriend project manager
handling design and development of the FoneFriend hardware, as well as
development and management of the FoneFriend firmware. Kevin Zheng is a Senior
Software Design Engineer handling design and development of the FoneFriend
Servers including the Gateway Server, Upgrade Server, and Connections Servers,
as well as gateway and billing integration. Herb Graefe is a Senior Software
Design Engineer handling the design and development of the FoneFriend firmware
and TCP/PPP stack as well as management of the FoneFriend Firmware. Management
will use the expertise of this team to develop its own infrastructure and
technology base over time, with the intention of ultimately bringing much of
this activity in house.
INTEREST IN FSI'S LICENSEES AND DISTRIBUTORS
In addition, predicated on the receipt of financing in the aggregate amount of
$5 Million, the Company will have an irrevocable option to acquire FSI's right,
title and interest in all other agreements (if any) that it has in place with
other distributors and licensees for a one-time payment of $250,000. The
Company believes this provision could provide a strategic marketing advantage in
that it will allow the Company to coordinate all marketing activities of the
FoneFriend, worldwide, and generate revenues from all other such distributors
and licensees. Additionally, said option entitles the Company to acquire all
rights to FSI's web site on the Internet, located at: www.fonefriend.com, for a
------------------
one-time payment of $250,000.
The "FoneFriend" product is an Internet "appliance" that will deliver high
quality, low cost, voice communications services, including worldwide
long-distance calling, conferencing, voice encryption, messaging, Internet
faxing and various other value-added "e-commerce" services such as access to
voice enabled web sites, etc.
PLEDGE OF FONEFRIEND SYSTEMS STOCK FOR BENEFIT OF INVESTORS
As part of its "Technology License Agreement" with FoneFriend Systems, Inc.
("FSI"), the Company acquired two hundred twenty five thousand (225,000) shares
of common stock of FSI, which said agreement represents was approximately four
and one-half percent (4.5%) of FSI's total authorized and outstanding common
stock. This percentage has been diluted by FSI through the issuance of
additional securities in an amount unknown to the Company. The Company's Board
of Directors has previously agreed to honor a pledge of these shares of FSI,
which was made by the Board of Directors of FoneFriend Nevada, for the benefit
and protection of investors who purchased shares of FoneFriend Nevada's common
stock under its previous private offering, in the event of liquidation. This
pledge will terminate at such time as the Company has attained a positive cash
flow for two consecutive calendar quarters.
PENDING STRATEGIC AGREEMENTS
The Company is in negotiations with several knowledge-based, customer
relationship management firms that can fulfill the Company's requirements for
customer service, product fulfillment, and telemarketing support. Additionally,
the Company is negotiating with several direct response advertising agencies
that are considered the best and that offer full service direct response
television advertising. We also are looking at agencies that specialize in
creative production, media and integrated marketing. The Company's potential
arrangement with these companies will include the production and marketing of
its television commercials for the "FoneFriend" product and services, as well as
the coordination, purchase and selection of media airtime for the Company's
direct response, television marketing campaign. As these agreements are pending,
however, there can be no assurance that they will ever materialize.
In connection with the Merger with FoneFriend Nevada, the Company assumed a
letter of intent to form a joint venture with Credit Phone International, S.r.i,
to provide both marketing and customer support services to FoneFriend customers
in Europe, including the billing of the minutes and customer service. Also, the
Company assumed an agreement with former NBA champion basketball star and Gold
Medal recipient, Spencer Haywood, to help market and promote visibility of the
FoneFriend product through its corporate video and planned television
commercials. Management plans to reevaluate the merits of these agreements and
renegotiate the terms to fit current circumstances.
INTERNET TELEPHONY INDUSTRY BACKGROUND
In the past few years, the development of the Internet and the World-Wide Web
has been one of the most dynamic, and exciting areas of business and technology
development in the history of mankind. The opportunities for business and
technology creators are vast.
The VoIP industry has grown dramatically from the early days of calls made
through personal computers. According to a research study from Insight Research,
VoIP-based services will grow from $13.0 billion in 2002 to nearly $197.0
billion in 2007, representing a significant opportunity for VoIP providers.
Internet telephony ("IT") has emerged as a low cost alternative to traditional
long distance telephone services and is rapidly catching the attention of the
general public as well as corporate users. As quality of service improves,
technology matures, e-commerce develops and the cost (savings) become
compelling, people worldwide will begin to use the Internet as a primary source
for telephony applications. Replacing traditional long distance telephony with
Internet telephony will yield significant cost savings to users worldwide. In
fact, these costs have been dropping over time, falling from approximately $0.30
per minute in 1988 to approximately $0.15 per minute in 1998, and it is
estimated that these costs will continue to drop as IT technology advances.
Whereas the IT market was less than 1% in 1997, analysts have predicted that
Internet telephony could account for more than 25% by 2005. International Data
Corporation projects that the Internet telephony market will grow rapidly with
call minutes from businesses reaching nearly 230 billion minutes in 2005, up
from only 328 million minutes in 2000. According to industry research conducted
by several marketing research firms, such as Frost & Sullivan, International
Data Corporation and Probe Research, significant growth is forecasted for the
Internet telephony industry. Highlights of recent reports include the following
predictions:
- An estimated Sixty million personal computer (PC) users made one or more
calls over the Internet in 2002.
- International telephone long-distance revenues were estimated at over $80
Billion worldwide in 2002.
- Twenty-five percent of the world's phone calls will likely be over the
Internet networks by 2005.
- Internet telephony sales are forecast to explode to $349 billion in 2006,
as quality and services improve.
Internet telephony has the potential to enable companies to substantially reduce
their telecommunications costs. Internet telephone calls are less expensive than
traditional international long distance calls primarily because they are routed
over the Internet, bypassing a significant portion of international long
distance tariffs. Packet-based networks, unlike circuit-based networks, do not
require that a fixed amount of bandwidth be reserved for each call. That allows
voice and data calls to be pooled, which means that packet networks can carry
more calls with the same amount of bandwidth. This greater efficiency creates
network cost savings that can be passed onto the consumer in the form of lower
long distance rates.
COMPETITION
THE INTERNET TELEPHONY MARKET IS HIGHLY COMPETITIVE.
Many other companies offer products and services similar to the Company's
product, and many of those companies have already established a substantial
presence in the IP telephony market. Competitor companies currently have
substantially greater financial, distribution and marketing resources than the
Company. As a result, we may not be able to compete successfully in the Internet
Telephony market. There is a risk that new product introductions or enhancements
by competitors could reduce the sales or market acceptance of our product and
services, increase price competition or render the Company's FoneFriend product
obsolete. To become and remain competitive, we plan to continue to invest
significant resources in research and development, sales and marketing and
customer support. However, given the formidable competition, the Company
continues to run the risk that it will not have sufficient resources to
withstand these market forces and may seek a consolidation or strategic alliance
with one or more of its competitors.
INTERNATIONAL COMMUNICATIONS SERVICES
Internationally, the competitive marketplace varies from region to region. In
markets where the telecommunications marketplace has been fully deregulated, the
competition continues to increase. Even a newly deregulated market, such as
India, allows for new entrants to establish a foothold and offer competitive
services more easily. Competitors include both government- owned phone companies
as well as emerging competitive carriers. As consumers and telecommunications
providers have come to understand the benefits that may be realized from
transmitting voice over the Internet, a substantial number of companies have
emerged to provide VoIP services. The principal competitive factors in the
market include: price, quality of service, breadth of geographic presence,
customer service, reliability, network capacity, the availability of enhanced
communications services and brand recognition.
COMPETITORS
Domestic state-to-state rates for typical VoIP competitors such as DeltaThree is
1.1 cents per minute, and Net2Phone is 2.0 cents per minute and have dropped
considerably since 2002. These rates are for calls made from a customer's
computer to a telephone within the continental U.S. Calls made with a VoIP
device (such as the FoneFriend product) are more expensive; ranging from 2.9
cents for DeltaThree to 3.9 cents for Net2Phone. Although these rates do not
include any access charges or monthly service fees (if any), and the customer is
required to purchase a VoIP device (and other equipment for broadband
connections), both Net2Phone and DeltaThree are public companies and have lost
money in their last quarter filings with their share prices falling below
12-month highs. Both companies are branching out in the software sector, which
enables the customer to either place calls through a computer or use a virtual
calling card from any telephone.
Dialpad Inc., a startup Internet telephony company with more than 11 million
registered users, carries online advertising to offset its 0-a-minute rate for
basic domestic long-distance service. This company offers software that is
downloaded to a users computer and telephone calls are then placed through the
computer while the user is online.
BestIP offers its BestIP 1000+ call box router priced at $195.00 with
full-duplex service and per-minute calling plans for international and domestic
calls ranging from $.04/minute to UK, to $.15/minute to Iran, $.25/minute to
Saudi Arabia, $.30/minute to Egypt and $.04/minute within the US.
The Company anticipates that it will offer the FoneFriend product free to
consumers who sign a 12-month contract for services. The Company plans to
chares a one-time account set-up fee (to help offset the cost of the product)
and a nominal monthly subscriber fee of $9.95. This monthly fee will include
unlimited, worldwide calling when both parties have a FoneFriend. FoneFriend
subscribers placing calls to any standard telephone will be charged a "per
minute" rate at substantial savings over traditional long-distance networks.
Overall, the Company's competition is from:
(1) incumbent wired PSTN network Providers and resellers.
(2) new entrant Internet gateway service providers,
(3) Internet telephony software providers, and
(4) Internet telephony appliances similar to FoneFriend.
With respect to the bulk of all calls made via PSTN (the "telephone company"),
in 1997, the average domestic toll call cost 17 cents per minute and the average
international call cost 74 cents per minute. Current pricing schemes by the
largest providers-AT&T, MCI and Sprint-as well as competition from newer
entrants such as Qwest and IXC continue to push pricing downward for domestic
calls, but not dramatically for international calls, which FoneFriend intends to
do internationally and domestically. Regarding Internet telephony gateway
providers, numerous companies have entered the Internet telephony marketplace
recently, and are focusing on corporate users to whom the cost savings resulting
from infrastructure gateway switches are sold, as opposed to the residential or
small home office user. These companies, such as IDT/Net2Phone, AT&T Jens, USA
GlobalLink, and next generation telecommunications companies like Delta Three,
Global Net and DotCom, provide a quality of service which is comparable to that
of the Company, however, at a substantially higher cost to the heavy toll caller
or international caller. Internet telephony software companies, of which
Net2Phone is the leading provider, target the technical PC user. Cost savings
are the major benefit to the user who already has incurred the cost of a PC and
only needs to add telephony software and the cost of an Internet service
provider (ISP) account.
The Company's direct competition primarily comes from companies with a
stand-alone VoIP product like Aplio, Inc., a California based company, with
offices in Paris, France (which was acquired by Net2Phone), Deltathree, a New
York based company with offices in Israel, InnoMedia, a San Jose, California
company, with offices in Singapore and Taiwan, Net2Phone and Vonage, both U.S.
companies based in New Jersey. Aplio uses a "meeting" process, whereby users
can transfer calls through the Internet by pushing a button. Deltathree has its
own proprietary network and broadband VoIP product. InnoMedia's InfoTalk employs
two different technologies relating to packet compression and recovery to
achieve improved voice quality as Internet traffic conditions and bandwidth
constraints change. Net2Phone uses its own proprietary network infrastructure
and Vonage is limited to customers who elect to purchase broadband internet
service such as DSL or high-speed internet cable service. For the most part, the
Company's competitors currently utilize similar technologies. However, they
generally have a higher product cost, are higher priced in the consumer market,
require programming and/or some computer knowledge and typically market a
broadband VoIP product.
The primary advantage that the FoneFriend product has over these direct
competitors is price, both in terms of initial cost of the product and in terms
of long-distance charges. In addition, the FoneFriend device utilizes a
"proprietary" design in software and is protected, worldwide, by patented
technology licensed by developer FSI. The Company believes its FoneFriend VoIP
device has the potential to deliver the lowest retail pricing by offering its
product and telephone calling rates lower than competition, especially
International calling rates from foreign countries to the U.S.
An example of an internationally based service that is becoming more competitive
is: PeopleCall by PeopleTel, S.A., a Spanish based Internet telephony company,
but it is not offering the same value package as FoneFriend to its international
callers. Also, it too requires a DSL or cable-modem connection, whereas the
FoneFriend product does not. An introductory offer for Internet voice
communications services (1/10/04 web-advertisement) by PeopleCall, using their
ADSL or cable-modem-connected, call-box router, is priced at 159 Euros, with
1,000 free minutes per month, and with regular per minute charges ranging from
..02 Euros to .90 Euros, for calls within the EU, Spain, and worldwide, plus
set-up fee minutes from .02 to .06 Euros per minute.
During the past several years, a number of other companies have introduced
services that make Internet telephony services available to businesses and
consumers. For example, Net2Phone, Microsoft, Deltathree, DialPad, AT&T Jens (a
Japanese affiliate of AT&T), ICG Communications, IPVoice.com, ITXC, OzEmail and
VIP Calling provide a range of voice-over-the-Internet services. These
companies offer PC-to-phone or phone-to-phone services that are similar to the
services the Company offers. Some, such as AT&T Jens and OzEmail, offer these
services within limited geographic areas. Additionally, a number of companies
have recently introduced Web-based voice-mail services and voice-chat services
to Internet users. Other companies focus on software that may be installed on a
user's computer to permit voice communications over the Internet. Representative
companies include VocalTec and Netspeak. While Net2Phone and VocalTec are
leading providers of IP telephony software, their products are primarily
targeted at the technical PC user. Also, Netspeak focuses on delivering
solutions targeted at traditional call centers that require significant
customization.
In addition, PSTN network companies, including, AT&T, Deutsche Telekom, and
Qwest, currently maintain, or plan to maintain, packet-switched networks to
route the voice traffic of other telecommunications companies. These companies
are large entities with substantial resources, and large budgets available for
research and development which may eventually further enhance the quality and
acceptance of voice transmission over the Internet. However, many of these
companies are new to the Internet telephony market, and may not build brand
recognition among consumers for these services. These companies also may not
provide the range of products and services that are necessary to independently
provide a broad set of voice-enabled web services. AT&T, for example, has
attempted to enter the market but has focused its effort on the cable market and
it is unclear if it will continue to pursue voice over the Internet. Qwest has
taken steps to enter the market by building a high capacity network in the
United States. In addition, Qwest has also entered into a three-year strategic
alliance with Netscape to provide one-stop access to Internet services including
long distance calling, e-mail, voice mail, faxes, Internet access and conference
calls.
Several of the world's major providers of telecommunications equipment, such as
Alcatel, Cisco, Lucent, Northern Telecom and Dialogic have developed or plan to
develop network equipment that may be used in connection with providing voice
over the Web services, including routers, servers and related hardware and
software. These manufacturers may exert substantial influence over the
technology that is used with transmission of voice over the Web, and may develop
products that facilitate the quality and timely rollout of these networks.
However, these companies are dependent both upon the operators of Internet
telephony networks to purchase and install their equipment into their networks
and, upon hardware and software developers to market their systems to end-users.
Cisco Systems currently manufactures Internet telephony equipment for low to
medium scale networking, but does not manufacture high-end Internet telephony
equipment for large networks. However, Cisco recently acquired two companies
that produce devices to help Internet service providers' transition voice and
data traffic to packet networks while maintaining traditional phone usage and
network equipment. Lucent has co-developed with VocalTec a set of industry
standards that have been adopted by major competitors and is currently marketing
Internet telephony hardware, including servers that allow the transmission of
calls and faxes over the Internet. Lucent also offers related support products,
such as billing centers and ''Internet call centers,'' which allow Internet
access and conversation with a customer support agent on a single line.
FONEFRIEND'S INTERNET TELEPHONY SOLUTION
The Company's Internet telephony product is based on the FoneFriend technology.
The product consists of a single circuit board, mounted inside a low-profile
modem-like enclosure, that contains microprocessors, digital signal processors
and associated circuitry to connect to, by dial-up via a standard analog
telephone line, an Internet service providers network and to the Internet and
then authenticates and authorizes the user with the Company's accounting system.
The firmware of the unit then queries the user for various functions that it can
perform. For a telephone call, it will query for a telephone number to call, and
place the call via the Internet, the Company's information system, and other
components. The destination party can receive the call with either another
FoneFriend unit, or with only a standard phone. In the former case, the call
transverses the Internet directly from FoneFriend to FoneFriend. In the latter
case the call is completed via the receiver's local public switched telephone
network (PSTN) through an Internet-to-PSTN gateway provider, for which a small
charge is applied to the originating users account. Phone calls from FoneFriend
to FoneFriend, however, are completely covered by the monthly subscription fee.
The Company anticipates it will attract a large number of subscribers for its
Internet telephony services (i.e., the "FoneFriend" product and related
services) through direct response television, radio and print media advertising
within three years after commencement of its marketing activities. Also, the
Company intends to partner with foreign based ISP networks to offer the
FoneFriend service to a broader base of local populations with a more affordable
price basis.
The following is a brief summary of FoneFriend's "Phone-to-Phone" Internet phone
system:
o Users do not need a computer or software, or any computer knowledge.
o Low monthly flat rate for worldwide long-distance calls.
o The FoneFriend will work internationally in most countries.
o Simple to install, and pre-programmed. Ready to use out of the package.
o The FoneFriend unit does not interfere with the existing phone service.
o Full-duplex communications with minimum latency.
o Good quality communications because of "dual packetization" technology.
o The service provider can remotely program the FoneFriend unit.
o Automatic upgrades can be implemented remotely from the Company's web
server.
o The FoneFriend unit has built-in message software for voice-mail.
o There is encryption for complete privacy.
o Broadcast services are available.
o Internet faxing will be available soon, by simply connecting a fax machine
to the unit.
o Advertising can be sold in place when initiating a call.
o The FoneFriend is small, lightweight and portable for traveling.
