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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
REGISTRATION NO. 333-87551
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT No. 2
To
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FRANKLIN TELECOMMUNICATIONS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 3670 95-3733534
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(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361 (805) 373-8688
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(ADDRESS AND TELEPHONE NUMBER, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FRANK W. PETERS
733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361
(805) 373-8688
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(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPY TO:
ROBERT J. ZEPFEL, ESQ.
HADDAN & ZEPFEL LLP
4675 MACARTHUR COURT, SUITE 710
NEWPORT BEACH, CALIFORNIA 92660
(949) 752-6100
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Amendment to Registration Statement is declared effective.
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 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
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Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Unit Price Fee
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Common Stock 4,264,736(1) $2.81(2) $11,983,908(2) $3,331.52
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(1) Based on 200% of 1,932,368 shares of Common Stock currently outstanding,
plus 400,000 shares issuable upon exercise of the Incentive Warrant (as that
term is defined in "The Selling Shareholder," elsewhere in this Registration
Statement). The additional 1,932,368 shares are intended to cover shares
issuable upon exercise of the Early Put Warrant (as that term is defined in
"The Selling Shareholder,"), a separate warrant in which the number of
shares issuable is based upon a formula relating to the market price of the
Common Stock (See "The Selling Shareholder").Pursuant to Rule 416 under the
Securities Act of 1933, there are also being registered such indeterminate
number of additional shares of common stock as may be issuable upon the
exercise of the common stock purchase warrants described herein pursuant to
the antidilution provisions thereof; provided, however, that shares issuable
under the Early Put Warrant (as defined elsewhere in this Registration
Statement) pursuant to the market price provisions are not covered by
Rule 416.
(2) The proposed maximum offering price per share and maximum aggregate offering
price for the shares being registered hereby is calculated in accordance
with Rule 457(c) under the Securities Act.
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 l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
4,264,736 SHARES
FRANKLIN TELECOMMUNICATIONS CORP.
COMMON STOCK
These shares of common stock are being offered by Crescent
International Ltd., one of our current shareholders. We issued the shares, or
reserved the shares for issuance, to Crescent International, Ltd. in connection
with investments made in the Company in August and September 1999.
The selling shareholder may sell the shares covered by this Prospectus
on the American Stock Exchange and in ordinary brokerage transactions, in
negotiated transactions or otherwise, at prevailing market prices at the time of
sale or at negotiated prices, and may engage a broker or dealer to sell the
shares. For additional information on the selling shareholder's possible methods
of sale, you should refer to the section of this prospectus entitled "Plan of
Distribution." The selling shareholder may be deemed to be an "underwriter"
within the meaning of the Securities Act in connection with the sale of its
shares. We will not receive any proceeds from the sale of the shares, but will
bear the costs relating to the registration of the shares.
Our common stock is traded on American Stock Exchange under the symbol
"FCM."
The shares offered in this prospectus involve a high degree of risk.
You should carefully consider the "Risk Factors" beginning on page 2 in
determining whether to purchase shares of our common stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _________, 1999.
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You should rely only on information contained or incorporated by
reference in this prospectus. See "Information Incorporated by Reference" on
page 15. Neither we nor the selling shareholder have authorized any other person
to provide you with information different from that contained in this
prospectus.
The information contained in this prospectus is correct only as of the
date on the cover, regardless of the date this prospectus was delivered to you
or the date on which you acquired any of the shares.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These
forward-looking statements include, without limitation, statements about our
market opportunity, our strategies, competition, expected activities and
expenditures as we pursue our business plan, and the adequacy of our available
cash resources. Our actual results could differ materially from those expressed
or implied by these forward-looking statements as a result of various factors,
including the risk factors described above and elsewhere in this prospectus.
OUR BUSINESS
Franklin Telecommunications Corp. designs, builds and sells Internet
Telephony equipment and other high speed communications products and subsystems.
Our products are marketed through Original Equipment Manufacturers ("OEMs") and
distributors, as well as directly to end users. In addition, through our
majority-owned subsidiary, FNet Corp. we provide Internet Protocol telephony
services and Internet access to businesses and individuals. Franklin was formed
in 1981. Our address is 733 Lakefield Road, Westlake Village, California 91361
and our telephone number is (805) 373-8688.
RISK FACTORS
You should carefully consider the following factors and other
information in this prospectus before deciding to invest in our shares. You
should not purchase any of the shares unless you can afford a complete loss of
your investment.
WE HAVE A HISTORY OF OPERATING LOSSES.
