AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 2004
REGISTRATION NO. 333-________
=========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FONEFRIEND, INC.
(FORMERLY KNOWN AS UNIVERSAL BROADBAND NETWORKS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0611753
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
14545 FRIAR ST., SUITE 204
VAN NUYS, CALIFORNIA 91411
(818) 376-1616
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------
JACKELYN GIROUX
PRESIDENT
FONEFRIEND, INC.
14545 FRIAR ST., SUITE 103
VAN NUYS, CALIFORNIA 91411
(818) 376-1616
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
HAROLD H. MARTIN, ESQ.
LAW OFFICES OF HAROLD H. MARTIN, P.A.
17111 KENTON DRIVE, SUITE 204B
CORNELIUS, NORTH CAROLINA 28031
(704) 894-9760
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, please check the following box and list
the Securities Act 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(c) under
the Securities Act, check the following box and list the Securities Act
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. [ ]
CALCULATION OF REGISTRATION FEE
------------------- ---------------- ------------------ ------------
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT PROPOSED
OF SECURITIES TO BE AMOUNT TO BE OF AGGREGATE AGGREGATE
REGISTERED REGISTERED OFFERING PRICE (1) FEE (1)
------------------- ---------------- ------------------ ------------
Common stock, $.001 17,950,000 $3,051,500 $386.63
par value
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(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933, as amended (the "Securities Act"), based on the average of the bid
and asked price for the common stock, $0.001 par value per share of $.17,
as reported on OTC Bulletin Board at February 26, 2004.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant 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 the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
17,950,000 SHARES
FONEFRIEND, INC.
COMMON STOCK
This prospectus relates to the offering for sale of up to 17,950,000 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. 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 George Huetter 300,000
RR Inv Holdings, Inc. 900,000
The Bulletin Board Productions, LLC 350,000
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17,950,000
Our common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol FFRD.OB. On February 26, 2004 the last reported sale price of our common
stock was $0.17 per share.
Dutchess may be deemed to be 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 Group, Inc. ("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 issued to
Danzig, Ltd., Lothar Elsaessar, Greentree Financial Group, Inc., Hans George
Huetter, RR Inv Holdings, Inc. and The Bulletin Board Productions, LLC 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
FEBRUARY 27, 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
SUMMARY 7
RISK FACTORS 10
USE OF PROCEEDS 26
DETERMINATION OF OFFERING PRICE 27
DILUTION 27
BUSINESS 29
THE SELLING STOCKHOLDERS 46
PLAN OF DISTRIBUTION 47
LEGAL MATTERS 49
EXPERTS 49
WHERE YOU CAN FIND MORE INFORMATION 50
INCORPORATION OF INFORMATION WE FILE WITH THE SEC 51
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 52
INDEMNIFICATION OF DIRECTORS AND OFFICERS 52
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 54
UNDERTAKINGS 55
SIGNATURES 56
POWER OF ATTORNEY 56
SUMMARY
THIS SUMMARY HIGHLIGHTS ASPECTS OF OUR BUSINESS AND INFORMATION CONTAINED
ELSEWHERE IN THIS MEMORANDUM. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT SHOULD BE CONSIDERED BEFORE PURCHASING OUR COMMON STOCK, AND
YOU SHOULD READ THE ENTIRE MEMORANDUM CAREFULLY, INCLUDING THE FINANCIAL
INFORMATION AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION.
OVERVIEW
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., 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 FoneFriend Systems, Inc., 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.
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.
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RECENT FINANCING DEVELOPMENTS
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 2,250,000 shares of outstanding common stock which were
previously issued in a private placement to Danzig, Ltd., Lothar Elsaessar,
Greentree Financial Group, Inc., Hans George Huetter, RR Inv Holdings, Inc. and
The Bulletin Board Productions, LLC. prior to the filing of the registration
statement of which this prospectus is a part.
THE OFFERING
Securities offered by Up to 17,950,000 shares of common
the selling shareholders stock, par value $.001 per share.