FONEFRIEND PRODUCT AND SERVERS
As currently featured on www.fonefriend.com (owned and operated by FSI),
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the FoneFriend product holds FCC Registration Certificate No. B11
USA-25483-MD-E. A first patent application for the FoneFriend appliance was
filed on February 25, 1997, and on February 25, 1998, an improved
continuation-in-part application, based thereon, was filed as an International
Application under the Patent Cooperation Treaty (PCT), providing the right to
file applications in the United States and Europe. The U.S. application was
filed on March 9, 1998, and FoneFriend Systems, Inc., filed its European
application on September 22, 1999. Finally, a trademark application for the name
"FoneFriend" was filed on March 28, 1998, in the U.S. Patent & Trademark Office
("PTO") for telecommunications devices for long-distance Internet telephony.
This application was cleared by the PTO for publication in the fall of 1998.
On October 1, 2001, FoneFriend Systems, Inc. ("FSI") received notice of
allowance from the U.S. Patent Office covering all aspects of the FoneFriend
system, 47 claims in all. U.S. Patent No. 6377570 was issued on April 23, 2002.
A Patent Application covering 11 additional claims (No. 10/003,047) was filed by
FSI on November 30, 2001 and approved on June 30, 2003. A Patent Application
covering 32 additional claims (No. 10/621,383) was filed by FSI on July 18, 2003
and is pending.
Included in the Company's license agreement with FSI is the use of its computer
server network comprised of Sun Microsystems servers that is easily scaleable to
accommodate millions of users and is currently deployed in two secure and
separate locations to provide true network redundancy.
Management believes a strategic competitive advantage of the FoneFriend devise
is the method by which the system measures the bandwidth of the call from both
ends throughout the call. When packet loss occurs, instead of buffering the
packets like many other systems, the FoneFriend technology dynamically double
packetizes the voice. This means that users do not detect latency in voice
transfer. Along with making Internet calls, FoneFriend system enables users to
send and receive Internet voice mails using the users' e-mail address, as well
as to listen to radio stations that broadcast over the Internet. In the
planning stages at FoneFriend Systems is also the ability of the computer
network to communicate over larger bandwidth (such as ISDN, cable, and DSL), as
well as to send and receive Internet faxes.
FONEFRIEND SYSTEMS PROPRIETARY TECHNOLOGY
FoneFriend uses innovations, including its Double-Packetization technology,
which was developed by FoneFriend Systems, Inc. The Company perceives a strong
competitive advantage in the marketplace as a result of the superior clarity of
communications using this technology and the Company's marketing strategy.
HOW THE FONEFRIEND SYSTEM WORKS
The Company's system measures the bandwidth of the call from both ends
throughout the duration of the call. When high packet loss occurs (possible with
Internet connections during peak network utilization), instead of buffering the
packets like most inferior systems do, the FoneFriend technology dynamically
double-packetizes the voice and assembles the needed data from either of the
packets at the other end, thus ensuring the integrity of the voice
communication. FoneFriend, is a stand-alone device for Internet phone calling.
Unlike other external products, the FoneFriend System uses the Company's web
server to establish and coordinate all connection services (charging a flat,
monthly rate) with each piece of hardware in use. This is done to avoid PSTN
charges when initially connecting a call. The FoneFriend device communicates
directly with the Company's web server so the call runs over the Internet. This
technology provides the foremost and finest phone-to-phone voice reception, via
the Internet (with no computer needed), available within the telephony industry.
This new and innovative system provides the consumer with a flat monthly fee as
an alternative to the typical "minute-to-minute" fees charged by present
long-distance services (e.g., MCI, Sprint, etc.), with a low cost entry cost for
the FoneFriend device, as opposed to more costly hardware requirements and
higher monthly service fees that competitors are now offering. The consumer
simply attaches the FoneFriend unit to their existing personal telephone; they
follow some simple instructions and, within about 8-minutes, the FoneFriend unit
is ready to begin making calls to anyone with similar service.
MARKETING
CUSTOMER VALUE PROPOSITION
The Company's value proposition to its primary targeted customers is that both
domestic and foreign based international callers can make FoneFriend long
distance and international calls through the Company's network of partnered
systems world-wide, as if the calls originated in the United States at much
reduced costs over traditional circuit based telephone systems. By routing calls
through the Company's Internet web server the caller will avoid the usual very
costly domestic and international phone systems' long distance toll charges, and
incur the lower Internet telephony gateway charges instead. So, no matter where
you are calling from, in the World, FoneFriend will enable the customer to pay
U.S. long distance rates.
The ideal FoneFriend customer is anyone who spends over $100 per month on
domestic long distance or international calls and wants to make easy, unlimited
long-distance calls for a flat monthly fee. The FoneFriend device is a
stand-alone device that turns any standard phone into an "Internet phone,"
capable of calling any phone in the world. It is lightweight and portable for
traveling, and easy to use. The customer will subscribe to the FoneFriend
service for $9.95 per month, which will allow the subscriber to make unlimited
worldwide calls to another FoneFriend device without incurring per-minute
charges. FoneFriend customers can also call any standard telephone anywhere in
the world (without the other party having a FoneFriend device) for competitively
low, per-minute rates at substantial discounts over traditional long distance
providers such as AT&T, Sprint, etc. The FoneFriend unit is simple to install
and operate. The Company will promote the fact that the service can pay for
itself within a few months.
FOREIGN MARKETS VALUE STRATEGY
The distinctive advantages of FoneFriend's value solution to its main targeted
markets of both foreign-born US based and foreign based callers are:
- Introducing a much broader base of customers (lower socio-economic users)
to low cost Internet Telephony in many third-world countries at a low
monthly flat-fee which is more affordable and has better voice quality than
existing broadband wireless services.
- Partnering with foreign- based local ISP networks which provide
customer-billing and customer management capabilities locally to FoneFriend
subscribers on a more cost-effective and expedient basis.
- Utilizing the phone hardware available in foreign countries to make a
reliable international voice connection through the FoneFriend unit
directly to an Internet service provider at a lower cost, with better sound
quality than either local wireless broadband or existing telephone systems
(PSTN's), that are operated as large, monopolistic state-owned companies,
with much higher "per-minute" calling charges.
- Providing US callers and their foreign counterparts' virtually free
calling, with no per minute charges, worldwide by using a
FoneFriend-to-FoneFriend unit connection.
- No costly PC hardware or software is needed to make an Internet Telephony
connection, which dramatically increases FoneFriend's foreign market
penetration to areas that can not afford personal computers, wireless
broadband service, or traditional long distance calling.
MARKETING STRATEGY
The Company's market strategy will be developed in several phases. First, will
be establishing a strong domestic base, by selling monthly fees to the vast
foreign-born, U.S. resident, who makes frequent monthly international calls to
friends, family, and businesses, by enrolling them as "FoneFriend-to-Phone"
subscribers. This will provide the Company with immediate revenues from the
domestic callers, and also expand the marketing base into their counterpart
overseas callers, for companion FoneFriend to FoneFriend units and service.
Secondly, a campaign, will be initiated, and directed toward converting existing
FoneFriend-to-Phone subscribers to FoneFriend-to-FoneFriend subscribers, who can
make calls internationally , with no per-minute charges for only $9.95 monthly,
by signing up additional FoneFriend clients/unit(s) for their overseas
counterparts. New entrants can be brought in by offering introductory special
pricing programs to purchase two units for the price of one, should the client
wish to purchase their box as a "gift" for a loved one.
A third phase will be to market directly to the overseas subscribers, through
possible joint campaigns with local market foreign ISP's for expansion of the
FoneFriend base to their friends, relatives, business associates, etc. living in
other countries . As more FoneFriend units are put into service internationally,
the opportunities for new subscribers will continue to grow.
The Company's primary media strategy is a highly visible marketing campaign
utilizing "Direct Response Television", (DRTV) advertising (e.g., 30, 60 and 120
second spots, infomercials, shopping channels, etc.). This will be supported
with traditional radio and print media advertising designed to capture a large
audience within mainstream America, primarily the 'heavy' long distance user, as
well as target the "foreign-born" U.S. resident who frequently makes
international calls. The DRTV campaign will support the Company's secondary
marketing efforts for "e-commerce" marketing and retail distribution.
In addition, the Company is in discussions with several organizations who have
expressed an interest in establishing an alliance or joint venture with the
Company using our technology and independently marketing the FoneFriend in
various parts of the world. The Company would receive significant income from
any such arrangement, should they be concluded.
THE COMPANY HAS FIVE PRIMARY GOALS TO ITS MARKETING AND SALES PLAN:
- MAINSTREAM BRANDING. We will market to mainstream America, while
identifying our primary target consumer, the 'heavy' long distance user,
such as the Foreign Born U.S. resident.
- REGIONAL SATURATION. We will aggressively penetrate and target our Media
and Reseller Direct Marketing Areas (DMA's) and initiate the Company's
Ethnic Regional Marketing Program, then form our Retail campaign.
- REFERRALS. We will implement "tell a friend" incentives for referral
sourcing.
- CUSTOMER SERVICE. We will provide a comprehensive customer service program
that will focus on technical and general customer issues, through strategic
alliances or partnerships.
- INTERNATIONAL MARKETS. We will enter each international direct response and
retail market by partnering with distributors for each territory.
MARKET SEGMENTATION AND SIZE OF MARKETS:
FoneFriend's market is the world. FoneFriend has potential in every country
where expensive long-distance calls are made. Easy and affordable access to the
Internet Telephony of FoneFriend would be well received in Asian, European and
Latin American countries where millions of dollars are spent each month on
international calls to the U.S. and elsewhere.
However, FoneFriend intends to market to the United States first, and lists the
following as its primary U.S. market segments:
- Foreign-born U.S. Residents;
- Heavy interstate and intrastate long-distance users;
- U.S. households that have no computer or Internet service;
- Current Internet telephony users;
- U.S. Business travelers;
- Families separated due to Military or Government service; and
- FoneFriend user's friends.
FoneFriend will initially target selected metropolitan areas in the U.S. with
the largest population of foreign-born residents such as Los Angeles, New York,
Miami, etc.
Hispanic Americans account for one-tenth of the U.S. total population and nearly
two-thirds of all Hispanics in the U.S. are of Mexican origin (65.2%) and will
be one of the key focus group of foreign-born residents for FoneFriend. Puerto
Ricans, Cubans, and people of Central and South American origin will also be
targeted amongst the Hispanic communities.
The Asian and Pacific Islander population is growing rapidly as demographics
state by 2000 the Asian population had grown to over 12 million; representing
about 4% of the total population. The largest proportions of Asian Americans
were Chinese (24%), Filipino (20%), Japanese (12%), Asian Indian (11.8%), Korean
(11.6%), and Vietnamese (8.9%). Approximately 75% of Pacific Islanders live in
the states of California and Hawaii alone, and will be targeted as subscribers
by FoneFriend.
FoneFriend-to-FoneFriend calls account for the most savings for FoneFriend
subscribers and FoneFriend plans to extend its services and distribution of
FoneFriend devices into those countries where a majority of the "friends"
reside, as well as to the countries where the majority of Friend-to-Phone
(gateway) calls are terminated.
REVENUE SOURCES
Upon implementation of its marketing campaign, the Company anticipates that it
will generate revenues from the following sources:
- MONTHLY SUBSCRIPTION FEE: The Company currently plans to offer its
customers a flat, monthly rate as low as $9.95 for unlimited, long-distance
telephone service when calling another FoneFriend subscriber anywhere in
the world via the Internet.
- COMPETITIVE LONG DISTANCE GATEWAY FEES: Subscribers with a FoneFriend unit
communicating to recipients without a FoneFriend unit at the other end,
still save on call origination; however, they will incur "per minute" usage
fees on the originating end at competitively low rates compared to what the
traditional long-distance carriers such as AT&T, MCI, Sprint, etc., charge
their residential customers. The Company plans to acquire minutes at a
wholesale rate from major telecommunications carriers, using large volumes,
creating certain economies of scale that it will pass on to its customers;
- PROGRAMMING/SET-UP FEE: The Company plans to charge a one-time, upfront fee
that will help offset the cost of the FoneFriend device. This fee will be
characterized as a "programming" or "setup" fee to cover the initial cost
of programming the unit with ISP information specific to each subscriber
and initiating the FoneFriend service;
- ADVERTISING INCOME: The Company can offer businesses the opportunity to
broadcast their advertisements directly to FoneFriend's Internet phone
users. This advertising message can be played during the 15- 40 seconds
that the unit dials an Internet service provider and establishes
communication with the network.
The Company plans to bundle additional services with the "FoneFriend", such as
encryption (available now), fax, voice-enabled web site access, and 3-way
calling, which services can be implemented remotely, through the web server, and
will generate additional revenue for the Company.
CHANNELS OF DISTRIBUTION
- Orders received through DRTV-Radio-Print-Web and telemarketing by CRM
Centers
- International Distributors in selected countries
- Cultural, Educational, and Business Associations (International)
- Corporate Accounts (Corporations who employ foreign workers)
- Solution Partners (vertical applications) and Multi-Level marketing
BRANDING PLAN
Employing a unique Foreign Born Regional Marketing Program together with Direct
Response Television (DRTV) marketing program, the Company plans to differentiate
its services from its competition. The Company believes the unique FoneFriend
technology and marketing strategy, advertising approach, and outsourcing mode of
operation will yield short-term profitability and sustained growth. FoneFriend's
Foreign Born Regional Marketing Program, which will employ foreign-language
media (television, radio, print and Internet), and foreign-language retail
outlets and distributorships, is flexible, pays its own way and reduces risk.
The following are particular advantages of our unique marketing strategy:
FLEXIBILITY: The Company's Foreign Born Regional Marketing Program will
initially target the eleven regions in the U.S. with the largest population of
foreign-born residents. By capturing regional markets one at a time, the
campaign can be measured and fine-tuned before it advances.
PAYS ITS OWN WAY: Subscriber revenue, from captured areas, will fund subsequent
market penetrations.
MINIMUM RISK TO CAPITAL: Regional marketing doesn't commit the entire marketing
budget to a vast, fixed campaign. FoneFriend will employ direct response
television marketing to create initial demand for FoneFriend. DRTV has several
advantages over traditional "image" spot television campaigns; among them are
greater efficiency, measurability, and accountability. DRTV creates demand:
Infomercials often produce substantial annual revenues. DRTV also drives retail
sales; "as seen on TV" is an effective point-of-sale tool.
EFFICIENCY: DRTV can reach very large numbers of new, potential customers and
present a complete product story for a fraction of the cost of 30-second
commercial spots. ("The more you tell, the more you sell.")
MEASURABLE AND FLEXIBLE: DRTV campaigns can accurately report success or
failures within 24 hours of a media run, and adjust themselves "on the fly."
Response - measured as a ratio of sales-generated to media-spent - is analyzed;
script, price, or call center pitch is fine-tuned; media strategy adjusted; and
the "new" campaign re-launched within 24 hours.
ACCOUNTABILITY: Unlike traditional image spot campaigns, infomercial campaigns
have no established media budget; campaigns remain on air only as long as they
continue to produces profits (from several months to several years).
SUPPORT SERVICES
FULFILLMENT & CUSTOMER SERVICE
The Company will outsource major functions (such as R&D, manufacturing, network
infrastructure and services, and Customer Relationship Management (CRM) to
eliminate the need for initial capital outlay, and minimize the requirement for
in-house resources, facilities, and competencies. Management has identified the
third party resources for our back-end infrastructure and Customer Relations
Management.
CUSTOMER SERVICE: The Company plans to contract with a proven and reliable third
-----------------
party supplier to provide fulfillment services such as warehousing, shipping and
customer follow up. To this end, the Company is currently negotiating an
agreement with several premiers, knowledge-based, customer relationship
management firms that can fulfill the Company's requirements for Customer
Service, product fulfillment, and telemarketing support.
When a caller orders the unit, the telemarketer could ask for additional
individuals that the caller believes would appreciate and value a similar unit,
also requesting that the caller, call each such person to inform them of our
call. The Customer service representative would then call the individuals on the
list and attempt to capture an order through the referral, by stating who made
the referral. If an order is not received, then a brochure will be mailed that
day, to register that person for follow up at another time. This process
results in a "domino effect", as each person who orders the FoneFriend unit will
call other persons whom they want to add to their personal directory and will
provide names for our telemarketer to call. This process increases the number
of subscribers, which could occur on an on-going basis, thus allowing the
Company to realize its marketing objectives. The telemarketer will also remind
the caller to inform others that they regularly call, to order the FoneFriend
unit, by calling the toll free number or by visiting our web sites.
FULFILLMENT: Fulfillment centers primarily receive the product from the
------------
manufacturer and ship to the consumer. Additionally, these facilities can
provide warehousing and customer service. The uniqueness of these customer
service representatives is that they have ability to "make the sale". Most
telemarketing and fulfillment companies have well trained customer service
personnel who have the capability to either initiate follow-up calls or call
potential subscribers. The Company is in discussions with a full service
fulfillment and telemarketing facility that is positioned in the West and East
Coast, thus providing on time delivery and shipping & handling cost savings to
the Company.