We have incurred operating losses in each of our last three fiscal
years, and have a significant accumulated deficit. Our operating losses have
resulted from a number of factors, including reduced demand for our original
hardware products, higher expenses for the development of new hardware products
and for installing the infrastructure for the Internet telephony and Internet
services business of FNet, and increasing sales and marketing expenses to
promote new products and services. Much of our operating capital during this
period has been derived from equity financings, rather than from operations. We
have been dependent on these equity financings to sustain our ongoing
operations. Thus, an investment in our shares is highly speculative and we
cannot assure you that you will realize any return on your investment or that
you will not lose their entire investment.
THE ARRANGEMENTS WITH THE SELLING SHAREHOLDER COULD CAUSE DILUTION OF EXISTING
SHAREHOLDERS
As of September 30, 1999, we had 25,796,726 shares outstanding. As
described in "The Selling Shareholder," we have entered into a Stock Purchase
Agreement with Crescent International Ltd. under which we can, at our option,
issue additional shares of our Common Stock to Crescent International Ltd. for a
total purchase price of $4,500,000. If we elect to issue such shares, the
purchase price per share is equal to 92% to the average of the lowest three
consecutive bid prices of our Common Stock during the preceding 22 trading days.
In addition to the built-in discount, the transaction may be dilutive of
existing
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shareholders if the market price of the Common Stock decreases, because the
purchase price under the Stock Purchase Agreement decreases as well. Under the
Stock Purchase Agreement, the Company cannot issue additional shares during any
period that the market price of the Common Stock is below $2.00 per share. If
the market price were to fall to $2.00 per share, the purchase price per share
would be $1.84 per share, and the maximum number of shares issuable for the
$4,500,000 would be 2,445,652.
In addition, we have issued two warrants to Crescent International Ltd.
One warrant permits Crescent International Ltd. to purchase up to 400,000 shares
at an exercise price of $1.5525 per share. The other warrant permits Crescent
International Ltd. to purchase shares at $.01 per share if the market price of
the Common Stock is less than $1.035 per share on the date the Registration
Statement (of which this prospectus is a part) is declared effective by the
Securities and Exchange Commission. The number of shares issuable under this
Warrant is based on a formula designed to ensure that the total market value of
the 1,932,368 shares originally purchased for $2,000,000, when increased by the
value of any shares issuable upon exercise of the warrant, equals $2,000,000 on
the date the Registration Statement (of which this prospectus is a part) is
declared effective by the Securities and Exchange Commission. Thus, for example,
if the market price of the Company's Common Stock were to decline by 25% from
the original $1.035 purchase price, to a market price of $ .77 per share, the
warrant would be exercisable to purchase 665,035 shares. (See "The Selling
Shareholder"). However, under the terms of the Warrant, it may not be exercised
to acquire shares to the extent the exercise would result in the Selling
Shareholder beneficially owning more than 4.9% of the outstanding shares. The
issuance of these shares of Common Stock, as well as subsequent sales of shares
of Common Stock in the open market, may cause the market price of the Common
Stock to fall and might impair our ability to raise additional capital through
sales of equity or equity-related securities.
OUR SUBSIDIARY, FNET, POSES CERTAIN RISKS.
Several year ago we organized FNet, which offers Internet Protocol
telephony services and Internet access. We have devoted significant resources
and management time to the organization and development of FNet. We currently
own approximately 70% of the common stock of FNet, with the balance owned by
members of management, including Franklin's CEO, and certain investors. We
believe that the growth of FNet will benefit Franklin through increased demand
for our communications hardware as well as the value of our interest in FNet.
However, FNet may adversely affect our principal business in the short term due
to competing demands on our resources and management. Also, the fact that
members of Franklin's management, including our CEO, hold a direct interest in
FNet may pose conflicts of interest. FNet is a relatively new business venture,
and it can be expected that its operations will be subject to many of the
expenses, delays and risks inherent in the establishment of a new business.
WE DEPEND ON SEVERAL MAJOR CUSTOMERS.
Our sales have been concentrated in a relatively small number of
customers, who account for a significant portion of our revenues. During the
fiscal year ended June 30, 1999, a single customer represented 76% of sales.
The loss of any major customer could adversely affect the Company. The Company
has no ongoing supply contracts with any of its major customers.
WE MAY HAVE DIFFICULTIES IN MANAGING OUR GROWTH.
Our growth has placed a significant strain on our personnel and
systems. To accommodate our current size and manage growth, we must improve our
operational, financial and information systems, and expand, train and manage our
employee base. This problem may be more serious if we acquire additional
businesses, as each such business must then be integrated into our operations
and systems.
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As we expand our customer base, we will experience greater demands on
our network infrastructure, technical staff and resources. If such demand
results in difficulties satisfying the needs of our customers, it could
negatively affect us by causing subscribers or potential subscribers to utilize
competitive long distance telephone service providers and Internet service
providers. We believe that our ability to provide timely access for customers,
and adequate customer and technical support, will mainly depend on our ability
to attract, train, integrate and retain qualified employees.