Common stock outstanding 19,184,444 shares.
on February 26, 2004
Use of Proceeds 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
Over-The-Counter Bulletin FFRD.OB
Board symbol
The table below sets forth the shares that we are registering pursuant to the
registration statement to which this prospectus is a part:
Compass Capital Group, Inc. (1) 700,000
Danzig, Ltd. 150,000
Dutchess Private Equities Fund, L.P. (2) 15,000,000
Mr. Lothar Elsaessar 300,000
Greentree Financial Group, Inc. 250,000
Dr. Hans-Georg Hutter 300,000
RR Inv Holdings, Inc. 900,000
The Bulletin Board Productions, LLC. 350,000
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Total Common Stock Being Registered 17,950,000
____________
(1) Assumes that Compass Capital elects to convert 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 we put 15,000,000 shares to Dutchess during the term of the
Investment Agreement.
OUR CAPITAL STRUCTURE BEFORE AND AFTER THE OFFERING
Common Stock outstanding:
Before the offering 19,184,444
After the offering 34,884,444
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 December 31, 2003, we
had an accumulated deficit of $3,086,851. 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 nine months ended
December 31, 2003, we incurred net losses from development stage operations of
$526,100 and sustained negative cash flows of $8,368, resulting in a net loss of
$0.06 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 nine months ended December 31,
2003, we experienced a net loss from development stage operations of $526,100
and had negative cash flows of $8,368. In addition, we had substantial
shareholders operating deficits at March 31, 2003 and December 31, 2003 of
$2,490,751 and $3,016,851, 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.
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 MAY
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.
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 February 13,
2004, the closing price of our common stock ranged from $0.13 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 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 43.5% 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.
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 and 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 December 31, 2003 was $880,238 or $.092 per
share 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. However,
subsequent to December 31, 2003, we issued an additional 9,628,444 shares of
common stock and no longer have any preferred stock outstanding. As of February
12, 2004, we had a total of 19,184,444 shares of common stock outstanding and no
shares of preferred stock outstanding. Accordingly, our "pro forma" book value
per share of common stock, adjusted as of December 31, 2003, would be about
$.046.
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) our pro forma book value adjusted as of
December 31, 2003, would have been $3,996,058, or about $.115 per share
(assuming a total of 34,884,444 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 $.069 per share and an immediate
dilution to new shareholders of about $.085 per share, or 42.5%.
The following table illustrates the per share dilution based on this example:
Assumed Average Offering Price Per Share $.200
Net Tangible Book Value Per Share Before This Offering (1) $.046
Increase Attributable To New Investors (2) $.069
-----
Net Tangible Book Value Per Share After This Offering $.115
-----
Dilution Per Share To New Shareholders $.085
=====
___________
(1) Assumes a pro forma adjusted book value of $881,058 on December 31, 2003,
and 19,184,444 shares of common stock outstanding, and no shares of
preferred stock outstanding, as of February 26, 2004.
(2) Assumes a net increase of $3,115,000 in pro forma adjusted book value
(attributable to new shares issued to Dutchess and Compass Capital) and
34,884,444 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 $881,058, or $.046 per
share (adjusted for 19,184,444 shares outstanding) before this offering,
and a pro forma, net tangible book value of $3,856,058 after this offering.
(3) Assumes that Compass Capital is issued 700,000 shares at $.20 per share.
BUSINESS
ORGANIZATION
FoneFriend, Inc. ("FoneFriend" or the "Company") is a development stage company
which 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. Soon thereafter it became a publicly traded company. In
1997 it merged with another business and changed its name to Universal Broadband
Networks Inc. ("UBN"), whose primary business was 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 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 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." 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, and the fax number is: (760) 454-2392. 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 own ninety-five percent (95%) and J.
Michael Issa, Esq., as Trustee of the Liquidating Trust (which was created
under the Plan), owns five percent (5%). The Liquidating Trust was granted
an option for a period of one year from the commencement of trading in the
stock of the Company to sell its shares back to the Company for $3 Million,
subject to the Company having sufficient capital surplus at the time the
option is exercised.