TECHNOLOGY INFRASTRUCTURE
As a marketing company providing a service-oriented product, management decided
to approach its technological, backend infrastructure through third party
relationships, thus assuring that the Company's resources are primarily utilized
for marketing and acquisition of product inventory. To this extent, the Company
has retained the services of Dr. Vaziri and his team of engineers to oversee the
development and implementation of the Company's infrastructure. The technology
infrastructure for FoneFriend is both unique and cost effective. Its uniqueness
and value is found in both its patented technology inside the FoneFriend
product, and in the unique selection and implementation of the infrastructure
network to optimize our quality, while being very cost effective. The Company
plans to utilize state-of-the-art facilities and equipment that is in place
through world-class telecom vendors. This allows for rapid development and
aggressive expansion of our system architecture, while reducing the risk and
cost of buying and building a world-class network, or investing and developing
the Company's own software and hardware components.
The Company is presently considering several vendors that can provide complete
turnkey solutions for the Company's back-end, technology infrastructure. This
turnkey solution will provide the Company access to gateways, routers, servers,
etc., saving the Company substantial upfront costs. The services furnished by
such turnkey providers are infinitely scalable, at an affordable cost, to
accommodate the Company's anticipated growth in subscribers.
This technology infrastructure will afford the Company an opportunity to quickly
and economically gain access to a global gateway system, call termination
services (both domestically and internationally), Internet Dial-up service
(ISP), and a complete customer billing solution.
MANUFACTURING
FSI has provided the Company detailed design specifications for third party
manufacturing. The Company intends to employ third-party manufacturing because:
(1) it does not believe that incurring the costs of manufacturing infrastructure
would be cost effective, (2) the quality from a third party manufacturing source
is consistent with the quality of product the Company can manufacture and (3)
using third party manufacturing provides the Company with product volume
flexibility. The "FoneFriend" product is currently manufactured in Malaysia.
Alternative manufacturing sources have also been identified which can provide
comparable quality, and production volume flexibility. The Company has retained
a knowledgeable manufacturing consultant who has substantial connections in the
manufacturing industries of the Far East to obtain better pricing. Management
intends to source state-of-the-art facilities that have the capacity to
accommodate large volume orders which the Company anticipates will occur from
its marketing campaign.
The Company, with Credit Phone International, received approximately 200
"FoneFriend" units from its Malaysian manufacturer at a cost of $100 per unit.
These initial units were used to "beta" test the viability of the Company's
product and operating systems. A subsequent order for about 10,000 units is
planned at a quoted cost of about $60 per unit. The Company is also discussing
a possible relationship with another foreign manufacturer that has quoted a
price of just under $50 per unit in larger quantities (i.e., 25,000 units).
EMPLOYEES
The Company currently has three officers and several business, professional and
technical consultants. We believe our relationships with all personnel are
good. The Company plans to hire additional personnel at such time as our
business growth demands.
DESCRIPTION OF PROPERTY
Our principal offices are located at 14545 Friar Street, Suite 103, Van Nuys,
California 91411. Since February 1, 2004, we have received free rent while we
negotiate the terms of a month to month lease. We presently occupy about 1,000
sq. ft., and anticipate we will negotiate the lease of about 2,000 sq. ft. by
April 30, 2004, at a monthly rate of approximately $1.25, or more, per sq. ft.
The current facilities are of adequate size to allow us to grow to approximately
five in-house people, after which time we will need to seek larger space. Our
month-to-month agreement will allow us flexibility in moving if we employ more
personnel.
Our previous office lease covered facilities located in Carlsbad, California,
and terminated on January 31, 2004. We have now relocated to the Los Angeles,
California area. Our rent expense was $34,947 for the fiscal year ended March
31, 2003, and $26,882 for the nine month period ended December 31, 2003.
The rent expense stated above included an apartment in close proximity to the
Carlsbad office that was leased by the Company for use by contract employees.
The expense for the apartment was $1,000 per month, including all utilities. We
terminated this lease effective June 30, 2003.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, CONSULTANTS AND CONTROL PERSONS
Our directors, executive officers, consultants and control persons and their
ages as of the date of this prospectus are as follows:
NAME AGE POSITION
----------------------- --- -----------------------------------------
Gary A. Rasmussen 52 Chairman and Senior Business Consultant
Jackelyn Giroux 46 President, Director
Edward N. Jones 67 Chief Financial Officer
Virginia Perfili 52 Director
Dennis H. Johnston 50 Secretary, Director
Faramarz Vaziri, Ph.D 53 Technology Consultant
GARY A. RASMUSSEN, is a founder of the predecessor company (FoneFriend,
Inc., a Nevada corporation) and has served as our Senior Business Consultant
since November 2002, helping to guide the Company through its development stage
and initial operations as a publicly held company. He was appointed our
Chairman on January 27, 2004 by our Board of Directors. Mr. Rasmussen has an
extensive background spanning over 25 years as an entrepreneur with vast
experience in all phases of business development, having been a founder, chief
executive officer or director of several publicly-held corporations in the areas
of cable television, investment banking, mortgage banking and motion pictures.
He has extensive experience in raising debt and equity capital for both public
and private enterprises, implementing short and long term business planning and
strategic concepts, acquisitions and divestitures, and has played a key role in
spearheading several publicly held corporations from their inception through the
early capital raising stages. In August 2001, Mr. Rasmussen was convicted in a
federal court for violation of Environmental Protection Laws regarding the
transportation of hazardous waste without a permit, and received a sentence of
ten months. The Board of Directors of the Company believes that such
conviction does not adversely affect Mr. Rasmussen's ability to serve the
company, and, furthermore, Mr. Rasmussen continues to deny the factual basis for
his conviction. Mr. Rasmussen is a graduate of Western Michigan University.
JACKELYN GIROUX, is a director and serves as the Company's President. Ms.
Giroux is also the President of Global Universal Limited, a film production and
distribution company. Prior to joining FoneFriend in August, 2001, Ms. Giroux
has been a writer, producer and director of feature films since 1985. Jackelyn
Giroux won a scholarship to the New York American Academy of Dramatic Arts, and
has appeared in many off Broadway and Broadway plays. Her career in films was
launched with a lead role in "The Cross and the Switch Blade", starring Pat
Boone and Eric Estrada. She has appeared in fifteen feature films and several
TV series; her last film as an actress was in "To Live and Die in LA", directed
by Billy Friedkin for MGM in 1985. Since then, she has written and produced ten
feature films and two "Movies of the Week." Ms. Giroux has extensive experience
in structuring financing and co-production deals, having successfully arranged
for co-productions between Canada, France and Germany, as well as Canada, France
and Australia. In 2000, she wrote and directed "Coo Coo Caf ", a satire on the
media networks, which prominently features the "FoneFriend" product being used
by the main characters. The film "Coo Coo Caf " was exhibited at the Cannes
Film Festival in May of 2001.
EDWARD N. JONES serves as the Company's Chief Financial Officer. Mr. Jones
has over thirty-five years experience as a practicing certified public
accountant, chief financial officer, chief executive officer, corporate board
member and as a consultant to corporate management and legal counsel. Mr. Jones
began his career at KPMG. He progressed rapidly at KPMG and left to work as a
chief financial officer and chief executive officer at various companies. In
1986, he began a new phase of his career, consulting for corporate management
and legal counsel on matters involving finance and litigation. His past board of
director affiliations include the following prestigious companies: Founders Life
Insurance Company, Presidio Insurance Company, Massachusetts Life Insurance &
Indemnity Company, First Nevada Corporation, Camino Real Savings Bank, Real
Estate Management Trust, Inc. (REIT), Sherman Oaks Savings Bank, as well as the
Gawzner Corporation.
In addition to the foregoing, Mr. Jones was responsible for listing the stock of
Nevada Savings and Loan Association on the New York Stock Exchange and growing
the institution from $600 million plus in assets to over $1.1 billion in assets
by early 1984, all the while maintaining exceptional profitability and superior
asset quality. Thereafter, while continuing his practice as a forensic
accountant and analyst, Mr. Jones was retained to act as the accounting expert
for counsel to the State of Rhode Island in the simultaneous, massive failure of
72 credit unions based in that state. Mr. Jones is a fully licensed Certified
Public Accountant in the State of California and is a member of both the
American Institute of Certified Public Accountants and the California Society of
Certified Public Accountants. Mr. Jones has a Bachelor of Sciences degree in
business and finance, graduating from California State University, Northridge in
1963. He was awarded the Wall Street Journal Outstanding Business Student Award
in 1961.
VIRGINIA PERFILI, was appointed as a director of the Company to fill a
vacancy on the board of directors. Ms. Perfili is an independent film producer
and director and is currently the President and founder of EM3, Inc., a film
production and entertainment company in Hollywood, California. From 1982
through 1997, Ms. Perfili was the President, CEO and a Director of Orphan, Inc.,
a publicly held company engaged in the film production and record industries.
During her tenure with Orphan, Ms. Perfili produced and directed several film
projects in addition to her responsibilities for the overall management and
promotion of the company. Ms. Perfili is a graduate of Wayne State University
in Detroit, Michigan.
DENNIS H. JOHNSTON, ESQ. serves as the Company's Corporate Secretary, and
is also an independent director. Mr. Johnston has more than 20 years of
experience as a practicing attorney specializing in the representation of
corporations and financial institutions. He has assisted in organizing and
financing numerous private and publicly traded companies and has handled mergers
and acquisitions with a total value in excess of $3 billion. Mr. Johnston
received undergraduate degrees in business and economics from UCLA and a law
degree with Dean's List Honors from Loyola University of Los Angeles, where he
was an Editor of The Loyola Law Review. He is a former partner at the nationally
recognized law firms of Manatt, Phelps, Rothenberg, & Tunney, and Wyman,
Bautzer, Kuchel & Silbert.
FARAMARZ VAZIRI, PH.D., is currently the president of TiVox Systems, Inc.,
a newly formed technology company, and will serve as the Company's primary
Technology Consultant. He is also a co-founder of FoneFriend Systems, Inc.
("FSI") He led the technical development of the FoneFriend product and brings a
wealth of computer telephony expertise to the Company, including his skills in
all major computer programming languages, operating systems and communication
hardware. Dr. Vaziri is currently an Associate Professor of Electrical
Engineering at the State University of New York, New Paltz, a position he has
held since 1985. Formerly, he was CTO of DSP Communications where he worked with
John Wimsatt (president of FSI) in delivering the Aviation PBX system on time
and under budget. He was also formerly CTO of Digital Techniques Marketing where
he developed a universal digital switching platform for most telecommunication
platforms. Dr. Vaziri was granted a patent for his development of a "Modular
User Programmable Telecommunications System with Distributed Processing." He was
also granted a patent on the FoneFriend technology, which patent was assigned to
FSI. Dr. Vaziri received a Ph.D. degree in Electrical Engineering from the
University of Houston.
ELECTION OF DIRECTORS
We elect our directors each year.
EMPLOYMENT AGREEMENTS WITH KEY PERSONS
We entered into a formal written Employment Agreement with Jackelyn Giroux, our
President, dated November 20, 2002, as amended by an Amendment to Employment
Agreement dated November 22, 2003 (together being the "Employment Agreement"),
which provide for, among other employment benefits, an annual salary of $90,000
with an accrued amount aggregating $82,500 paid in installments over twelve
months with 10% interest, the right to purchase 2.8 million shares of common
stock at a price of $.001 per share, and an anti-dilution clause to maintain Ms.
Giroux's ownership interest in the Company at 21.2% of the issued and
outstanding shares of common stock. The shares have been purchased under the
Employment Agreement by Ms. Giroux. However, payment of both current and
accrued salary amounts have been suspended and continue to accrue due to a lack
of revenues, and may be reinstated in the future. In addition, Ms. Giroux's
Employment Agreement granted her an option to purchase 350,000 shares of our
common stock at a price of $.01 per share. This option is vested but has not
been exercised as of the date of this prospectus.
We entered into a formal written Consulting Services Agreement with Gary
Rasmussen, then our Senior Business Consultant and now also our Chairman, dated
November 20, 2002, as amended by an Amendment to Consulting Services Agreement
dated November 22, 2003 (together being the "Consulting Services Agreement"),
which provide for, among other benefits, an annual salary of $120,000
(increasing to $180,000 under certain conditions) with an accrued amount
aggregating $86,000 paid in installments over twelve months with 10% interest,
the right to purchase 4.5 million shares of common stock at a price of $.001 per
share, and an anti-dilution clause to maintain Mr. Rasmussen's ownership
interest in the Company at 25% of the issued and outstanding shares of common
stock. The shares have been purchased under the Consulting Services Agreement
by Mr. Rasmussen. However, payment of both current and accrued consulting fees
have been suspended and continue to accrue due to a lack of revenues, and may be
reinstated in the future. In addition, Mr. Rasmussen's consulting agreement
granted him an option to purchase 350,000 shares of our common stock at a price
of $.10 per share; provided, however, that the amount of shares and terms of
such option shall not be less favorable than any other grantee of options.
Accordingly, the exercise price was adjusted to $.01 per share in order to match
the exercise price granted the Company's President. This option is vested but
has not been exercised as of the date of this prospectus.
We entered into a formal written Consultancy Agreement with Edward N. Jones, our
Chief Financial Officer, dated November 15, 2002, as amended by an Amendment to
Consultancy Agreement dated November 16, 2003, and as amended by a Second
Amendment to Consultancy Agreement dated March 1, 2004 (together being the
"Consultancy Agreement"), which provide for, among other consulting benefits,
payment in the amount of 85,000 shares over the term of the Consulting
Agreement, which commenced on November 20, 2002, and ends on June 30, 2004.
These shares have been delivered to Mr. Jones. Mr. Jones has sold some of these
shares in the open market.
PROMOTERS.
We have engaged RR Inv Holdings, Inc. for investor relations and public
relations services for our Company. Our engagement with them provides that they
will profile our Company to broker dealers and the investment community via
telephone conference calls and internet news dissemination, as well as other
media forms. We have paid RR Inv Holdings, Inc. 900,000 shares of our common
stock for their services. A copy of our agreement with RR Inv Holdings, Inc. is
attached as an exhibit to this registration statement.
LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY;
POSITION OF THE COMMISSION ON INDEMNIFICATION
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify such person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
As permitted by Section 145 of the DGCL, the Company's Bylaws provide that, to
the fullest extent permitted by the DGCL, directors, officers and certain other
persons who are made, or are threatened to be made, parties to, or are involved
in, any action, suit or proceeding will be indemnified by the company with
respect thereto. Article V of the Company's Bylaws provides for the
indemnification of officers, directors, employees and agents of the corporation
if such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the corporation, and, with respect to
any criminal action or proceeding the indemnified party had no reason to believe
his conduct was unlawful.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, expect for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit.
As permitted by Section 102(b)(7) of the DGCL, our Amended and Restated
Certificate of Incorporation includes a provision that limits a director's
personal liability to the company or its stockholders for monetary damages for
breaches of his or her fiduciary duty as a director. Article IX of the Company's
Amended and Restated Certificate of Incorporation provides that no director or
the company shall be personally liable to the company or its stockholders for
monetary damages for breach of fiduciary duty to the fullest extent permitted by
DGLC.
On February 25, 2004, we entered into an Investment Agreement with Dutchess
Private Equities Fund, L.P., in which we agreed to defend, protect, indemnify
and hold harmless Dutchess' officers, directors, employees, counsel, and direct
or indirect investors, agents or other representatives, from and against any and
all actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and reasonable expenses including reasonable attorneys'
fees and disbursements incurred by Dutchess as a result of, or arising out of,
or relating to (i) any misrepresentation or breach of any representation or
warranty made by us or any other certificate, instrument or document; (II) any
breach of any of our covenants, agreements or obligations or (III) any cause of
action, suite or claim brought or made against Dutchess by a third party, except
insofar as any such misrepresentation, breach or any untrue statement, alleged
untrue statement, omission or alleged omission is made in reliance upon and in
conformity with information furnished to Dutchess which is specifically intended
for use in the preparation of any such registration statement, preliminary
prospectus, prospectus or amends to the prospectus.
On February 25, 2004, we entered into a Registration Rights Agreement with
Dutchess, in which we agreed to indemnify, hold harmless and defend Dutchess and
its officers, partners, employees, counsel, agents and representatives against
any losses, claims, damages, liabilities, judgments, fines, penalties, charges,
costs, attorneys' fees, amounts paid in settlement or expenses, joint or
several, incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not Dutchess is or
may be a party thereto, to which any of them may become subject insofar as such
claims or actions or proceedings, whether commenced or threatened, arise out of
or are based upon: (I) any untrue statement or alleged untrue statement of a
material fact in a registration statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other "blue sky" laws of any jurisdiction in
which Dutchess has requested in writing that we register or qualify the common
stock, or the omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which the statements therein were made, not misleading, (II)
any untrue statement or alleged untrue statement of a material fact contained in
the final prospectus or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(III) any violation or alleged violation by us of the Securities Act, the
Securities Exchange Act, or any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the common stock pursuant to a registration statement. The
indemnification agreements (I) shall not apply to a claim arising out of or
based upon a violation which is due to the inclusion in the registration of the
information furnished to us by Dutchess expressly for use in connection with the
preparation of the registration or any such amendment thereof or supplement
thereto; (II) shall not be available to the extent such claim is based on (A) a
failure of Dutchess to deliver or to cause to be delivered the prospectus made
available by us or (B) Dutchess' use of an incorrect prospectus despite being
promptly advised in advance by us in writing not to use such incorrect
prospectus; (III) any claims based on the manner of sale of the common stock by
Dutchess or of Durchess' failure to register as a dealer under applicable
securities; (IV) any omission of Dutchess to notify us of any material fact that
should be stated in the registration statement or prospectus relating to
Dutchess or the manner of sale; and (V) any amounts paid in settlement of any
claim if such settlement is effected without the prior written consent, which
consent shall not be unreasonably withheld.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to director, officers or persons controlling us under the foregoing
provisions, we have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act, and
is unenforceable for that reason.