IT IS LIKELY WE WILL REQUIRE ADDITIONAL CAPITAL.
All of the proceeds of this offering will be received by the selling
shareholder. While we may receive cash from the exercise of warrants covered by
this Prospectus, we can't be sure that we will derive any specific amount from
this offering. We may require additional capital to sustain our business as
presently operated, and developments in our business and possible expansion into
other markets could indicate that we need to raise additional capital.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results may vary significantly due to a variety
of factors, including the availability and cost of materials and components, the
introduction of new products, the timing of our marketing efforts, pricing
pressures, general economic and industry conditions that affect customer demand,
and other factors.
OUR FUTURE GROWTH DEPENDS UPON AN INCREASE IN THE USE OF INTERNET PROTOCOL
TELEPHONY AS A MEDIUM FOR VOICE COMMUNICATIONS.
The Internet Protocol telephony business has little operating history,
and is evolving rapidly. Until very recently, the sound quality of Internet
telephony calls was poor, and the technology is still in the early stages of
development. As the industry has grown, substantial improvements to sound
quality have been made but technological impediments still need to be overcome.
In addition, the capacity constraints of the public Internet network could
hinder further development of Internet telephony if callers experience delays,
errors in transmissions or other difficulties. We have attempted to reduce this
risk by utilizing private leased lines, international private lines, Frame Relay
lines and T-1 lines for voice traffic, while using the Internet primarily for
fax and data traffic and only secondarily for voice traffic. As is typical in
the case of a new and rapidly evolving industry, demand and market acceptance
for our services are subject to a high level of uncertainty and risk. In
particular, the Internet must be accepted as a viable alternative to traditional
telephony service. Customers that have already invested substantial resources in
integrating traditional telephony service with their operations may be
particularly reluctant or slow to adopt a new technology that makes their
existing infrastructure obsolete. Because this market is new and evolving, it is
difficult to predict the size of this market and its growth rate. If the
Internet telephony market fails to develop, develops more slowly than we expect
or becomes saturated with competitors, then our business, results of operations
and financial condition will be materially adversely affected.
OUR BUSINESS IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID TECHNOLOGICAL CHANGES.
The internet telephony, data communications and telecommunications
industry is extremely competitive. Our principal competitors in the manufacture
of communications hardware are Lucent Technologies, Nokia, HyperCom, Clarent,
Ascend Communications and Cisco Systems. Most of these companies have
substantially greater marketing, financial, technical and field support
resources. In addition, we could face strong competition from a number of
established computer and telecommunications firms which may enter the market in
the future.
The fields of internet telephony and data communications are marked by
rapid changes in technology, which can cause products to become obsolete over
very short time frames. Thus, our performance will depend on our ability to
develop and market new hardware products and services to
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meet changing technology, pricing considerations and other market factors. Our
business could be severely impacted if we were to experience delays in
developing new hardware products and services or enhancements.
The market for internet telephony services has been extremely
competitive, and is expected to be so for the foreseeable future. Many companies
offer Internet telephony products and services, and many of these companies have
a substantial presence in this market. Most of the current Internet telephony
products permit voice communications over the Internet between two parties that
are both connected to the Internet with sound-equipped personal computers and
where both parties are using identical Internet telephony software products.
Current product offerings include VocalTec Communications' Internet Phone,
QuarterDeck's WebPhone and Microsoft's NetMeeting.
In addition, a number of large telecommunications providers and
equipment manufacturers, such as Cisco, Lucent, Northern Telecom and Dialogic,
have announced that they intend to offer server-based products. These products
are expected to allow voice communications over the Internet between parties
using a personal computer and a telephone and between two parties using
telephones. Cisco Systems has also taken a further step by recently acquiring
two companies that produce devices that help Internet service providers
transition voice and data traffic to cell and packet networks while maintaining
traditional phone usage and infrastructure. Internet telephony service
providers, such as ICG Communications, IPVoice.com, ITXC, RSL Communications
(through its Delta Three subsidiary) and VIP Calling, route Internet telephony
traffic to destinations on a worldwide basis. In addition, major long distance
providers, such as AT&T, Deutsche Telekom, Frontier, MCI WorldCom, and Qwest
Communications, as well as other major companies such as Motorola and Intel,
have all entered or plan to enter the Internet telephony market. Many of our
competitors are larger than and have substantially greater financial,
distribution and marketing resources than we do. We cannot be certain that we
will be able to compete successfully in the developing Internet telephony
market.
The entry of new participants from these categories and the potential
entry of competitors from other categories (such as computer hardware
manufacturers) would result in substantially greater competition. The ability of
these competitors or others to bundle services and products with Internet
connectivity services could place FNet at a significant competitive
disadvantage. In addition, competitors in the telecommunications industry may be
able to provide customers with reduced communications costs in connection with
their long distance telephone and Internet access services, reducing the overall
cost of telephone and Internet access and significantly increasing pricing
pressures on FNet.