3. 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.
4. 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.
5. 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.
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.
6. As of February 12, 2004, the Company has 19,184,444 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.
Further, 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 is approximately four
and one-half percent (4.5%) of FSI's total authorized and outstanding common
stock. The Company's Board of Directors has previously agreed to pledge these
shares of FSI 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
The Company has recently entered into a letter of intent to joint venture with
Credit Phone International, S.r.i, and two consultants to provide customer
support services to FoneFriend customers in Europe, including the billing of the
minutes and customer service.
The Company has a contract 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.
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.
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
FoneFriend. As a result, FoneFriend 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 the
Company's products and services, increase price competition or render the
Company's products obsolete. To become and remain competitive, the Company plans
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 customers
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. The Company offers software which is
downloaded to a users computer and calls are 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 comes primarily from Aplio, Inc., a California
based company, with offices in Paris, France (which was acquired by Net2Phone),
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. 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. 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.
The Company's competitors currently utilize similar technology. However, they
generally have a higher product cost, are higher priced in the consumer market
and require programming and/or some computer knowledge.
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
FoneFriend 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 1000 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.
Competitors to the FoneFriend product do not offer cost competitive pricing
strategies on monthly service fees nor as high a quality voice connection, as
does FoneFriend. 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.
In addition, the FoneFriend device utilizes a "proprietary" design in software
and is protected, worldwide, by patented technology licensed by developer
FoneFriend Systems, Inc. The Company believes its FoneFriend VoIP device has
the potential to deliver the lowest retail pricing by offering telephone rates
lower than competition, especially International calling rates from foreign
countries to the U.S.
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, DialPad, AT&T Jens (a Japanese
affiliate of AT&T), ICG Communications, IPVoice.com, ITXC, OzEmail, RSL
Communications (through its Delta Three subsidiary) 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
FoneFriend'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.
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), 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. Included in the Company's license
agreement with FoneFriend Systems, Inc. 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 up to 70%, or more, less than major long distance
providers (e.g., 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.
Further expansion of sales to multi-national companies can be leveraged off of
the consumer base, with additional sales of conferencing, fax, messaging,
services and advertising sales to the businesses that become enrolled as
corporate subscribers. For example, a law firm who has an office in several
different Countries can have a FoneFriend box in each office of each Country and
hold conference calls between each office of the different Countries, at the
same time, each day, for the low fee of $9.95 per box per month. When the
attorney travels for business, he/she can take the FoneFriend box with them to
plug into any land line telephone in the Hotel for low rates.
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 regions in the U.S. with the largest
population of foreign-born residents:
(1) Los Angeles-Long Beach, (Hispanic/Asian), Anaheim-Santa Ana,
Riverside-San Bernardino, Oxnard-Ventura, and Santa Barbara-Santa
Maria
(2) New York City, (Hispanic/Asian)
(3) Miami, Fort Lauderdale-Hollywood, and Pompano Beach metro areas
(4) San Francisco-San Jose, CA
(5) Chicago
(6) Houston
(7) San Antonio
(8) Dallas-Ft. Worth
(9) Albuquerque
(10) McAllen/Brownsville
(11) San Diego
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 (estimated to be 70% or greater savings from traditional
long-distance carriers such as AT&T, MCI, Sprint, etc.), due to the
fact that the Company acquires it's 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 12- 15
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 backend infrastructure through third party relationships, thus
assuring that the Company's investment funds are utilized for marketing and
acquisition of product inventory. The technology infrastructure for FoneFriend
is both unique and safe at the same time. 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 is utilizing
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 Company's 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.
THE SELLING SHAREHOLDERS
Based upon information available to us as of February 26, 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 900,000 900,000 -0-
The Bulletin Board
Productions, LLC 350,000 350,000 -0-
Totals 2,950,000 17,950,000 -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.