EXECUTIVE COMPENSATION
The Summary Compensation Table and the accompanying notes set forth below
provide summary information for each of the last three fiscal years ended March
31st, concerning cash and non-cash compensation earned, paid or accrued by our
Chief Executive Officer and each of our most highly compensated executive
officers or consultants whose total compensation exceeded $100,000. Information
for our fiscal year ended March 31, 2004, is provided through March 15, 2004.
Summary Compensation Table
--------------------------
Annual Compensation Awards Payout
-------------------------- ---------------------- -------------
Name and Other Restricted Securities LTIP Other
Principal Year Salary Bonus Compensation Stock Award Underlying Payouts
Position ($) ($) ($) (s) ($) Options ($) ($)
SARs (#)
---------- ---- ------ ----- ------------ ----------- ---------- ------- -----
Jackelyn 2004 86,250 - - - - - -
Giroux 2003 32,500 - - - 350,000 - -
President 2002 -0- - - - - - -
-CEO (1)
Gary A. 2004 115,000 - - - - - -
Rasmussen 2003 43,333 - - - 350,000 - -
Chairman 2002 -0- - - - - - -
And
Consultant (2)
Brandon 2004 -0- - - - - - -
Powell 2003 115,606 - - - - - -
Exec. Vice 2002 184,969 - - - - - -
President (3)
1. Ms. Giroux's annual base salary is $90,000 and is payable to Global
Universal Limited, a corporation owned and controlled by her. Fiscal year
2004 reflects salary earned for the period April 1, 2003 through March 15,
2004, of which $11,382 was paid in cash and the balance was accrued. Fiscal
year 2003 reflects salary earned for the period November 20, 2002
(commencement of her employment) through March 31, 2003, of which $17,500
was paid in cash and the balance was accrued. Prior to November 20, 2002,
Ms. Giroux served as the President of our predecessor company, FoneFriend,
Inc., a Nevada corporation, where she received an additional $59,000 for
the period April 1, 2002 through November 19, 2002. Ms. Giroux's employment
agreement with the Company granted her an option to acquire 350,000 shares
of the Company's common stock at a price of $.01 per share. Additionally,
her agreement provides for an auto allowance, health insurance and other
perks, as well as bonus compensation in the amount of one percent (1.0%) of
net revenues realized by the Company. No perks or bonus compensation has
been paid to date.
2. Mr. Rasmussen's annual base compensation as our consultant is presently
$120,000 and will increase to $180,000 upon the Company's receipt of
minimum financing in the amount of $1 Million. Fiscal year 2004 reflects
consulting fees earned for the period April 1, 2003 through March 15, 2004,
of which $41,000 was paid in cash and the balance was accrued. Fiscal year
2003 reflects consulting fees earned for the period November 20, 2002
through March 31, 2003, of which $8,000 was paid in cash and the balance
was accrued. Prior to November 20, 2002, Mr. Rasmussen served as a
consultant to our predecessor company, FoneFriend, Inc., a Nevada
corporation, where he received an additional $29,142 for the period April
1, 2002 through November 19, 2002. Mr. Rasmussen's consulting agreement
with the Company granted him option to acquire a minimum of 350,000 shares
of the Company's common stock at a price of $.10 per share; provided,
however, that the amount and terms of such option shall be no less
favorable than granted to any other person by the Company. Accordingly, the
exercise price of his option has been adjusted to $.01, in order to match
the exercise price granted the Company's President. Additionally, his
agreement provides for an auto allowance, health insurance and other perks,
as well as bonus compensation in the amount of one and one-half percent
(1.5%) of any private financing received by the Company and one percent
(1.0%) of revenues realized. No perks or bonus compensation has been paid
to date and Mr. Rasmussen has not yet received any compensation for his
role as our Chairman.
3. Mr. Powell's salary for fiscal year 2002 is based upon information reported
in Universal Broadband Network's annual report on Form 10-K for the year
ended March 31, 2002. His salary for fiscal year 2003 is estimated and
reflects the period April 1, 2002 through November 15, 2002, when Mr.
Powell resigned. Mr. Powell was the sole executive officer during the
bankruptcy.
DIRECTOR COMPENSATION
Our policy is that directors are entitled to be compensated at the rate of $500
per meeting. Only one director, Virginia Perfili, has received such compensation
to date, because of our cash position. However, we intend to pay all of our
directors at this rate in the future when cash flow permits us to do so. In
addition to the aforementioned compensation, Ms. Perfili, who worked as a
contract employee during 2002, was granted 100,000 award shares pursuant to the
Company's 2002 Stock Plan in January 2003 for her services. It is intended that
Ms. Perfili will receive additional shares of common stock for her services as
director and for her services as a contract employee. Dennis H. Johnston, Esq.,
our Corporate Secretary and Director, was granted options to purchase 300,000
shares of common stock at a purchase price of $.10 cents per share on May 20,
2003 for his service.
OPTIONS AND AWARD SHARES
We have a 2002 Non-Employee, Director and Consultant Retainer Stock Plan and
Employee Stock Incentive Plan (the "Plan"), which is more fully discussed below.
The Plan was adopted to award shares and options to Non-Employees, Directors,
Consultants and Employees for their service and to provide them with an equity
stake in our Company. To date, Mr. Perfili was awarded 100,000 shares in 2003,
and Ms. Giroux, Mr. Rasmussen and Mr. Johnston were awarded options to purchase
350,000, 350,000 and 300,000 shares of common stock, respectively, in 2003. The
options awarded to Ms. Giroux and Mr. Rasmussen have fully vested, while half of
the options awarded to Mr. Johnston have vested.
In July, 2003, we issued an option to a consultant to acquire 200,000 shares at
$.20 (current market). The option was exercised in August. In September, 2003,
we issued an option to a consultant to acquire 200,000 shares at $.15 (current
market). This option was exercised in October. In October, 2003, we issued an
option to a consultant to acquire 100,000 shares at $.15 (current market). This
option was exercised.
In January, 2004, we gave 15,000 shares of registered common stock to Edward
Jones, our CFO, as consideration for the renewal of his agreement to serve as
CFO through February 29, 2004. His original agreement had expired November 15,
2003. Just recently, on March 1, 2004, we entered into an amended agreement to
give Ed Jones an additional 20,000 shares of registered common stock to renew
his contract until June 30, 2004.
2002 NON-EMPLOYEE DIRECTOR AND CONSULTANT RETAINER STOCK PLAN AND EMPLOYEE STOCK
INCENTIVE PLAN
The following table sets forth information about our 2002 Non-Employee Director
and Consultant Retainer Stock Plan and Employee Stock Incentive Plan (the "2002
Plan") adopted by our Board of Directors on December 27, 2002, as filed with the
Commission as an exhibit to our Registration Statement on Form S-8 on December
27, 2002.
2002 Non-employee
Director and Consultant As of March31, 2003
Retainer Stock Plan and Award Stock Stock Options
Employee Stock Incentive Plan Issued Issued
----------------------------- ----------- -------------
1,080,000 (1)(2) 1,000,000 (3)
Remaining securities available 20,000 2,500,000
(1) On December 27, 2002, we issued 825,000 award shares to Consultants that
performed services on behalf and at the request of the Company.
(2) Subsequent to March 31, 2003, we issued an additional 270,000 award shares
to Consultants pursuant to consulting services agreements, and an
additional 500,000 options to Consultants which have been exercised at a
weighted average price of $.17 per share.
(3) The Board of Directors has authorized the grant of options covering
1,000,000 shares as follows: (i) 350,000 to Jackelyn Giroux, pursuant to
her employment agreement with the Company; (ii) 300,000 shares to Dennis H.
Johnston, pursuant to his agreement with the Company for his continued
services as Secretary and General Counsel; and (iii) 350,000 shares to Gary
Rasmussen, pursuant to his consulting agreement with the Company.
The Compensation Committee of the Board of Directors issues award stock and
stock options, as the case may be, to employees, directors, officers,
consultants, advisors and other persons associated with our company. The 2002
plan is intended to provide a method whereby our company may be stimulated by
the personal involvement of our employees, directors, officers, consultants,
advisors and other persons in our business and reward such involvement, thereby
advancing the interests of our company and all of its shareholders. A copy of
the 2002 plan has been incorporated as an exhibit to this registration
statement.
As of the date of this prospectus, a total of 1,095,000 shares of common stock
and 1,500,000 options have been issued pursuant to our 2002 Plan. Of this amount
65,000 shares of common stock and 650,000 options were issued to our management.
RELATED PARTY TRANSACTIONS
During the calendar year of 2003, Jackelyn Giroux, the Company's President,
along with a member of her family, and Gary Rasmussen, then a consultant to the
Company, made several short term loans of various amounts to the Company to
cover its operating expenses. The aggregate amount of such loans did not total
over $60,000 and were repaid to these individuals without interest in December,
2003. The effects of the imputed interest on the shareholders loans were
immaterial.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "FFRD.OB". The following table shows the high and low prices of our
common stock since we began trading under the name of FoneFriend, Inc. on March
6, 2003, as reported by the National Daily Quotation Service and the
Over-The-Counter Bulletin Board. Prior to December 5, 2002, our common stock
was traded under the name of our predecessor company, Universal Broadband
Networks, Inc. (UBNTQ:OTCBB). For the period beginning with the fiscal year
ended March 31, 2002, through December 5, 2002, our predecessor corporation was
in bankruptcy (under the name of Universal Broadband Networks, Inc.) and its
common stock traded at a high of $.02 (on April 1, 2002) and a low of $.003 (on
December 5, 2002), under the symbol "UBNTQ" as mentioned before.
The quotations set forth below reflect inter-dealer prices, without mark-ups,
mark-downs, or commissions and may not represent actual transactions:
Period High Low
-------- --------
From January 1, 2004 to March 31, 2004 $ 0.30 $ 0.12
Quarter Ended December 31, 2003 $ 0.45 $ 0.13
Quarter Ended September 30, 2003 $ 2.05 $ 0.14
Quarter Ended June 30, 2003 $ 3.90 $ 2.01
From March 6, 2003 to March 31, 2003 $ 4.00 $ 3.50
As of December 31, 2003, we had approximately 312 holders of record of our
common stock. Our transfer agent is Executive Registrar & Transfer Agency, Inc.,
of Englewood, Colorado. Their phone number is 303-783-9055.
We have not declared any cash dividends with respect to our Common Stock and we
do not intend to declare dividends in the foreseeable future. Our future
dividend policy cannot be ascertained with any certainty. There are no material
restrictions limiting, or that are likely to limit, our ability to pay dividends
on either our common or preferred stock.
Penny Stock Characterization
Our Shares are "penny stocks" within the definition of that term as contained in
the Securities Exchange Act of 1934, which are generally equity securities with
a price of less than $5.00. Our shares will then be subject to rules that impose
sales practice and disclosure requirements on certain broker-dealers who engage
in certain transactions involving a penny stock. These will impose restrictions
on the marketability of the common stock.
Under the penny stock regulations, a broker-dealer selling penny stock to anyone
other than an established customer or "accredited investor" must make a special
suitability determination for the purchaser and must receive the purchaser's
written consent to the transaction prior to the sale, unless the broker-dealer
is otherwise exempt. Generally, an individual with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 individually or $300,000 together
with his or her spouse is considered an accredited investor. In addition, unless
the broker-dealer or the transaction is otherwise exempt, the penny stock
regulations require the broker-dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the Securities and
Exchange Commission relating to the penny stock market. A broker-dealer is also
required to disclose commissions payable to the broker-dealer and the Registered
Representative and current bid and offer quotations for the securities. In
addition a broker-dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customer's
account, the account's value and information regarding the limited market in
penny stocks. As a result of these regulations, the ability of broker-dealers
to sell our stock may affect the ability of selling security holders or other
holders to sell their shares in the secondary market. In addition, the penny
stock rules generally require that prior to a transaction in a penny stock, the
broker-dealer make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. These additional sales practice and disclosure requirements
could impede the sale of our securities, if our securities become publicly
traded. In addition, the liquidity for our securities may be adversely
affected, with concomitant adverse affects on the price of our securities. Our
shares may someday be subject to such penny stock rules and our shareholders
will, in all likelihood, find it difficult to sell their securities.
We have 1,000,000 outstanding options to purchase shares of our common stock at
prices ranging from $.01 per share to $.10 cents per share, 200,000 outstanding
warrants to purchase shares of our common stock at a price of $.20 per share and
a stock option to purchase 150,000 shares at an average price of $.58 per share.
In addition, we have a convertible note outstanding in the principal amount of
$100,000, bearing interest at the rate of 15%, that is convertible into shares
of our common stock at a 25% discount to the closing price of our shares on the
date of conversion.
Agreements to Register.
We have agreed to register shares that are "put" to Dutchess Private Equities
Fund, L.P. under the Investment Agreement pursuant to a Registration Rights
Agreement. A copy of such Registration Rights Agreement is incorporated by
reference as Exhibit 10.11 of this registration statement. We have agreed to
register shares that may be acquired by Compass Capital pursuant to the
conversion of a convertible note and through the exercise of warrants, and we
have agreed to register 650,000 shares that may be acquired by Equity Market
Information Systems in connection with our agreement with them and their
exercise of a stock option to purchase 150,000 shares of common stock. In
addition, we have agreed to register 1,500,000 shares of common stock owned by
Gary Rasmussen and 500,000 shares of common stock owned by Jackelyn Giroux on a
Registration Statement on Form S-8 of the Company.
Shares Eligible for Future Sale.
Upon effectiveness of this registration statement, up to 17,950,000 shares of
common stock sold in this offering will be freely tradable without restrictions
under the Securities Act of 1933, except for any shares held by our
"affiliates", which will be restricted by the resale limitations of Rule 144
under the Securities Act of 1933.
In general, under Rule 144 as currently in effect, any of our affiliates and any
person or persons whose sales are aggregated who has beneficially owned his or
her restricted shares for at least one year, may be entitled to sell in the open
market within any three-month period a number of shares of common stock that
does not exceed the greater of (i) 1% of the then outstanding shares of our
common stock, or (ii) the average weekly trading volume in the common stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also affected by limitations on manner of sale, notice requirements, and
availability of current public information about us. Non-affiliates who have
held their restricted shares for one year may be entitled to sell their shares
under Rule 144 without regard to any of the above limitations, provided they
have not been affiliates for the three months preceding such sale.
Further, Rule 144A as currently in effect, in general, permits unlimited resales
of restricted securities of any issuer provided that the purchaser is an
institution that owns and invests on a discretionary basis at least $100 million
in securities or is a registered broker-dealer that owns and invests $10 million
in securities. Rule 144A allows our existing stockholders to sell their shares
of common stock to such institutions and registered broker-dealers without
regard to any volume or other restrictions. Unlike under Rule 144, restricted
securities sold under Rule 144A to non-affiliates do not lose their status as
restricted securities.
Of the 19,260,944 shares of common stock currently issued and outstanding, our
management estimates there are about 1,785,000 free trading shares in the float
and about 7,668,500 shares eligible for sale under Rule 144. An additional
2,750,000 shares currently outstanding will be registered hereunder. Also, we
have agreed to register 2,000,000 shares of common stock currently outstanding
that are held by our President and our Chairman. Additionally, future sales of
stock owned by our affiliates may be permitted according to Rule 144. The
availability for sale of substantial amounts of common stock under Rule 144
could adversely affect prevailing market prices for our securities.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, to our knowledge, certain information regarding
the beneficial ownership of the common stock, and the address of such beneficial
owner, as of March 15, 2004, for (i) each person known by the Company to be the
beneficial owner of 5% or more of the outstanding common stock, (ii) each of the
Company's officers, directors and consultants, and (iii) all of the Company's
executive officers, directors, consultants and Principal Stockholders as a
group. The notes accompanying the information in the table below are necessary
for a complete understanding of the figures provided below. The number of common
shares owned includes shares of common stock issuable upon the exercise of
options that are currently exercisable or will become exercisable within 60 days
of the date of this prospectus. For each beneficial owner, officer, director or
consultant, his or her percentage of shares outstanding is based upon 19,260,944
shares outstanding as of March 31, 2004, plus 865,000 additional shares that
such beneficial owners have the right to acquire within 60 days of the date of
this prospectus (i.e., a total of 20,125,944).