WE FACE PRICING PRESSURES, PARTICULARLY IN THE INTERNET TELEPHONY MARKET.
The success of our current product and service offerings is based on
our ability to provide discounted voice communications by taking advantage of
cost savings achieved through Internet telephony. In recent years, the price of
traditional domestic and international long distance calls has been declining.
In response to these declines, many internet telephony providers have lowered
the price of their service offerings. Should prices of traditional long distance
calls decline to a point where we no longer have a price advantage over our
competitors, we would lose a significant competitive advantage and would have to
rely on factors other than price to differentiate our product and service
offerings. If we fail to do so, our business could be materially adversely
affected.
OUR BUSINESS DEPENDS ON OUR NETWORK INFRASTRUCTURE AND CAPACITY, AND MAY BE
SUBJECT TO SYSTEM FAILURE AND SECURITY RISKS
The future success of FNet's business will depend on the capacity,
reliability and security of its network infrastructure. FNet will be required to
expand and improve this infrastructure as the number of customers and the amount
and type of information its customers communicate over the Internet increases,
and the means by which customers connect to the Internet evolve. Such expansion
and improvement may require substantial financial, operational and managerial
resources.
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Capacity constraints have occurred at many Internet Service Providers,
both at the level of particular "points of presence" ("POPs") (affecting only
customers attempting to use that particular POP) and in connection with system
wide services (such as e-mail and news services, which can affect all
customers). From time to time, FNet has experienced delayed delivery from
suppliers of new telephone lines, modems, servers and other equipment used by
FNet in providing its services. Any severe shortage of new telephone lines,
modems, servers or other equipment could result in incoming access lines
becoming full during peak times, causing busy signals for customers who are
trying to connect to the Internet. Similar problems may occur if FNet is unable
to expand the capacity of its various network, e-mail, World Wide Web and other
servers quickly enough to keep pace with demand from our expanding customer
base. If the capacity of such servers is exceeded, customers will experience
delays when trying to use a particular service. Further, if FNet does not
maintain sufficient capacity in its network connections, customers will
experience a general slowdown of all services on the Internet. Any of these
events could cause customers to terminate use of FNet's services. Accordingly,
our business would be damaged if we failed to expand or enhance our network
infrastructure on a timely basis, or failed to adapt it to an expanding customer
base, changing customer requirements or evolving industry standards.
FNet's operations are dependent on its ability to protect its
telecommunications and computer equipment against damage from fire, earthquake,
power loss, telecommunication failure and similar events. The occurrence of a
natural disaster or another unanticipated problem at our headquarters and
network hub or at POPs through which customers connect to the Internet could
cause interruptions in the services provided by FNet. In addition, failure of
FNet's telecommunications providers to provide the data communications capacity
required by FNet as a result of a natural disaster, operational disruption or
for any other reason could cause interruptions in the services provided by FNet.
FNet's network infrastructure may be vulnerable to computer viruses and
other similar disruptive problems caused by its customers, other Internet users
or other third parties. Computer viruses and other problems could lead to
interruptions, delays in or cessation of service to FNet's customers, as well as
corruption of FNet's or its customers' computer systems. Inappropriate use of
the Internet by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of FNet or those of its
customers, which may cause losses to FNet or its customers, or deter certain
persons from using FNet's services. We expect that FNet's customers may
increasingly use the Internet for commercial transactions in the future. Any
network malfunction or security breach could cause these transactions to be
delayed, not completed or completed with compromised security. Alleviating
problems caused by computer viruses or other inappropriate uses or security
breaches may cause interruptions, delays or cessation in service to FNet's
customers. Customers or others could assert claims of liability against us as a
result of such events. FNet does not presently maintain redundant or backup
Internet services or backbone facilities or other redundant computing and
telecommunications facilities.
OUR BUSINESS DEPENDS ON OUR ABILITY TO PROTECT OUR TECHNOLOGY.
Our success will depend in part on protecting our proprietary
technology. While we have patents covering certain of our products, we rely
principally on copyright law for protection of our hardware and software
designs, as well as trade secret law, confidentiality agreements and our
technical abilities and responsiveness to the demands of customers to protect
ours proprietary rights.
THE TELECOMMUNICATIONS BUSINESS IS HEAVILY REGULATED, AND REGULATORY CHANGES
COULD DISRUPT OUR BUSINESS.
Some of our products are subject to regulations of the Federal
Communications Commission. Certain regulations require that products which
reside on a customer's premises and interconnect the public switched network
meet certain standards to prevent harm to the network. Other regulations limit
the
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levels of electromagnetic radiation which may emanate from an electronic device
located on a customer's premises. We currently comply with these regulations and
we foresee no problem in complying with these regulations in the future.