PLAN OF DISTRIBUTION
This prospectus relates to the resale of up to 17,950,000 shares of our common
stock by current stockholders Compass Capital, Danzig, Ltd., Lothar Elsaessar,
Greentree Financial Group, Inc., Hans George Huetter, RR Inv Holdings, Inc. and
The Bulletin Board Productions, 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.
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 at 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 and any broker-dealers who acts in connection with the sale of their
shares may be deemed to be "underwriters" 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 sharer only
pursuant to the limitations of Rule 144 promulgated under the Securities Act.
LEGAL MATTERS
The Law Offices of Harold H. Martin, P.A. will pass upon the validity of the
common stock offered hereby.
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.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirement of the Securities Exchange Act
of 1934, as amended and, in accordance therewith, file reports, proxy statements
and other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information we have filed may be inspected and copied
at the Commission's public reference facilities maintained by the SEC, Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. The SEC maintains a Web site at HTTP://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The selling shareholders are offering to sell, and
seeking offers to buy, shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" into the prospectus information
we have previously filed with them. The information incorporated by reference is
an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, after the initial filing of this
registration statement and prior to the time that the shares covered by this
prospectus are sold:
o Our Annual Report on Form 10-K for the fiscal year ended March 31, 2003,
filed on July 16, 2003;
o Our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2003, filed on August 19, 2003;
o Our Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2003, filed on November 19, 2003;
o Our Quarterly Report on Form 10-Q for the quarterly period ended December
31, 2003, filed on February 13, 2004;
o Our Current Reports on Form 8-K filed on December 5, 2002 (as amended on
December 24, 2002, December 26, 2002 and February 19, 2003), April 9, 2003,
and February 27, 2004; and
We also incorporate by reference each of the following documents that we will
file with the SEC after the date of this prospectus but before all the shares
offered by this prospectus are sold:
o Reports filed under Sections 13(a) and (c) of the Exchange Act; and
o Definitive proxy statement filed under Section 14 of the Exchange Act in
connection with any subsequent shareholders' meeting. The reports and other
documents we file after the date of this prospectus will update and
supercede the information in this prospectus.
You may request a copy of any filings referred to above (excluding exhibits) at
no cost by writing or telephoning us at the following address: FoneFriend, Inc.,
Attention: Jackelyn Giroux, 14545 Friar Street, Suite 103, Van Nuys, California
91411, and by telephone: (818) 376-1616.
DEALER PROSPECTUS DELIVERY OBLIGATION
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.
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 $ 375.25
Legal Fees and Expenses $ 20,000.00
Accounting fees and expenses $ 2,500.00
Miscellaneous expenses $ 2,124.75
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Total $ 25,000.00
INDEMNIFICATION OF DIRECTORS AND OFFICERS
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
e 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.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit Description
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4.1 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).
4.2 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).
4.3 15% Convertible Debentures, Warrants and Registration
Rights Agreement by and between Registrant and Compass
Capital Group, Inc.
4.4 Consulting Agreement between Registrant and Danzig, Ltd
4.5 Consulting Services Agreement between Registrant and
Greentree Financial Group, Inc.
4.6 Consulting Agreement between Registrant and RR Inv
Holdings, Inc.
4.7 Media Production Agreement between Registrant and The
Bulletin Board Productions, LLC
4.8 Consulting Agreement between Registrant and Dr. Hans-
Georg Hutter
4.9 Consulting Agreement between Registrant and Lothar
Elsaessar
4.10 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).
5.1 Opinion of Law Offices of Harold H. Martin, P.A.
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.
24.1 Power of Attorney (included on signature page)
UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement.
2. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
3. To deliver or cause to be delivered with the prospectus, to each person to
whom the prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under
the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide
such interim financial information.
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. 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 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, 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 Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Los Angeles, State of California, on February 26,
2004.
FONEFRIEND, INC.
BY: /s/ 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
---- ----- ----
/s/ Dennis H. Johnston Secretary, Director February 26, 2004
----------------------
/s/ Edward N. Jones Chief Financial Officer February 26, 2004
-------------------
/s/ Virginia Perfili Director February 26, 2004
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