SHAREHOLDER NAME RELATIONSHIP TO SHARES OWNED PERCENTAGE OF
AND ADDRESS COMPANY SHARES OUTSTANDING
---------------- --------------- ------------ ------------------
Jackelyn Giroux President and 3,297,900 16.18%
14545 Friar St, Director (1)
#103
Van Nuys, CA 91411
---------------- --------------- ------------ ------------------
Gary Rasmussen Chairman and 4,808,225 23.59%
14545 Friar St, Senior Business (2)
#103 Consultant
Van Nuys, CA 91411
---------------- --------------- ------------ ------------------
Dennis Johnston Secretary and 478,140 2.36%
2895 Woodwardia Dr. Director (3)
Los Angeles,
CA 90077
---------------- --------------- ------------ ------------------
Edward N. Jones Chief Financial 75,500 0.35%
13331 Moorpark St, Officer (4)
#346, Sherman Oaks,
CA 91423
---------------- --------------- ------------ ------------------
Virginia Perfili Director 55,000 0.27%
14545 Friar St, (5)
#103, Van Nuys,
CA 91411
---------------- --------------- ------------ ------------------
Francois Van Der Former Officer 1,800,000 8.83%
Hoeven and Director (6)
1404 Eastview Ct.
Oceanside,
CA 92056
---------------- --------------- ------------ ------------------
Officers, directors, (5 persons) 8,714,765 42.75%
and consultants
as a group
---------------- --------------- ------------ ------------------
Officers, directors (6 persons) 10,514,765 51.58%
and all beneficial
owners, as a group
---------------- --------------- ------------ ------------------
(1) Amount consists of (a) 2,700,000 shares owned directly by Ms. Giroux, (b)
options to purchase up to 350,000 shares of common stock on or before May
20, 2008 at an exercise price of $0.01 per share, and (c) 247,900 shares
held in the name of Global Universal Limited, Inc., a corporation
controlled by Ms. Giroux as its President and majority shareholder.
(2) Amount consists of (a) 4,267,500 shares owned directly by Mr. Rasmussen,
(b) options to purchase up to 350,000 shares of common stock on or before
May 20, 2008 at an exercise price of $0.01 per share, (c) 105,000 shares
owned by Mr. Rasmussen as custodian for the benefit of his minor children
under the Michigan Uniform Gift to Minors Act, (d) 85,725 shares of the
428,625 shares owned by Rochester Capital Partners, a limited partnership,
of which Mr. Rasmussen is the general partner and a beneficial owner of 20%
of its equity. Although he has sole dispositive power as general partner,
Mr. Rasmussen disclaims any beneficial ownership in the remaining 80%
equity of the partnership, representing 342,900 shares owned by Rochester
Capital Partners, as such equity and corresponding shares are beneficially
owned by Mr. Rasmussen's minor children and former spouse. Additionally,
the amount does not include 75,000 shares of common stock owned by an
irrevocable children's trust for the benefit of Mr. Rasmussen's minor
children for which he is not the trustee.
(3) Amount consists of 328,140 shares owned directly by Mr. Johnston, plus
150,000 shares that may be acquired by him through the exercise of stock
options within sixty days from the date of this prospectus. In connection
with his employment as Secretary, Mr. Johnston was granted a stock option,
which vests pro-ratably over a 3-year period, to purchase up to 300,000
shares of common stock on or before May 20, 2006, at an exercise price of
$0.10 per share.
(4) Amount consists of 55,500 shares owned directly by Mr. Jones, plus 20,000
shares owed to him in connection with his employment as our Chief Financial
Officer.
(5) Amount consists of 55,000 shares owned directly by Ms. Perfili.
(6) Amount consists of 1,800,000 shares owned directly by Mr. Van Der Hoeven.
The Company has placed a stop-transfer order on 1,300,000 of these common
shares due to Mr. Van Der Hoeven's voluntary departure from the Company in
mid-February, 2003. He was granted the right to acquire these shares in
consideration for a 3-year employment agreement, of which he served less
than 3 months. He resigned as a director on July 30, 2003.
THE SELLING SHAREHOLDERS
Based upon information available to us as of March 31, 2004, the following table
sets forth the name of the selling stockholders, the number of shares owned, the
number of shares registered by this prospectus and the number and percent of
outstanding shares that the selling stockholders will own after the sale of the
registered shares, assuming all of the shares are sold. The selling stockholders
may have sold, transferred or otherwise disposed of, or may sell, transfer or
otherwise dispose of, at any time or from time to time since the date on which
it provided the information regarding the shares beneficially owned, all or a
portion of the shares of common stock beneficially owned in transaction exempt
from the registration requirements of the Securities Act of 1933, as amended. As
used in this prospectus, the term "selling stockholder" includes donees,
pledges, transferees or other successors-in-interest selling shares received
from the named selling stockholder as a gift, pledge, distribution or other
non-sale related transfer.
The table lists the ownership of the common stock offered by the selling
shareholders assuming the exercise by the Company of all "put" options under the
Equity Line of Credit covering shares offered by this prospectus. None of the
selling shareholders has held any position or office or had a material
relationship with us, or any of our affiliates, within the past three years.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated
by the Commission under the Securities Exchange Act of 1934, as amended. Unless
otherwise noted, each person or group identified possesses sole voting and
investment power with respect to the shares, subject to community property laws
where applicable.
Name and address Number of Shares Number of Shares Number of Shares
of beneficial owner Beneficially Owned Offered Owned After
Offering (1)
--------------------------------------------------------------------------------
Dutchess Private
Equities Fund, L.P. -0- 15,000,000 (2) -0-
(3)
Compass Capital Group, Inc. -0- 700,000 (4) -0-
Danzig, Ltd 150,000 150,000 -0-
Lothar Elsaessar 300,000 300,000 -0-
Greentree Financial
Group, Inc. 250,000 250,000 -0-
Hans George Huetter 300,000 300,000 -0-
RR Inv Holdings, Inc 400,000 400,000 -0-
Equity Market Information
Systems, Inc. 650,000 650,000 -0-
Totals 2,750,000 17,750,000 -0-
________________
(1) These numbers assume the selling shareholders sell all of their shares in
the offering.
(2) Consists of shares that may be issued pursuant to an Equity Line of Credit
Agreement, also known as an Investment Agreement.
(3) Dutchess is a private limited partnership whose business operations are
conducted by its general partner, Dutchess Capital Management, LLC. Michael
Novielli and Douglas H. Leighton are the owners of Dutchess Capital
Management, LLC., and have voting and dispositive power with respect to
shares owned by Dutchess Private Equities Fund, L.P.
(4) Consists of shares that may be issued pursuant to the conversion of a
promissory note currently held by Compass Capital Group and/or the exercise
of their warrant to purchase up to 200,000 shares at a price of $.20.
(5) Consists of shares that may be issued pursuant to the Company's agreement
with Equity Market Information Systems and the exercise of their stock
option to purchase up to 150,000 shares at an average price of $.583.
DESCRIPTION OF SECURITIES
Common Stock
We have authorized 200,000,000 shares of common stock, $.001 par value per
share. As of March 31, 2004, there were 19,260,944 issued and outstanding
shares of common stock. Following the offering, there will be up to 35,610,944
shares issued and outstanding. All shares are of the same class and have the
same rights, preferences and limitations.
Holders of shares of common stock are entitled to one vote for each share on all
matters to be voted on by the stockholders. Holders of common stock do not have
cumulative voting rights. Holders of shares of common stock are entitled to
share ratably in dividends, if any, as may be declared, from time to time by the
Board of Directors in its discretion, from funds legally available therefore.
In the event of a liquidation, dissolution, or winding up of the Company, the
holders of shares of common stock are entitled to share pro rata all assets
remaining after payment in full of all liabilities and any amounts owing to
holders of shares of preferred stock. Holders of common stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares, with the
noted exception of a put option held by the Liquidating Trust. Pursuant to the
Plan of Merger with FoneFriend Nevada, the Liquidating Trust was granted a
conditional put option whereby it could sell its shares back to the Company for
up to $3 Million dollars, contingent upon the Company having sufficient
available capital surplus at the time of such transaction, and was granted
certain anti-dilution rights with respect to their 5% holdings. A quorum of
shareholders for purposes of matters requiring a shareholder vote constitutes
35% of all of the issued and outstanding shares entitled to vote. Shareholder
action constitutes the affirmative vote at a meeting or action in lieu of a
meeting taken by a majority of the shares representing a quorum.
Preferred Stock
We have authorized 50,000,000 shares of preferred stock, $.001 par value per
share. As of March 31, 2004, there were no issued and outstanding shares of
preferred stock. The rights, preferences, privileges and restrictions granted to
and imposed on the preferred shares may be set by the Board of Directors upon
issuance. Terms of the Preferred Stock would be outlined by our Board of
Directors in the event of such issuance.
PLAN OF DISTRIBUTION
This prospectus relates to the resale of up to 2,950,000 shares of our common
stock by current stockholders Danzig, Ltd., Lothar Elsaessar, Greentree
Financial Group, Inc., Hans George Huetter and Equity Market Information
Systems, Inc. Additionally, Dutchess Private Equities Fund, L.P. will become a
stockholder pursuant to a put right under an Investment Agreement that we have
entered into with Dutchess, and Compass Capital Group, Inc., which will become a
stockholder upon the conversion of a convertible note which it holds or the
exercise of warrants to purchase our common stock which it holds.
DUTCHESS PRIVATE EQUITIES FUND, L.P.
On February 25, 2004, we entered into an Investment Agreement with Dutchess
Private Equities Find, L.P. ("Dutchess"). Pursuant to the Investment Agreement,
we may, at our discretion, periodically "put to" or require Dutchess to purchase
shares of our common stock. The aggregate amount that Dutchess is obligated to
pay for our shares shall not exceed $3.0 million. For each share of common
stock purchased under the Investment Agreement, Dutchess will pay 94% of the
lowest Best Bid price as defined in the Agreement. Dutchess is a private
limited partnership whose business operation are conducted through its general
partner, Dutchess Capital Management, LLC. Our ability to put the shares of
common stock under the Investment Agreement is conditioned upon us registering
the shares of common stock with the Securities and Exchange Commission. The
costs associated with this registration will be borne by us.
The amount that the Company shall be entitled to put to Dutchess in any single
transaction pursuant to the Investment Agreement will be equal to, at the
Company's election, either: (A) 200% of the average daily volume in the U.S.
market of the common stock for the 20 trading days prior to the notice of our
put, multiplied by 94% of the average of the three daily closing Best Bid prices
immediately preceding the date of the put, or (B) $25,000; provided that in no
event shall the amount of any single put be more than $1,000,000. All
references to the terms of the Investment Agreement are qualified in their
entirety to the language contained in that Agreement, a copy of which is
incorporated by reference in this Registration Statement.
Subject to a variety of limitations, we may put shares pursuant to the
Investment Agreement once the underlying shares are registered with the
Securities and Exchange Commission. Thereafter, we may continue to put shares
to Dutchess until Dutchess has paid a total of $3.0 million or until 36 months
after the effectiveness of the accompanying Registration Statement, whichever
occurs first.
We cannot predict the actual number of shares of common stock we will issue
pursuant to the Investment Agreement, in part because the volume and purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw.
You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Investment Agreement.
That is, if our stock price declines, we would be required to issue a greater
number of shares under the Investment Agreement for a given advance.
We have engaged Charleston Capital Corporation ("Charleston") as our placement
agent with respect to the securities to be issued under the Equity Line of
Credit and, for these services, they will be paid one percent (1%) upon each put
up to a maximum of $10,000. Charleston has no affiliation or business
relationship with Dutchess.
PLAN OF DISTRIBUTION
The selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholders
may sell shares from time to time
o at market prices prevailing on the OTC Bulletin Board at the time of offer
and sale, or
o at prices related to such prevailing market prices, or
o in negotiated transactions, or
o in a combination of such methods of sale.
The selling stockholders may effect such transactions by offering and selling
the shares directly to or through securities broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of the shares
for whom such broker-dealers may act as agent or to whom the selling
stockholders may sell as principal, or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions.
Dutchess is, and any broker-dealers who acts in connection with the sale of
their shares may be deemed to be, an "underwriter" within the meaning of the
Securities Act of 1933, as amended, and any discounts, concessions or
commissions received by them and profit on any resale of the shares as principal
may be deemed to be underwriting discounts, concessions and commissions under
the Securities Act.
On or prior to the effectiveness of the registration to which this prospectus is
a part, we will advise the selling stockholders that they and any securities
broker-dealers or others who may be deemed to be statutory underwriters will be
governed by the prospectus delivery requirements under the Securities Act.
Under applicable rules and regulations under the Securities Exchange Act, any
person engaged in a distribution of any of the shares may not simultaneous
engage in market activities with respect to the common stock for the applicable
period under Regulation M prior to the commencement of such distribution. In
addition and without limiting the foregoing, the selling security owners may be
governed by the applicable provisions of the Securities and Exchange Act, and
the rules and regulations thereunder, including without limitation Rules 10b-5
and Regulation M, which provisions may limit the timing of purchases and sales
of any of the shares by the selling stockholder. All of the foregoing may
affect the marketability of our securities.
On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholders that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling security holders and
any of their affiliates. We have informed the selling security holders that
they may not:
o engage in any stabilization activity in connection with any of the shares;
o bid for or purchase any of the shares or any rights to acquire the shares,
or attempt to induce any person to purchase any of the shares or rights to
acquire the shares other than as permitted under the Securities Exchange
Act;
o effect any sale or distribution of the shares until after the prospectus
shall have been appropriately amended or supplemented, if required, to
describe the terms of the sale or distribution.
We have informed the selling stockholders that they must effect all sales of
shares in broker's transactions, through broker-dealers acting as agents, in
transaction directly with market makers, or in privately negotiated transactions
where no broker or other third party, other than the purchaser, is involved.
The selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of shares against certain liabilities arising
under the Securities Act. Any commissions paid or any discounts or concessions
allowed to any broker-dealers, and any profits received on the resale of shares,
may be deemed to be underwriting discounts and commissions under the Securities
Act if the broker-dealers purchase shares as principal.
In the absence of the registration statement to which this prospectus is a part,
certain of the selling stockholders would be able to sell their shares only
pursuant to the limitations of Rule 144 promulgated under the Securities Act.
LEGAL PROCEEDINGS
In October, 2003, the Company received notice of a lawsuit commenced against its
predecessor company, FoneFriend, Inc., a Nevada corporation ("FoneFriend of
Nevada"), seeking past due legal fees of approximately $21,000. The assets of
this predecessor company were acquired by the Company in a stock for assets
purchase transaction and FoneFriend of Nevada was dissolved. Should the Company
become a party to this litigation, it believes it has an affirmative defense as
to the amount sought and will attempt to negotiate a reduced settlement or
defend against such action should it be commenced.
In November, 2003, the Company has received a threat of litigation from the
bankrupt estate of Allegiance Telecom, seeking approximately $5,000. No lawsuit
has yet been commenced. Should the Company become a party to any such
litigation, it believes it has affirmative defenses to such charges and intends
to defend against any such action should it be commenced.
In January, 2003, the Company entered into a settlement agreement with a former
officer and director of FoneFriend, Inc., a Nevada corporation. As partial
consideration under the settlement agreement, the Company was required to pay
plaintiff the sum of $20,000 on December 1, 2003. The plaintiff accepted a
payment of $10,000 from the Company in December of 2003 and agreed to accept a
final payment of $12,500 on January 4, 2004. The Company has not yet made the
final payment to plaintiff. In accordance with the terms of the settlement, the
plaintiff may, upon the Court's order, file with the Court a "Stipulation for
Entry of Judgment." The Company intends to settle this matter as soon as
finances permit. The plaintiff has not yet moved to file or enforce the
judgment.
The Company recently received a letter from counsel to the court appointed
Liquidating Trustee under the Fourth Amended Chapter 11 Plan of Reorganization,
as modified (the "Plan of Reorganization"), of Universal Broadband, Inc., a
Delaware corporation ("UBN"), which was the predecessor company into which
FoneFriend, Inc., a Nevada corporation, was merged pursuant to the Amended and
Restated Agreement and Plan of Merger (the "Merger Agreement"). As described
in the Section entitled "Description of Business" set forth on page 40, above,
after the merger, UBN subsequently changed its name to FoneFriend, Inc. and
commenced operations. The letter from counsel to the Liquidating Trustee
pointed out some material differences between the Plan of Reorganization and the
Merger Agreement with respect to the rights of the Liquidating Trustee. In
particular, counsel asserted that the Liquidating Trustee was entitled under the
Plan of Reorganization, at any time, to request FoneFriend, Inc. to redeem its
shares of common stock that were received pursuant to the Plan of Reorganization
for an amount up to $3.0 million. In addition, the letter pointed out that the
shares issued to the Liquidating Trustee would be entitled to anti-dilution
protection, so that the Liquidating Trustee would maintain a 5% equity position
at all times prior to redemption. This would mean, for example, that the
Liquidating Trustee could demand and acquire the proceeds of this offering and
any subsequent offering of common stock up to an amount equal to $3.0 million.
The terms of the Merger Agreement that FoneFriend, Inc., a Nevada corporation,
agreed to be bound by included provisions that were directly contradictory to
the position asserted by the Liquidating Trustee. For example, Section 3.14(a)
of the Merger Agreement provides, in part, that any right of redemption held by
the Liquidating Trustee is subject to FoneFriend, Inc. having on hand at the
time of such request sufficient surplus capital to pay for the full redemption
price, and that a redemption is otherwise permitted to be consummated under
applicable law. For example, the Company currently has no surplus capital and
the Liquidating Trustee therefore would not be entitled to any right of
redemption until such time as the Company has $3.0 million in surplus capital.
Therefore, the Merger Agreement provides certain protections to the Company from
actions of the Liquidating Trustee that are not included in the Plan of
Reorganization. Further, the Merger Agreement can be interpreted in a way that
would result in the anti-dilution protection of the Liquidating Trustee having
expired. In addition, the anti-dilution protection as defined in the Merger
Agreement does not apply to the issuance of securities that are not dilutive
from a book value standpoint. For example, under this offering, shares issued
to Dutchess at a price that is above book value, would not result in an
anti-dilution adjustment.