The use of the Internet to provide telephone service is a recent market
development. The Federal Communications Commission is considering whether to
impose surcharges or additional regulations on certain providers of Internet
telephony. In April of 1998 the FCC issued a report on the implementation of the
universal service provisions of the Telecommunications Act. The report indicates
that the FCC plans to examine the question of whether certain forms of
"phone-to-phone" Internet telephony are information services or
telecommunications services. The FCC noted that it did not have, as of the date
of the Report, an adequate record on which to make a definitive pronouncement,
but that the record suggested that certain forms of phone-to-phone Internet
telephony appear to have the same functionality as non-Internet
telecommunications services and lack the characteristics that would render them
information services. If the FCC were to determine that certain services are
subject to FCC regulation as telecommunications services, the FCC may require
providers of Internet telephony services to make universal service
contributions, pay access charges or be subject to traditional common carrier
regulation. In addition, the FCC sets the access charges on traditional
telephony traffic and if it reduces these access charges, the cost of
traditional long distance telephone calls will probably be lowered, thereby
decreasing our competitive pricing advantage.
In September 1998, two regional Bell operating companies, U S WEST and
BellSouth, advised Internet telephony providers that the regional companies
would impose access charges on Internet telephony traffic. In addition, U S WEST
has petitioned the FCC for a declaratory ruling that providers of interstate
Internet telephony must pay federal access charges, and has petitioned the
public utilities commissions of two states for similar rulings concerning
payment of access charges for intrastate Internet telephone calls. It is not
known whether these companies, U S WEST and BellSouth, will actually impose
access charges or when such charges will become effective. If these companies
succeed in imposing access charges that may reduce the cost savings of using
Internet telephony as compared to traditional telephone service. The existence
of such access charges could adversely affect the development of our Internet
telephony business. In February 1999, the FCC adopted an order concerning
payment of reciprocal compensation that provides support for a possible finding
by the FCC that providers of Internet telephony must pay access charges for at
least some portions of Internet telephony services. If the FCC were to make such
a finding, the payment of access charges could adversely affect our business.
Many of our competitors are lobbying the FCC for the imposition of access
charges on Internet telephony traffic.
To our knowledge, there are currently no domestic and few foreign laws
or regulations that prohibit voice communications over the Internet. State
public utility commissions may retain jurisdiction to regulate the provision of
intrastate Internet telephony services. A number of countries that currently
prohibit competition in the provision of voice telephony have also prohibited
Internet telephony. Other countries permit but regulate Internet telephony. If
Congress, the FCC, state regulatory agencies or foreign governments begin to
regulate Internet telephony, such regulation may interfere with our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We anticipate that a substantial portion of FNet's business will be
based outside of the United States, and international expansion is a significant
component of our strategy. We cannot assure you that we will be successful in
expanding into additional international markets. In addition to the uncertainty
regarding our ability to generate revenue from foreign operations and expand our
international presence, there are certain risks inherent in conducting a
telecommunications business on an international basis, including uncertain and
changing legal and regulatory requirements, political instability, and
subscriber fraud.
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AS AN INTERNET SERVICE PROVIDER, FNET MAY BE SUBJECT TO SPECIALIZED RISKS.
The law relating to the liability of Internet Service Providers and
online service companies for information carried on or disseminated through
their networks has not yet been definitively established. Several private
lawsuits seeking to impose such liability upon Internet Service Providers and
online services companies are currently pending. Although no such claims have
been asserted against FNet to date, there can be no assurance that such claims
will not be asserted in the future, or if asserted, will not be successful. The
Telecommunications Act imposes fines on any entity that knowingly (i) uses any
interactive computer service or telecommunications device to send obscene or
indecent material to minors; (ii) makes obscene or indecent material available
to minors via an interactive computer service; or (iii) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. As the law in this area develops, the potential
imposition of liability upon FNet for information carried on and disseminated
through its network could require it to implement measures to reduce its
exposure to such liability. The implementation of such measures could require
the expenditure of substantial resources or the discontinuation of certain
service offerings. Any costs that are incurred as a result of such expenditure,
contesting any such asserted claims or the imposition of liability could have a
material adverse effect on FNet.
Due to the increasing use of the Internet, it is possible that
additional laws and regulations may be adopted with respect to the Internet
covering issues such as content, user privacy, pricing, libel, intellectual
property protection and infringement and technology export and other controls.
Changes in the regulatory environment relating to the Internet services
industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition,
could affect the Company.
OUR NETWORK DEPENDS ON UNRELATED TELECOMMUNICATIONS CARRIERS.