It is noteworthy that the Merger Agreement provides in its recitals that the
terms of such agreement shall be incorporated into the Plan of Reorganization.
Inasmuch as the Company was not a party to the Plan of Reorganization and was
not privy to its terms, and was only a party to the Merger Agreement, the
Company has relied upon the provisions of the Merger Agreement with respect to
its dealings with the Liquidating Trustee and the disclosures required in its
filings with the SEC. The Plan of Reorganization and the Merger Agreement are
hereby incorporated by reference from a Current Report on Form 8-K of the
Company, dated December 24, 2002.
Although the claims of the Liquidating Trustee may have some merit, the
Company's position is that counsel for the Debtor failed to include the terms of
the Merger Agreement, as required by the Merger Agreement, in its Plan of
Reorganization. Further, the Company believes that counsel to the Liquidating
Trust had actual knowledge of the provisions of the Merger Agreement and the
conflict between said documents. Moreover, Section 160(a) of the Delaware
General Corporation Law, prohibits redemptions of capital stock when the capital
of the corporation is impaired or when such purchase or redemption would cause
any impairment of the capital of the corporation. This statute has been
interpreted by the courts to mean that a corporation can only purchase its own
stock out of surplus. Currently, the Company does not have any surplus, and a
redemption of its common stock at this point in time would be prohibited as a
matter of law.
Accordingly, the Company intends to pursue all remedies available at law or in
equity to protect its rights under the Merger Agreement, which it believes will
be deemed to be the controlling document in this matter. Additionally, the
Company will evaluate all options and take legal action for damages associated
with the material misrepresentations made in connection with the Plan of
Reorganization and the Merger Agreement negotiated by and approved by the
Official Creditor's Committee.
Nonetheless, this is a serious matter for the Company. It is a development
stage entity that through this offering may raise the necessary capital to
implement its intended plan of business. The payment of $3.0 million to the
Liquidating Trustee at this point in time could have a material adverse effect
on the Company. Additionally, the Company may not have adequate resources
available to defend its position and may be forced to seek the protection under
the bankruptcy laws.
In May, 2004, the Company cancelled its agreements with RR Inv Holdings and The
Bulletin Board Productions. All shares except 400,000 issued to RR Inv Holdings
were held in escrow to ensure performance. All 850,000 shares held in escrow are
being returned to treasury and the 400,000 shares held by RR Inv Holdings is the
subject of a dispute.
Other than the legal matters disclosed above, we are not aware of any litigation
or potential litigation affecting us or our assets.
LEGAL MATTERS
The Law Offices of Harold H. Martin, P.A. will pass upon the validity of the
common stock offered hereby. Mr. Martin will not receive a direct or indirect
interest in the small business issuer and has never been a promoter,
underwriter, voting trustee, director, officer or employee of our company. Nor
does Mr. Martin have any contingent based agreement with us or any other
interest in or connection to us.
EXPERTS
The consolidated financial statements incorporated by reference in this
prospectus have been audited by Henry Schiffer, independent certified public
accountants, to the extent and for the periods set forth in their report (which
contains an explanatory paragraph regarding our ability to continue as a going
concern) incorporated herein by reference, and are incorporated herein in
reliance upon such report given the authority of said firm as experts in
auditing and accounting. Neither Mr. Schiffer nor his firm has any direct or
indirect interest in us, nor were they a promoter or underwriter.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration statement on
Form SB-2 under the Securities Act of 1933 for the shares of common stock in the
offering, of which this prospectus is a part. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedules that were filed with the registration statement. For further
information with respect to us and the common stock, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement.
Statements contained in this prospectus about the contents of any contract or
any other document that is filed as an exhibit to the registration statement are
not necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules that were filed with the
registration statement may be inspected without charge at the Public Reference
Room maintained by the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the
Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. We intend to furnish our shareholders with annual
reports containing audited financial information.
The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the SEC. The address of the site is
www.sec.gov.
-----------
FINANCIAL STATEMENTS
FONEFRIEND, INC.
(A DEVELOPMENT STAGE COMPANY)
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(Amounts in Dollars)
ASSETS
(UNAUDITED) (AUDITED)
March 31, March 31,
2004 2003
------------ ------------
CURRENT ASSETS
Cash in banks and on hand $ 4,868 $ 20,221
Inventory-equipment $ 16,400 $ 16,000
Stock subscription receivable $ 2,500 $ -
Current portion of prepaid expenses $ 225,225 $ 143,000
------------ ------------
TOTAL CURRENT ASSETS $ 249,293 $ 179,221
------------ ------------
Furniture & equipment, net of depreciation - Note 3 $ 12,166 $ 12,713
------------ ------------
OTHER ASSETS
Non-current prepaid expenses and deposits $ 500 $ 13,597
Capitalized development costs $ 694,863 $ 694,863
Technology rights, FoneFriend license $ 300,000 $ 300,000
Stock in FoneFriend Systems, Inc. $ 150,000 $ 150,000
Organizational costs, net of
amortization - Note 3 $ 80 $ 120
------------ ------------
Total other assets $ 1,145,443 $ 1,158,580
------------ ------------
TOTAL ASSETS $ 1,406,902 $ 1,350,514
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and unpaid payroll taxes $ 32,524 $ 9,718
Accrued expenses payable $ 176,500 $ -
Litigation settlement payable $ 12,500 $ -
Loans from officers and others, current, Note 4 $ 147,478 $ 60,888
------------ ------------
Total current liabilities $ 342,049 $ 70,606
------------ ------------
Loans payable, non-current, Note 4 $ 25,000 $ 20,000
------------ ------------
TOTAL LIABILITIES $ 394,002 $ 90,606
------------ ------------
Stockholders' Equity - Note 4
Preferred stock, $.001 par value, authorized
50,000,000 shares, issued and outstanding, 0
and 820,361 at March 31, 2004 and at March 31,
2003, respectively $ 0 $ 820
Common stock, $.001 par value, authorized
200,000,000 shares, issued and outstanding,
19,260,944 and 8,471,000 at March 31, 2004
March 31, 2003, respectively $ 19,261 $ 8,471
Additional paid in capital $ 4,212,892 $ 3,741,368
Operating deficit $ (3,219,253) $ (2,490,751)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 1,012,900 $ 1,259,908
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,406,902 $ 1,350,514
------------ ------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF OPERATIONS
(Amounts in Dollars)
11 Months
Year Ended Ended Year Ended
March 31, March 31, April 30,
2004 2003 2002
---------- ---------- ----------
(Unaudited) (Audited) (Audited)
Revenue $ 0 $ 0 $ 0
Expenses
Advertising $ 2,780 $ 12,244 $ 76,540
Automobile $ 1,845 $ 13,952 $ 16,471
Commissions related to raising funds $ - $ 18,889 $ -
Consulting fees $ 570,405 $ 323,422 $ 374,088
Depreciation and amortization $ 3,492 $ 3,202 $ 1,845
Insurance $ 1,963 $ 7,886 $ 3,562
Legal, accounting fees $ 23,883 $ 85,169 $ 25,478
Meals and entertainment $ 2,741 $ 5,603 $ 5,211
Office supplies $ 5,793 $ 10,889 $ 12,591
Payments to officers $ 22,560 $ 31,033 $ 53,000
Postage $ 2,088 $ 5,568 $ 35,125
Rent $ 39,515 $ 34,947 $ 121,191
Salaries, payroll $ - $ 100,890 $ -
Telephone $ 14,399 $ 25,880 $ 95,155
Travel $ 21,271 $ 26,848 $ 24,362
Other $ 15,767 $ 33,934 $ 40,699
---------- ---------- ----------
Total expenses before
write-down of capitalized
development costs $ 728,502 $ 740,356 $ 885,288
Write-down of capitalized
development cost to
estimated fair value $ - $ 865,108 $ -
---------- ---------- ----------
Total expenses $ 728,502 $1,605,464 $ 885,288
---------- ---------- ----------
Loss from development
stage operations $ (728,502) $(1,605,464) $ (885,288)
---------- ---------- ----------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF CASH FLOWS
(Amounts in Dollars)
11 Months
Year Ended Ended Year Ended
March 31, March 31, April 30,
2004 2003 2002
---------- ---------- ----------
(Unaudited) (Audited) (Audited)
Operating Activities
Loss from development stage
operations $ (728,502) $(1,605,464) $ (885,288)
---------- ---------- ----------
Adjustments to loss from development
stage operations:
Capitalized development costs $ - $ (296,814) $(1,329,491)
Accounts payable $ 22,806 $ 9,718 $ -
Accrued expenses $ 176,500 $ - $ -
Litigation settlement payable $ 12,500 $ - $ -
Consulting, legal fees paid
with stock $ 309,000
Depreciation and amortization $ 3,492 $ 3,202 $ 1,845
Purchase of furniture & equipment $ - $ (6,812) $ (9,028)
Purchase of inventory equipment $ - $ (10,000) $ (6,000)
Stock subscriptions receivable $ (2,500) $ 61,066 $ (61,066)
Increase in loans from
officers and others $ 91,590 $ 80,693 $ 195
Write-down of capitalized
development cost $ - $ 865,108 $ -
Other $ (4,039) $ 18,993 $ (61,295)
---------- ---------- ----------
Net adjustments to loss from
development stage operations $ 609,349 $ 725,154 $(1,464,840)
---------- ---------- ----------
Net cash provided (used) by
development stage operations $ (119,153) $ (880,310) $(2,350,128)
---------- ---------- ----------
Investing activities
Purchase of technology license
from FoneFriend Systems, Inc. $ - $ - $ (300,000)
Purchase of FoneFriend Systems,
Inc. common stock $ - $ - $ (150,000)
Payment to Universal Broadband,
Inc. $ - $ - $ (50,000)
---------- ---------- ----------
Net cash provided (used) in
investing activities $ - $ - $ (500,000)
---------- ---------- ----------
Financing Activities
Issuance of common stock $ 103,800 $ 672,521 $ 3,078,138
---------- ---------- ----------
Net cash increase (decrease)
for the period $ (15,353) $ (207,789) $ 228,010
Cash at beginning of period $ 20,221 $ 228,010 $ -
---------- ---------- ----------
Cash at end of period $ 4,868 $ 20,221 $ 228,010
---------- ---------- ----------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF STOCKHOLDERS'EQUITY
(AMOUNTS IN DOLLARS)
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------- ---------- ----------- -------------
COMMON SHARES
Beginning
balance, July 1, 2002 8,956,361 $ 8,956 $3,069,182 $(1,036,686) $ 2,041,452
Loss from
operations $ (211,316) $ (211,316)
Common shares
issued September 30, 2002 85,500 $ 86 $ 427,415 $ 427,501
----------- ------- ---------- ----------- -------------
Balance,
September 30, 2002 9,041,861 $ 9,042 $3,496,597 $(1,248,002) $ 2,257,637
Loss from Operations
to November 21, 2002 $ (118,281) $ (118,281)
Common shares
cancelled (300,000) $ (300) $ (300)
Common shares
issued November 21, 2002 58,139 $ 58 $ 29,942 $ - $ 30,000
----------- ------- ---------- ----------- -------------
Total common
shareholders'
equity pre-merger,
November 21, 2002 8,800,000 $ 8,800 $3,526,539 $(1,366,283) $ 2,169,056
----------- ------- ---------- ----------- -------------
MERGER OF FONEFRIEND, INC. (NEVADA CORPORATION) ON NOVEMBER
21, 2002 WITH AND INTO FONEFRIEND, INC. (DELAWARE CORPORATION)
--------------------------------------------------------------
Exchange of
Nevada shares
for Delaware shares 2,200,000 $ 2,200
Issue new
Delaware
Shares:
To: management 4,600,000 $ 4,600
FONEFRIEND, INC.
STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------- ---------- ----------- -------------
To: Trust 423,000 $ 423
To: Dennis Johnston 423,000 $ 423
Transfer par value
to paid-in capital $(1,154) $ 1,154
Issue common shares to
consultants, December 2002 825,000 $ 825 $ 213,675 $ 214,500
Loss from operations
from November 21, 2002 to
March 31, 2003 $(1,124,468) $ (1,124,468)
Total common shareholders'
equity, March 31, 2003
Delaware Corporation 8,471,000 $ 8,471 $3,741,368 $(2,490,751) $ 1,259,088
Issue common shares to
consultants, officers and
others 10,789,940 $10,790 $ 471,524 $ 482,314
Loss from operations
April 1, 2003 to March
31, 2004 $ (728,502) $ (728,502)
----------- ------- ---------- ----------- -------------
Total common shareholders'
equity, March 31, 2004 Delaware
Corporation 19,260,940 $19,261 $4,212,892 $(3,219,253) $ 1,012,900
----------- ------- ---------- ----------- -------------
PREFERRED SHARES
Preferred shares issued November
21, 2002, Nevada 820,361 $ 820 $ 820
----------- ------- ---------- ----------- -------------
FONEFRIEND, INC.
STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Cancel Nevada preferred
shares, November 21, 2002 (820,361) $ (820) $ (820)
----------- ------- ---------- ----------- -------------
Issue Delaware preferred shares
for Nevada preferred shares,
November 21, 2002 820,361 $ 820 $ 820
Cancellation of preferred shares
for issuance of new common
shares (820,361) $ (820) $ (820)
Total stockholders'
equity, March 31, 2004 $ 1,012,900
----------- ------- ---------- ----------- -------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
NOTE 1 - DESCRIPTION OF BUSINESS
A. Background
FoneFriend, Inc. ("FoneFriend" or the "Company") was incorporated on April 24,
2001, under the laws of the State of Nevada, and on November 21, 2002, was
merged with and into FoneFriend, Inc., a Delaware corporation. The Company
maintains a corporate office at 14545 Friar Street, Suite 103, Van Nuys,
California 91411. The Company's telephone number is: (818) 376-1616.
The Company is a development stage enterprise and has not generated any revenue
during its brief history. The primary business of the Company is to market an
Internet telephony device and related services to customers worldwide, called
the "FoneFriend". The underlying technology of FoneFriend has been licensed by
the Company from FoneFriend Systems, Inc. and will enable the Company's
subscribers to make and receive unlimited long distance telephone calls over the
Internet, using only their standard residential telephone set (without the need
for a computer), for a low monthly fee of about $10.00 or less. Due to the small
cost of transmitting calls over the Internet, the Company anticipates that it
will realize significant profit margins, well in excess of the traditional
telecommunications industry.
B. Basis of Presentation
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") which contemplates
continuation of the Company as a going concern. Management is attempting to
raise additional capital.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Fiscal Year
The Company's fiscal year is March 31 (after the above-described merger of
FoneFriend, Inc. of Nevada with and into FoneFriend, Inc. of Delaware).
B. Significant Estimates
In the process of preparing its financial statements in accordance with GAAP,
the Company estimates the carrying value of certain assets and liabilities that
are subjective
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
in nature. The primary estimates included in the Company's financial statements
include capitalized development costs and the ongoing value of its purchased
technology license.
C. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
maturity dates of three months or less at the date of purchase. These items are
carried at cost, which approximates fair value due to their short-term maturity
dates.
D. Prepaid Expenses and other Current Assets
The Company has cash outlays in advance of expense recognition for items such as
rent, interest, financing fees, and service contracts. All amounts identified as
prepaid expenses that will be utilized during the next twelve months are
identified as current assets, while any portion that will not be utilized during
the next twelve months are classified as non-current assets.
E. Furniture and Equipment
Furniture and equipment are carried at cost and depreciated over the estimated
useful lives of the individual assets.
F. Capitalized Development Costs
Capitalized development costs consist of expenditures made by the Company to
improve the product and develop marketing channels for the product, and which
are deemed by management to have future value to the Company. Such capitalized
development costs will be amortized over the estimated useful life once product
sales begin.
G. Technology Rights, FoneFriend License
The Company purchased a license to use the FoneFriend technology for a period of
ten years from FoneFriend Systems, Inc. under a license agreement dated April
30, 2001. This license agreement allows the Company to manufacture, market and
utilize a proprietary technology referred to as FoneFriend. During the
development stage operations, the company is carrying the asset at cost and will
begin amortization over the remaining life of the license when product sales
begin. The remaining value to the company will be reviewed quarterly and if
management determines that impairment of the asset has occurred, the carrying
value will be adjusted accordingly.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
H. Stock in FoneFriend Systems, Inc.
The Company purchased stock in FoneFriend Systems, Inc. as a long-term
investment. Such investment is carried at cost and will be evaluated
periodically by management to determine whether impairment has occurred. Should
management determine that the value has been impaired, the carrying value will
be adjusted accordingly.