We depend on other telecommunications carriers to route our telephone
traffic.. All of the telephone calls made by FNet's customers are connected at
least in part through leased transmission facilities. In many of the foreign
jurisdictions in which FNet conducts or plans to conduct business, the primary
provider transmission facilities is a governmental telephone monopoly.
Accordingly, we may be required to lease transmission capacity at artificially
high rates from a single provider. These rates may prevent us from generating a
profit on those calls. In addition, national telephone companies may not be
required by law to allow us to lease necessary transmission lines. In any event,
we may encounter delays in negotiating leases and interconnection agreements,
which would delay commencement of operations.
In the United States, the providers of local exchange transmission
facilities are generally the incumbent local exchange carriers, including the
regional Bell operating companies. The permitted pricing of local exchange
facilities in the United States is subject to uncertainties. The Federal
Communications Commission issued an order requiring existing local exchange
carriers to price those facilities at total element long-run incremental cost,
and the United States Supreme Court recently upheld the FCC's jurisdiction to
set a pricing standard for incumbent local exchange carrier facilities provided
to competitors. However, the local exchange carriers could challenge the FCC's
total element long-run incremental cost standard and, if they succeed, the
result may be to increase the cost of local exchange carrier facilities obtained
by us.
Many of the international telephone calls made by our customers are
transported via transmission facilities that we lease from our current and
potential competitors. We lease facilities from local exchange carriers that are
our competitors, such as the regional Bell operating companies. We generally
lease lines on a fixed-cost basis. These include leases of transmission capacity
for point-to-point circuits on a monthly or longer-term fixed-cost basis.
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OUR PRODUCTS AND SERVICES MAY BE SUBJECT TO RISKS RELATED TO THE YEAR 2000
PROBLEM.
Many computer systems and software products are coded to understand
only dates that have two digits for the relevant year. These systems and
products need upgrading to accept four digit entries in order to distinguish
21st century dates from 20th century dates. Without upgrading, many computer
applications could fail or create erroneous results beginning in the year 2000.
We are conducting an assessment to ensure that our computer-related applications
will not fail or create erroneous results as a result of these issues. The "Year
2000" problems of companies on the Internet generally could affect our systems
or operations.
THE SELLING SHAREHOLDER
In August of 1999 the Company entered into a Stock Purchase Agreement
with Crescent International Ltd., a Bermuda-based investment company. Under the
Stock Purchase Agreement, the Company can, at its option from time to time,
require Crescent International Ltd. to purchase shares of the Company's Common
Stock at prices determined in accordance with a formula, up to a maximum amount
of $6,500,000. However, the Company may not require Crescent to purchase shares
if, after giving effect to the purchase, Crescent would beneficially own more
than 4.9% of the outstanding shares.
Upon execution of the Stock Purchase Agreement Crescent purchased
966,184 shares of Common Stock at a purchase price of $1.035 per share, and on
September 14, 1999 it purchased an additional 966,184 shares at the same
purchase price. As provided in the Stock Purchase Agreement, the purchase price
was determined by applying 92% to the average of the lowest three consecutive
bid prices during the preceding 22 trading days. The aggregate number of shares
purchased was 1,932,368, and the aggregate purchase price was $2,000,000.
The shares remaining available under the Stock Purchase Agreement, with
an aggregate purchase price of $4,500,000, may be issued by the Company in
increments of $200,000 to $300,000 at minimum 22-day intervals for a period of
up to two years. The ability of the Company to issue shares under the Stock
Purchase Agreement is subject to a number of conditions (none of which are
within the control of Crescent), including requirements that (i) the bid price
for the Company's Common Stock for the preceding seven days must be $2.00 or
more, (ii) the average daily trading value of the Common Stock for the 22 days
preceding the issuance must be $160,000 or more, and (iii) the resale of the
shares must have been registered under the Securities Act of 1933. The purchase
price per share for these issuances is determined by the same formula as the
original draws, applying 92% to the average of the lowest three consecutive bid
prices during the 22 trading days immediately preceding the issuance.
As part of the transaction, the Company also issued two warrants to
Crescent. The Early Put Warrant is a warrant to purchase an indeterminate number
of shares at an exercise price of $.01 per share. The number of shares is
determined by reference to the market price of the Company's Common Stock on the
date the registration statement of which this Prospectus is a part is declared
effective, as compared to $1.035 per share, the purchase price for the shares
acquired by Crescent in August and September of 1999. Thus, if the market price
on the date this Registration Statement becomes effective exceeds $1.035 per
share, no shares are issuable upon exercise of the warrant. The purpose of this
Warrant is to protect Crescent against decreases in the market value of the
shares between the dates the shares were acquired and the date the Registration
Statement is declared effective, although it remains subject to liquidity risks
associated with the relatively low trading volume of the Company's Common Stock,
and risks of bankruptcy or insolvency due to the Company's history of operating
losses and significant accumulated deficit. If the market price of the Company's
Common Stock were to fall below $1.035 on the date the Registration Statement is
declared effective, the effect of this Warrant would be dilutive to existing
shareholders, as it would involve the issuance of shares of Common Stock at $.01
per share, provided that the issuance does not
9
<PAGE> 11
increase Crescent's beneficial ownership of the Company's Common Stock above
4.9% at the time of issuance. On September 24, 1999, the Selling Shareholder
filed a Schedule 13D with the Securities and Exchange Commission disclosing
ownership of 1,932,368 shares, constituting 7.17% of the shares then
outstanding. Accordingly, until the Selling Shareholder disposes of enough
shares to fall below the 4.9% threshold, the Company is unable to exercise its
right to issue shares to Crescent.
The Incentive Warrant is a warrant to purchase up to 400,000 shares at
an exercise price of $1.5525 per share. This exercise price is subject to
adjustment under certain circumstances in the event of stock splits, stock
dividends, recapitalizations, reclassifications, and similar events.
The Company is also required to register the resale of all of the
shares issuable under the Stock Purchase Agreement, including the shares
issuable upon exercise of the Warrants.
The Company had no prior dealings with Crescent International Ltd.,
except that a company associated with Crescent participated in an offering of
Series C Preferred Stock by the Company in 1998 through its banker, Banque
Franck, S.A. Crescent has advised us that the purchase was in the ordinary
course of its business, which is purchasing securities. Crescent has also
advised us that at the time the Shares were acquired it had no understandings or
arrangements to dispose of the Shares.
The following table sets forth certain information as of September 15,
1999, regarding the ownership of the common stock by the selling shareholder and
as adjusted to give effect to the sale of the shares offered in this prospectus.
<TABLE>
<CAPTION>
Shares Owned Prior Shares Owned
To Offering(1) After Offering(1)
Selling -------------------------- Shares ---------------------
Shareholder Number Percentage Offered(1) Number Percentage
- ----------- ---------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Crescent International Ltd. 4,264,736 16.5% 4,264,736 -0- -0-
</TABLE>
- -------------------
(1) The number of shares is an estimated one, based on 200% of 1,932,368
shares of Common Stock currently held by Crescent International Ltd., plus
400,000 shares issuable upon exercise of a Warrant. The additional shares
are intended to cover shares issuable upon exercise of a separate warrant
in which the number of shares issuable is based upon a formula relating to
the market price of the Common Stock.
The selling shareholder and its officers and directors have not held
any positions or office or had any other material relationship with the Company
or any of its affiliates within the past three years.
PLAN OF DISTRIBUTION
The shares of common stock are being offered on behalf of the selling
shareholder, and we will not receive any proceeds from the offering. The shares
of common stock may be sold or distributed from time to time by the selling
shareholder, or by pledgees, donees or transferees of, or other successors in
interest to, the selling shareholder, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agent or may acquire such shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed prices, which may be subject to
change. The sale of the shares of common
10
<PAGE> 12
stock may be effected through one or more of the following methods: (i) ordinary
brokers' transactions, which may include long or short sales; (ii) transactions
involving cross or block trades or otherwise on the American Stock Exchange;
(iii) purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this prospectus; (iv) "at the
market" to or through market makers or into established trading markets,
including direct sales to purchasers or sales effected through agents; and (v)
any combination of the foregoing, or by any other legally available means. In
addition, the selling shareholder may enter into hedging transactions with
broker-dealers who may engage in short sales of shares of common stock in the
course of hedging the position they assume with the selling shareholder. The
selling shareholder also may enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares of
common stock, which shares of common stock may be resold thereafter pursuant to
this prospectus. We cannot be certain that all or any of the shares of common
stock will be sold by the selling shareholder.
Brokers, dealers, underwriters or agents participating in the sale of
the shares of common stock as agents may receive compensation in the form of
commissions, discounts or concessions from the selling shareholder and/or
purchasers of the common stock for whom such broker-dealers may act as agent, or
to whom they may sell as principal, or both (which compensation to a particular
broker-dealer may be less than or in excess of customary commissions). The
selling shareholder and any broker-dealers or other persons who act in
connection with the sale of the common stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commission they receive and
proceeds of any sale of such shares may be deemed to be underwriting discounts
and commissions under the Securities Act. Neither the Company nor the selling
shareholder can presently estimate the amount of such compensation. The Company
knows of no existing arrangements between the selling shareholder and any other
shareholders, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares of common stock.
The selling shareholder and any other persons participating in the sale
or distribution of the common stock will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the common stock by the
selling shareholder or any other such persons. The foregoing may affect the
marketability of the common stock.