NOTE 3 - DEPRECIATION AND AMORTIZATION
The Company's management has estimated the useful lives of furniture, equipment
and certain organization costs. The following tables show the gross asset
amounts and the accumulated depreciation and amortization:
A. Furniture and Equipment
March 31,
2004 2003
---------- ----------
Cost $ 18,745 $ 15,840
Less accumulated depreciation $ (6,579) $ (3,127)
---------- ----------
Net value $ 12,166 $ 12,713
---------- ----------
B. Organizational Costs
March 31,
2004 2003
---------- ----------
Cost $ 195 $ 195
Less accumulated depreciation $ (115) $ (75)
---------- ----------
Net value $ 80 $ 120
---------- ----------
NOTE 4 - MERGER AND CAPITAL STOCK
The merger of FoneFriend, Inc. of Nevada with and into FoneFriend, Inc. of
Delaware was consummated on November 21, 2002 wherein the assets of FoneFriend,
Inc. of Nevada were acquired by Universal Broadband Networks, Inc. ("UBN") in a
tax-free reorganization pursuant to IRC 368 (the "Merger"). The Merger was
effectuated as a "C" type reorganization whereby UBN issued stock in exchange
for all of the assets FoneFriend, Inc. of Nevada, after which that corporation
was dissolved. UBN was the surviving corporation and changed its name to
FoneFriend, Inc. (a Delaware corporation)
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
immediately subsequent to the Merger. Pursuant to the express terms of the
Fourth amended Plan of Reorganization, as approved by the U.S. Bankruptcy court
(the "Plan"), the Merger was accomplished as follows:
1. All of UBN's issued and outstanding shares of capital stock were cancelled
and extinguished and the stockholders of UBN prior to the Merger have no
further interest or rights in UBN.
2. UBN issued 2,200,000 shares of newly created common stock in favor of
FoneFriend, Inc. (Nevada corporation) in exchange for all of FoneFriend,
Inc.'s assets and 115,750 of newly created common stock in favor of a
Liquidating Trust for the benefit of UBN's creditors. As a result, the
merged entity had a total of 2,315,750 shares of newly created common stock
issued and outstanding, of which former shareholders of the dissolved
Nevada corporation owned 95%, and J. Michael Issa, Esq., as Trustee of the
Liquidating Trust (which was created under the Plan), owned 5%.
3. The issuance of stock pursuant to the Plan, as filed within the U.S.
Bankruptcy Court, was ordered by the Court to be exempt from all applicable
Federal, State and local securities law pursuant to 11 U.S.C. ss.1145 (a).
4. The dissolved Nevada corporation's management distributed the newly issued
2,200,000 shares of FoneFriend, inc. (Delaware corporation) to its former
shareholders, on a pro-rata basis. Each of such former shareholders
received one share of stock in FoneFriend, Inc. (Delaware corporation) for
every four-share shares held in the dissolved Nevada corporation.
5. Immediately subsequent to the Merger, the Company authorized the issuance
of 820,361 shares of an newly created Series A Preferred Stock (each share
of which is convertible into one share of common stock) to be issued to
shareholders of preferred stock in the dissolved Nevada corporation prior
to the Merger.
6. The Company then issued 4,600,000 shares of common stock to various
management personnel and consultants in order to hire or retain their
services. The Company also issued 423,000 shares of common stock to Dennis
H. Johnston, Esq. as compensation for his services in connection with the
Merger. Additionally, the company issued 307,250 shares of common stock to
the Liquidating Trust so as to be in compliance with the Anti-Dilution
Protection provisions of the Plan.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
7. Pursuant to the Merger, the Liquidating Trust was granted certain
anti-dilution and put rights with respect to its shares of common stock of
the Company. The terms of the Merger agreement, entered into between the
Company and the former Debtor in Possession, and the terms of the Fourth
Amended Plan of Reorganization, approved by the U.S. Bankruptcy Court,
conflict with respect to the conditions pertaining to the rights of the
Liquidating Trust. Management is attempting to resolve these conflicting
terms in a manner consistent with the provisions of its Merger agreement.
HENRY SCHIFFER, CPA
AN ACCOUNTANCY CORPORATION
315 S. BEVERLY DR. #211
BEVERLY HILLS, CA 90212
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To: The Shareholders
The Board of Directors
FoneFriend, Inc.
Carlsbad, California
I have audited the accompanying balance sheet of FoneFriend, Inc. as of March
31, 2003 and the related statements of operations, stockholders' equity and cash
flows for the periods ended April 30, 2002 and March 31, 2003. This financial
statement is the responsibility of the Company's management. My responsibility
is to express an opinion on this financial statement based on my audit.
I conducted my audit in accordance with generally accepted auditing standards in
the United States of America. Those standards require that I plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above fairly present in all
material respects, the financial position of FoneFriend, Inc., a development
stage company, for the dates indicated above and the results of its operations,
stockholders' equity and cash flows for the respective periods then ended in
conformity with generally accepted accounting principles consistently applied. I
believe this to be a "true and fair" reflection of the company's financial
affairs.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the Notes to the
financial statements, the Company has sustained losses from initial startup
costs and has a lack of substantial capital that raises doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 6. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
I hereby consent to the use of this opinion letter for inclusion in the filing
of FoneFriend's Form 10-KSB for the period through March 31, 2003.
/s/ Henry Schiffer, CPA
--------------------------
Henry Schiffer, CPA
An Accountancy Corporation
Beverly Hills, California
July 8, 2003
FONEFRIEND, INC.
FINANCIAL STATEMENTS
MARCH 31, 2003
(AUDITED)
BALANCE SHEETS
(Amounts in Dollars)
March 31, April 30,
2003 2002
------------ ------------
ASSETS
Current Assets
Cash in banks and on hand $ 20,221 $ 228,010
Inventory-equipment $ 16,000 $ 6,000
Stock subscriptions receivable $ -- $ 61,066
Prepaid consulting fees $ 143,000 $ --
------------ ------------
Total current assets $ 179,221 $ 295,076
------------ ------------
Furniture & equipment, net of depreciation Note 3 $ 12,713 $ 7,222
------------ ------------
Other Assets
Non-current prepaid expenses and deposits $ 13,597 $ 22,500
Capitalized development costs $ 694,863 $ 1,329,491
Technology rights, FoneFriend license $ 300,000 $ 350,000
Notes receivable $ -- $ 38,600
Stock in FoneFriend Systems, Inc. $ 150,000 $ 150,000
Reorganizational costs, net of
amortization Note 3 $ 120 $ 156
------------ ------------
Total other assets $ 1,158,580 $ 1,890,747
------------ ------------
TOTAL ASSETS $ 1,350,514 $ 2,193,045
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,302 $ --
Payroll taxes payable $ 5,416 $ --
Loans from officers and others, current Note 4 $ 60,888 $ 195
------------ ------------
Total current liabilities $ 70,606 $ 195
------------ ------------
Loans payable, non-current Note 4 $ 20,000 $ --
------------ ------------
TOTAL LIABILITIES $ 90,606 $ 195
------------ ------------
Stockholders' Equity Notes 5 and 6
Preferred stock, $.001 par value, authorized
50,000,000 shares authorized, issued and
outstanding 820,361 shares $ 820 $ --
Common stock, $.001 par value, authorized
200,000,000 shares, issued and outstanding,
8,471,000 at March 31, 2003 and 8,956,361
at April 30, 2002 $ 8,471 $ 8,956
Additional paid in capital $ 3,741,368 $ 3,069,182
Operating deficit $ (2,490,751) $ (885,288)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 1,259,908 $ 2,192,850
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,350,514 $ 2,193,045
============ ============
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF OPERATIONS
(Amounts in Dollars)
FOR THE
--------------------------------
11 MONTHS ENDED YEAR ENDED
MARCH 31, 2003 APRIL 30, 2002
--------------- --------------
Revenue $ -- $ --
--------------- --------------
Expenses
Advertising $ 12,244 $ 76,540
Automobile $ 13,952 $ 16,471
Commissions related to fund raising activity $ 18,889 $ --
Consulting fees $ 323,422 $ 374,088
Depreciation and amortization $ 3,202 $ 1,845
Insurance $ 7,886 $ 3,562
Legal fees $ 49,104 $ 21,683
Meals and entertainment $ 5,603 $ 5,211
Office supplies $ 10,889 $ 12,591
Officer/stockholder payments $ 31,033 $ 53,000
Salaries and payroll $ 100,890 $ --
Postage $ 5,568 $ 35,125
Accounting and auditing fees $ 36,065 $ 3,795
Rent $ 34,947 $ 121,191
Telephone $ 25,880 $ 95,155
Travel $ 26,848 $ 24,362
Other $ 33,934 $ 40,669
--------------- --------------
Total before write-down of capitalized
development cost $ 740,356 $ 885,288
Write down capitalized development cost
to estimated fair value $ 865,108 $ --
--------------- --------------
Total expenses $ 1,605,464 $ 885,288
--------------- --------------
Loss from development stage operations $(1,605,464) $ (885,288)
--------------- --------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF CASH FLOWS
(Amounts in Dollars)
FOR THE
--------------------------------
11 MONTHS ENDED YEAR ENDED
MARCH 31, 2003 APRIL 30, 2002
--------------- --------------
Operating Activities
Loss from development stage operations $(1,605,464) $ (885,288)
--------------- --------------
Adjustments to loss from development
stage operations:
Capitalized development costs $ (296,814) $(1,329,491)
Capitalized organization costs $ -- $ (195)
Purchase of furniture and equipment $ (6,812) $ (9,028)
Decrease in prepaid cash based
expenses and deposits $ 8,903 $ (22,500)
Purchase of inventory-equipment $ (10,000) $ (6,000)
Increase in accounts payable $ 4,303 $ --
Stock subscriptions receivable $ 61,066 $ (61,066)
Depreciation and amortization $ 3,202 $ 1,845
Increase in loans from officers
and others $ 80,693 $ 195
Write-down of capitalized development
cost to estimated fair value $ 865,108 $ --
Other $ 15,505 $ (38,600)
--------------- --------------
Net adjustments to loss from
development stage operations $ 725,154 $(1,464,840)
--------------- --------------
Net cash provided (used) by development
stage operations $ (880,310) $(2,350,128)
--------------- --------------
Investing Activities
Purchase of technology license
from FoneFriend Systems, Inc. $ -- $ (300,000)
Purchase of FoneFriend Systems, Inc. stock $ -- $ (150,000)
Payment to Universal Broadband, Inc. $ -- $ (50,000)
--------------- --------------
Net cash provided (used) in investing
activities $ -- $ (500,000)
--------------- --------------
Financing Activities
Preferred stock $ 820 $ --
Common stock and paid in capital $ 671,701 $ 3,078,138
--------------- --------------
Net cash provided by financing activities $ 672,521 $ 3,078,138
--------------- --------------
Net cash increase (decrease) for the period $ (207,789) $ 228,010
Cash at beginning of period $ 228,010 $ --
--------------- --------------
Cash at end of period $ 20,221 $ 228,010
--------------- --------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF STOCKHOLDERS'EQUITY
(AMOUNTS IN DOLLARS)
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------- ---------- ----------- -------------
Common shares
Beginning balance,
April 30, 2002 8,956,361 $ 8,956 $3,069,182 $ (885,288) $ 2,192,850
Common shares
issued September 30, 2002 85,500 $ 86 $ 427,415 -- $ 427,501
Common shares
cancelled (300,000) $ (300) -- -- $ (300)
Loss from development stage
Operations to merger date -- -- -- $ (480,995) $ (480,995)
Common shares issued
November 21, 2002 58,139 $ 58 $ 29,942 $ -- $ 30,000
----------- ------- ---------- ----------- -------------
Total common shareholders'
equity pre- merger,
November 21, 2002 8,800,000 $ 8,800 $3,526,539 $(1,366,283) $ 2,169,056
----------- ------- ---------- ----------- -------------
MERGER OF FONEFRIEND, INC. (NEVADA CORPORATION) ON NOVEMBER
21, 2002 WITH AND INTO FONEFRIEND, INC. (DELAWARE CORPORATION)
--------------------------------------------------------------
Exchange of Nevada shares
for Delaware shares 2,200,000 $ 2,200
Issue new Delaware shares to
management consultants and the
Liquidating Trust for creditors: 5,464,000 $ 5,464
----------- ------- ---------- ----------- -------------
FONEFRIEND, INC.
STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------- ---------- ----------- -------------
Transfer par value to paid-
in capital -- $(1,154) $ 1,154 -- --
Issue common shares to consultants,
December 10, 2002 825,000 $ 825 $ 213,675 -- $ 214,500
Loss from operations from
November 21, 2002 to
March 31, 2003 -- -- -- $(1,124,468) $ (1,124,468)
----------- ------- ---------- ----------- -------------
Total common shareholders'
equity, March 31, 2003
Delaware corporation 8,471,000 $ 8,471 $3,741,368 $(2,490,751) $ 1,259,088
----------- ------- ---------- ----------- -------------
PREFERRED SHARES
Preferred shares issued
November 21, 2002, Nevada 820,361 $ 820 -- -- $ 820
Cancel Nevada preferred shares,
November 21, 2002 (820,361) $ (820) $ (820)
----------- ------- ---------- ----------- -------------
Issue Delaware preferred shares
for Nevada preferred shares,
November 21, 2002 820,361 $ 820 -- -- $ 820
----------- ------- ---------- ----------- -------------
Total stockholders' equity,
March 31, 2003 -- -- -- -- $ 1,259,908
----------- ------- ---------- ----------- -------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
NOTE 1. DESCRIPTION OF BUSINESS
A. Background
FoneFriend, Inc. ("FoneFriend" or the "Company") was incorporated on April 24,
2001, under the laws of the State of Nevada, and on November 21, 2002, was
merged with and into FoneFriend, Inc., a Delaware corporation. The Company
maintains a corporate office at 2722 Loker Avenue, Suite G, Carlsbad, California
92008. The Company's telephone number is: (760) 607-2330.
The Company is a development stage enterprise and has not generated any revenues
during its brief history. The primary business of the Company is to market an
Internet telephony device and related services to customers worldwide, called
the "FoneFriend". The underlying technology of FoneFriend has been licensed by
the Company from FoneFriend Systems, Inc. and will enable the Company's
subscribers to make and receive unlimited long distance telephone calls over the
Internet, using only their standard residential telephone set (without the need
for a computer), for a low monthly fee of less than $10.00 per month. Due to the
small cost of transmitting calls over the Internet, the Company anticipates that
it will realize significant profit margins, well in excess of the traditional
telecommunications industry.
B. Basis of Presentation
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") which contemplates
continuation of the Company as a going concern. Management is attempting to
raise additional operating capital.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Fiscal Year
The Company's fiscal year is March 31 (after the above-described merger of
FoneFriend, Inc. of Nevada with and into FoneFriend, Inc. of Delaware. The
accompanying audited financial statements are for March 31, 2003 and April 30,
2002 and the respective eleven month and one year periods then ended.
B. Significant Estimates
In the process of preparing its financial statements in accordance with GAAP,
the Company estimates the carrying value of certain assets and liabilities that
are subjective in nature. The primary estimates included in the Company's
financial statements include capitalized development costs and the ongoing value
of its purchased technology license.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS Continued
C. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
maturity dates of three months or less at the date of purchase. These items are
carried at cost, which approximates fair value due to their short-term maturity
dates.
D. Prepaid Expenses and other Current Assets
The Company has cash outlays in advance of expense recognition for items such as
rent, interest, financing fees, and service contracts. All amounts identified as
prepaid expenses that will be utilized during the next twelve months are
identified as current assets, while any portion that will not be utilized during
the next twelve months are classified as non-current assets.
E. Furniture and Equipment
Furniture and equipment are carried at cost and depreciated over the estimated
useful lives of the individual assets.
F. Capitalized Development Costs
Capitalized development costs consist of expenditures made by the Company to
improve the product and develop marketing channels for the product, and which
are deemed by management to have future value to the Company. Such capitalized
development costs will be amortized over the estimated useful life once product
sales begin.
G. Technology Rights, FoneFriend License
The Company purchased a license to use the FoneFriend technology for a period of
ten years from FoneFriend Systems, Inc. under a license agreement dated April
30, 2001. This license agreement allows the Company to manufacture, market and
utilize a proprietary technology referred to as FoneFriend. During the
development stage operations, the company is carrying the asset at cost and will
begin amortization over the remaining life of the license when product sales
begin. The remaining value to the company will be reviewed quarterly and if
management determines that impairment of the asset has occurred, the carrying
value will be adjusted accordingly.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS Continued
H. Stock in FoneFriend Systems, Inc.
The Company purchased stock in FoneFriend Systems, Inc. as a long-term
investment. Such investment is carried at cost and will be evaluated
periodically by management to determine whether impairment has occurred. Should
management determine that the value has been impaired, the carrying value will
be adjusted accordingly.
NOTE 3. DEPRECIATION AND AMORTIZATION
The Company's management has estimated the useful lives of furniture, equipment
and certain organization costs. The following tables show the gross asset
amounts and the accumulated depreciation and amortization:
A. Furniture and Equipment
March April
31, 2003 30, 2002
-------- --------
Cost $ 15,840 $ 9,028
Less accumulated depreciation $ (3,127) $ (1,806)
-------- --------
Net value $ 12,713 $ 7,222
-------- --------
B. Organizational Costs
Cost $ 195 $ 195
Less accumulated depreciation $ (75) $ (39)
-------- --------
Net value $ 120 $ 156
-------- --------
NOTE 4. NOTES PAYABLE
The company has borrowed funds from certain officers and others in order to
maintain its operations while attempting to raise additional capital through the
issuance of shares under the terms of a Private Placement Memorandum. The
amounts and terms of such borrowings as of March 31, 2003 are presented below:
Due on demand, bearing interest at 6.0% per annum $ 60,888
--------
Due April 1, 2005, bearing interest at 8.0% per annum $ 20,000
--------
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS Continued
NOTE 5. MERGER AND CAPITAL STOCK
The merger of FoneFriend, Inc. of Nevada with and into FoneFriend, Inc. of
Delaware was consummated on November 21, 2002 wherein the assets of FoneFriend,
Inc. of Nevada were acquired by Universal Broadband Networks, Inc. ("UBNT") in a
tax-free reorganization pursuant to IRC 368 (the "Merger"). The Merger was
effectuated as a "C" type reorganization whereby UBNT issued stock in exchange
for all of the assets FoneFriend, Inc. of Nevada, after which that corporation
was dissolved. UBNT was the surviving corporation and changed its name to
FoneFriend, Inc. (a Delaware corporation) immediately subsequent to the Merger.
Pursuant to the express terms of the Fourth Amended Plan of Reorganization, as
approved by the United States Bankruptcy court (the "Plan"), the Merger was
accomplished as follows:
1. All of UBNT's issued and outstanding shares of capital stock were cancelled
and extinguished and the stockholders of UBNT prior to the Merger have no
further interest or rights in UBNT.
2. UBNT issued 2,200,000 shares of newly created common stock in favor of
FoneFriend, Inc. (Nevada corporation) in exchange for all of FoneFriend,
Inc.'s assets and 115,750 of newly created common stock in favor of a
Liquidating Trust for the benefit of UBNT's creditors. As a result, the
merged entity had a total of 2,315,750 shares of newly created common stock
issued and outstanding, of which former shareholders of the dissolved
Nevada corporation owned 95%, and J. Michael Issa, Esq., as Trustee of the
Liquidating Trust (which was created under the Plan), controlled 5% of the
then issued and outstanding shares.
3. The issuance of stock pursuant to the Plan, as filed within the U.S.
Bankruptcy Court, was ordered by the Court to be exempt from all applicable
Federal, State and local securities law pursuant to 11 U.S.C. ss.1145 (a).
4. The dissolved Nevada corporation's management distributed the newly issued
2,200,000 shares of FoneFriend, inc. (Delaware corporation) to its former
shareholders, on a pro-rata basis. Each of such former shareholders
received one share of stock in FoneFriend, Inc. (Delaware corporation) for
every four shares held in the dissolved Nevada corporation.
Immediately subsequent to the Merger, the Company authorized the issuance of
820,361 shares of an newly created Series "A" Preferred Stock (each share of
which is convertible into one share of common stock) to be issued to
shareholders of preferred stock in the dissolved Nevada corporation prior to the
Merger.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS Continued
5. The Company then issued 4,600,000 shares of common stock to various
management personnel and consultants in order to hire or retain their
services. The Company also issued 423,000 shares of common stock to Dennis
H. Johnston, Esq. and options to acquire a like number of shares as
compensation for his services in connection with the Merger and for his
continued serves for acting as a director and officer of the Company.
Additionally, the company issued 307,250 shares of common stock to the
Liquidating Trust so as to be in compliance with the Anti-Dilution
Protection provisions of the Plan.
NOTE 6. MANAGEMENT'S PLANS FOR RAISING ADDITIONAL CAPITAL
As described in Note 1 hereinabove, the Company is a development stage
enterprise and has not generated any revenue during its brief history. The
primary business of the Company is to market an Internet telephony device and
related services to customers worldwide, called the "FoneFriend". The underlying
technology of FoneFriend has been licensed by the Company from FoneFriend
Systems, Inc. and will enable the Company's subscribers to make and receive
unlimited long distance telephone calls over the Internet, using only their
standard residential telephone set (without the need for a computer), for a low
monthly fee of $10.00 or less. Due to the small cost of transmitting calls over
the Internet, the Company anticipates that it will realize significant profit
margins, well in excess of the traditional telecommunications industry.
Management is presently in the process of finalizing a Private Placement
Memorandum for distribution to qualified investors in an attempt to raise up to
$5,000,000 in additional capital in order to effectuate its business plan.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The accounting firm of Henry Schiffer, CPA, audited our financial statements.
We have had no changes in or disagreements with our accountants.
======================================== ====================================
Until _____________, 2004 (40 days after
the date of this prospectus), all
dealers that effect transactions in
these securities, whether or not
participating in this offering, may be
required to deliver a prospectus. This
is in addition to the dealers'
obligation to deliver a prospectus when
acting as underwriters and with respect
to their unsold allotments or
subscriptions.
--------------------------------
TABLE OF CONTENTS FONEFRIEND, INC.
--------------------------------
Prospectus Summary
Risk Factors
Use of Proceeds
Determination of Offering Price
Dilution 17,750,000 SHARES
Capitalization COMMON STOCK
Dividend Policy $.001 PAR VALUE
Organization Within Last Five Years
Management's Discussion and Analysis
Description of Business
Description of Property
Management
Director and Officer Liability; Indemnification
Executive Compensation ----------------
Related Party Transactions PROSPECTUS
Market for Our Common Equity ----------------
Security Ownership
Selling Security Holders
Description of Securities
Plan of Distribution
Legal Proceedings
Legal Matters
Experts
Additional Information
Financial Statements
Changes In and Disagreements with Accountants May 17, 2004
NO DEALER, SALESPERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY FONEFRIEND,
INC.. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER IN ANY
JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE FONEFRIEND,
INC. SINCE SUCH DATE.
======================================== ====================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, payable by us in connection with
the sale of common stock being registered. All amounts are estimates except for
the Registration Fee.
Registration fee $ 386.63
Legal Fees and Expenses $ 20,000.00
Accounting fees and expenses $ 2,500.00
Miscellaneous expenses $ 2,113.37
------------
Total $ 25,000.00
RECENT SALES OF UNREGISTERED SECURITIES
On November 20, 2002, we issued 4,600,000 shares for cash consideration of
$4,600 to two executive officers and a consultant. These shares were acquired by
the individuals in connection with their agreements to provide personal services
to the Company.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
On November 20, 2002, we issued 423,000 shares to Dennis Johnston, our Director
and Secretary, as consideration for his services in connection with the merger.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
On November 20, 2002, pursuant to the terms of a statutory merger, we issued
2,200,000 shares of common stock and 820,361 shares of preferred stock (each
share of which was convertible into one share of common stock) to FoneFriend,
Inc., a Nevada corporation, in exchange for all of its assets. The Nevada
corporation then distributed these shares, on a pro-rata basis, to about 300
shareholders. The Nevada corporation was then liquidated. Also, pursuant to the
merger, we issued 423,000 shares of common stock to the Liquidating Trust for
the benefit of creditors of Universal Broadband Networks, Inc., a Delaware
corporation of which we are the successor.
Pursuant to U.S. Bankruptcy Code Section 1155(a), the shares of common stock we
issued in connection with the bankruptcy have been ordered exempt from Section 5
of the Securities Act of 1933 and any State or local law requiring registration
for the offer or sale of a security or registration or licensing of an issuer
of, underwriter of, or broker or dealer in, a security. In addition, all of the
shares were issued to "accredited investors" within the meaning of Rule 501 of
the Securities Act of 1933, and the issuance met the other requirements of, and
therefore qualifies as, an exempt private placement pursuant to Rule 506 of the
Securities Act of 1933.
In July, 2003, we issued 60,000 shares of common stock to an option holder of
our predecessor company to settle litigation.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
In December, 2003, we issued 70,000 shares of common stock to a consultant in
exchange for personal services provided to the Company which we valued at
$3,500.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales imposed on the securities acquired.
In January, 2004, we issued 1,000,000 shares of common stock for cash
consideration of $1,000 to our President, Jackelyn Giroux, to cure a breach of
her employment agreement. In addition, in January, 2004, we issued 3,000,000
shares of common stock for cash consideration of $3,000 to our Chairman and
consultant, Gary Rasmussen, to cure a breach of his consulting agreement.
The Company believes that the issuance of these shares was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales of the securities acquired.
In January, 2004, we issued a total of 2,443,083 shares of common stock as a
special dividend on our Series A Convertible Preferred stock. Further, the
preferred stock was converted into 814,361 shares of common stock.
The Company believes that the special dividend on our Series A Convertible
Preferred stock was exempt from registration by reason of the provisions of Rule
144 under the Securities Act. In addition, the Company believes the conversion
of preferred stock into common stock was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In January, 2004, we also issued 12,500 shares to Dutchess Advisors, LLC., for
legal services rendered in connection with the financing agreement entered into
with Dutchess.
In January, 2004, we also issued 150,000 shares to Danzig, Ltd., for consulting
services to be rendered to us in connection with finding financing and
implementing financial strategies and planning.
In January, 2004, we also issued 250,000 shares to Greentree Financial Group,
Inc. for professional services to be rendered to us in connection with this
offering, the preparation of a registration statement, review of quarterly
reports, edgarizing of all filings with the Commission
and general consultation on securities matters.
In January, 2004, we also issued 900,000 shares to RR Inv Holdings, Inc. for
services to be rendered to us in connection with our securities markets,
research reports, investor relations and public relations.
In January, 2004, we also issued 350,000 shares to The Bulletin Board
Productions, LLC for marketing and media production services to be rendered to
us in connection with creating television commercials and purchasing of
air-time.
In January, 2004, we also issued 300,000 shares to Lothar Elsaessar for
consulting services to be performed for us in Europe relating to marketing.
In January, 2004, we also issued 300,000 shares to Hans Georg Huetter for
consulting services to be performed for us in Europe relating to business
development.
In January, 2004, we also issued 170,000 shares to Winston Johnson for services
performed as our technology consultant for the 3-month period from November 1,
2003 through January 31, 2004.
The Company believes that all of the above-listed issuances in January, 2004 of
shares of common stock were exempt from registration under the Securities Act by
reason of Section 4(2) thereof and/or Regulation D under the Securities Act as a
non-public sale of securities due to the absence of a general solicitation, the
general nature and circumstances of the sale, including the qualifications of
the purchasers, and the restrictions on resales of the securities acquired.
Sales of Unregistered Securities by Predecessor Company
From May, 2001, through May, 2002, the Company's predecessor, FoneFriend, Inc.,
a Nevada corporation, conducted a limited, private offering of its common stock,
intended to comply with Rule 506 of Regulation D, to accredited investors only.
No sales were made to any non-accredited investors. This offering raised a total
of $3,439,945 in gross proceeds from the sale of 687,989 shares of common stock
to approximately 280 investors. The Company believes that the offering was
exempt from registration under the Securities Act as these prior sales were
conducted in reliance upon exemptions set forth under Sections 3(B), 4(2), 4(6)
and Regulation D of the Securities Act as an exempt sale of securities due to
the general nature and circumstances of the sale, including the qualifications
of the purchasers, and the restrictions on resales of the securities acquired.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the DGCL or the Company's Certificate of Incorporation or By-Laws,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
EXHIBIT INDEX
Exhibit No. Description of Exhibit
2.1 Amended And Restated Agreement And Plan of Merger, dated as of
--- June 12, 2002, by and among Universal Broadband Networks, Inc., a
Delaware corporation and FoneFriend, Inc. a Nevada corporation
(incorporated herein by reference from Exhibit 2.1 of our Form
8-K dated November 21, 2002 and filed December 5, 2002)
2.2 Certificate of Merger of FoneFriend, Inc. with and into Universal
--- Broadband, Inc. pursuant to Section 252 of the General
Corporations Law of the State of Delaware, dated as of November
20, 2002 (incorporated herein by reference from Exhibit 2.2 of
our Form 8-K dated November 21, 2002 and filed December 5, 2002)
2.3 Articles of Merger Of FoneFriend, Inc. and Universal Broadband
--- Networks, Inc. pursuant to the provisions of Chapter 92A of the
Nevada Revised Statutes, dated as of November 19, 2002
(incorporated herein by reference from Exhibit 2.3 of our Form
8-K dated November 21, 2002 and filed December 5, 2002)
2.4 FoneFriend Restated Certificate of Incorporation dated as of
--- November 20, 2002 (incorporated herein by reference from Exhibit
2.4 of our Form 8-K dated November 21, 2002 and filed December 5,
2002)
2.5 Universal Broadband Networks, Inc.'s Fourth Amended Plan of
--- Reorganization dated as of June 13, 2002. (incorporated herein by
reference from Exhibit 2.5 of our Form 8-K/A dated November 21,
2002 and filed December 24, 2002)
2.6 Order confirming Universal Broadband Networks, Inc.'s Fourth
--- Amended Plan of Reorganization entered as of September 18, 2002
by the U.S. Bankruptcy for the Court Central District of
California. (incorporated herein by reference from Exhibit 2.6 of
our Form 8-K/A dated November 21, 2002 and filed December 24,
2002)
3.1 FoneFriend Restated Certificate of Incorporation dated as of
--- November 20, 2002 (incorporated herein by reference from Exhibit
2.4 of our Form 8-K dated November 21, 2002 and filed December 5,
2002)
3.2 Bylaws of FoneFriend, Inc. *
---
4.1 Specimen Stock Certificate of FoneFriend, Inc. *
---
5.1 Opinion of Law Offices of Harold H. Martin, P.A. **
---
10.1 2002 Non-Employee Director And Consultant Retainer Stock Plan And
---- Employee Stock Incentive Plan (incorporated herein by reference
from Form S-8, filed on December 27, 2002)
10.2 Employment Agreement executed by the Registrant and Jackelyn
---- Giroux (incorporated herein by reference from Form 10-KSB, filed
on July 16, 2003)
10.3 Consulting Agreement executed by the Registrant and Gary A.
---- Rasmussen (incorporated herein by reference from Form 10-KSB,
filed on July 16, 2003)
10.4 Indemnification Agreement executed by the Registrant and Jackelyn
---- Giroux (incorporated herein by reference from Form 10-KSB, filed
on July 16, 2003)
10.5 Indemnification Agreement executed by the Registrant and Edward
---- N. Jones (incorporated herein by reference from Form 10-KSB,
filed on July 16, 2003)
10.6 Indemnification Agreement executed by the Registrant and Dennis
---- H. Johnston (incorporated herein by reference from Form 10-KSB,
filed on July 16, 2003)
10.7 Indemnification Agreement executed by the Registrant and Gary A.
---- Rasmussen (incorporated herein by reference from Form 10-KSB,
filed on July 16, 2003)
10.8 Indemnification Agreement executed by the Registrant and Francois
---- Van Der Hoeven. (incorporated herein by reference from Form
10-KSB, filed on July 16, 2003)
10.9 Technology License Agreement executed by the Registrant and
---- FoneFriend Systems, Inc. (incorporated herein by reference from
Form 10-KSB, filed on July 16, 2003)
10.10 Investment Agreement by and between Registrant and Dutchess
----- Private Equities Fund, L.P. (incorporated by reference from
Exhibit 10.10 to the Registrant's Current Report on Form 8-K
filed with the Commission on February 27, 2004).
10.11 Registration Rights Agreement by and between Registrant and
----- Dutchess Private Equities Fund, L.P. (incorporated by reference
from Exhibit 10.11 to the Registrant's Current Report on Form 8-K
filed with the Commission on February 27, 2004).
10.12 Placement Agent Agreement between Registrant, Charleston Capital
----- Corporation and Dutchess Private Equities Fund, L.P.
(incorporated by reference from Exhibit 10.12 to the Registrant's
Current Report on Form 8-K filed with the Commission on February
27, 2004).
10.13 15% Convertible Debentures, Warrants and Registration Rights
----- Agreement by and between Registrant and Compass Capital Group,
Inc. *
10.14 Consulting Agreement between Registrant and Danzig, Ltd. *
-----
10.15 Consulting Services Agreement between Registrant and Greentree
----- Financial Group, Inc. *
10.16 Consulting Agreement between Registrant and RR Inv Holdings, Inc.
----- *
10.17 Media Production Agreement between Registrant and The Bulletin
----- Board Productions, LLC. *
10.18 Consulting Agreement between Registrant and Dr. Hans Georg
----- Huetter. *
10.19 Consulting Agreement between Registrant and Lothar Elsaessar. *
-----
10.20 Consulting Agreement between Registrant and Winston Johnson. *
-----
10.21 Services Agreement between Registrant and Winsonic Holdings, Ltd.
----- *
10.22 Consulting Agreement between Registrant and Dr. Vaziri. *
-----
10.23 Consultant Agreement between Registrant and Equity Market
----- Information Systems, Inc. ***
17.1 Resignation of Director (Francois Van Der Hoeven). (incorporated
---- herein by reference from Form 10-QSB, filed on August 19, 2003)
23.1 Consent of Law Offices of Harold H. Martin, P.A. (included in
---- Item No. 5.1 above) **
23.2 Consent of Accountants - Henry Schiffer, CPA. **
----
* Previously filed in SB-2/A on April 2, 2004
** Previously filed in SB-2/A on April 15, 2004
*** Filed herewith
UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
a. Include any prospectus required by Section 10(a)(3) of the securities
Act of 1933;
b. Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
c. Include any additional or changed material information on the plan of
distribution.
2. That, for determining liability under the Securities Act of 1933, to treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
3. To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
5. In the event that a claim for indemnification against such liabilities,
other than the payment by the Registrant of expenses incurred and paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding, is asserted by such director,
officer or controlling person in connection with the securities being
registered hereby, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing of Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Van
Nuys, California on May 17, 2004.
FONEFRIEND, INC.
BY: /s/ Jackelyn Giroux
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Jackelyn Giroux
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jackelyn Giroux his or her true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments, including post-effective amendments,
to this registration statement, and to file the same, with exhibits thereto and
other documents in connection herewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or her substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated:
Name Title Date
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/s/ Dennis H. Johnston Secretary, Director May 17, 2004
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/s/ Edward N. Jones Chief Financial Officer May 17, 2004
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/s/ Virginia Perfili Director May 17, 2004
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/s/ Gary A. Rasmussen Chairman, Director May 17, 2004
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