We will pay substantially all of the expenses incidental to the
registration, offering and sale of the common stock to the public, other than
any commissions or discounts of underwriters, broker-dealers or agents. We and
the selling shareholder have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
INFORMATION INCORPORATED BY REFERENCE AND OTHER AVAILABLE INFORMATION
This prospectus is part of a Registration Statement on Form S-3 that we
filed with the SEC. Certain information in the Registration Statement has been
omitted from this prospectus in accordance with SEC rules.
We file annual, quarterly and special reports and other information
with the SEC. You may read and copy the Registration statement and any other
document that we file at the SEC's public reference rooms located at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549; 7 World Trade
Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West
MadisonStreet, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to you free of charge at the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" certain of our
publicly-filed documents into this prospectus, which means that information
included in those documents is considered part of this
11
<PAGE> 13
prospectus. Information that we file with the SEC subsequent to the date of this
prospectus will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 until the selling shareholder has sold all the shares.
The following documents filed with the SEC are incorporated by
reference in this prospectus:
(1) Our Annual Report on Form 10-K for the year ended June 30, 1999;
and
(2) Our Quarterly Report on Form 10-Q for the three months ended
September 30, 1999; and
(3) The description of our common stock set forth under the caption
"Description of Common Stock" in our Registration Statement on Form S-1 (File
No. 333-24791) as originally filed with the Securities and Exchange Commission
on April 9, 1997, or as subsequently amended (the "Registration Statement").
We will furnish without charge to you, on written or oral request, a
copy of any or all of the documents incorporated by reference, other than
exhibits to such documents. You should direct any requests for documents to
Secretary, Franklin Telecommunications Corp, 733 Lakefield Road, Westlake
Village, California 91361.
The information relating to the Company contained in this prospectus is
not comprehensive and should be read together with the information contained in
the incorporated documents.
EXPERTS
The financial statements incorporated in this prospectus by reference
from our Annual Report on Form 10-K for the year ended June 30, 1999, have been
so incorporated in reliance on the report of Singer Lewak Goldstein & Greenbaum
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
Certain legal matters with respect to the legality under California law
of the shares of Common Stock offered hereby will be passed upon for the Company
by Haddan & Zepfel LLP, Newport Beach, California.
12
<PAGE> 14
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
The Company...........................
Risk Factors..........................
Selling Shareholder...................
Plan of Distribution..................
Legal Matters.........................
Experts...............................
Information Incorporated by
Reference and Other
Available Information................
Experts...............................
Legal Matters.........................
4,264,736 SHARES
FRANKLIN
TELECOMMUNICATIONS
CORP.
COMMON STOCK
PROSPECTUS
December , 1999
<PAGE> 15
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS
The following exhibits are filed with this Registration Statement:
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
3.1* Restated Articles of Incorporation of Franklin
Telecommunications Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
5.1+ Opinion of Haddan & Zepfel LLP
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
10.2+ Stock Purchase Agreement, dated August 30, 1999 between
Registrant and Crescent International Ltd.
10.3+ Warrant, dated September 15, 1999, issued To Crescent
International Ltd. (Early Put Warrant)
10.4+ Warrant, dated August 30, 1999, issued To Crescent
International Ltd. (Incentive Warrant)
10.5+ Registration Rights Agreement, dated August 30, 1999 between
the Registrant and Crescent International Ltd.
10.6+ Amendment to Stock Purchase Agreement, dated September 15,
1999 between Registrant and Crescent International Ltd.
10.7+ Amendment to Registration Rights Agreement, dated September
15, 1999 between Registrant and Crescent International Ltd.
10.8+ Letter Agreement, dated September 15, 1999 between Registrant
and Crescent International Ltd.
23.1+ Consent of Singer, Lewak, Greenbaum & Goldstein LLP
23.2+ Consent of Haddan & Zepfel LLP.
- -----------------
* Incorporated by reference from Registrant's Registration Statement on
Form S-1 (No. 333-24791), filed with the Commission on April 9, 1997, and
incorporated herein by reference.
+ Previously filed.
II-1
<PAGE> 16
Item 17. Undertakings.
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:
(i) To include any Prospectus required by Section l0(a)(3) of the
Securities Act of l933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement;
(iii) 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, including
(but not limited to) any addition or deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of l933, each such post-effective amendment 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 remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of l933 may be permitted to directors, officers and controlling persons of
the Registrant, 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 of 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.
II-2
<PAGE> 17
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
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westlake Village, State
of California, on December 10, 1999.
FRANKLIN TELECOMMUNICATIONS CORP.
By /s/ FRANK W. PETERS
-----------------------------------
Frank W. Peters, President
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
/s/ FRANK W. PETERS Chief Executive Officer and a December 10, 1999
- ----------------------------------------------------- Director
Frank W. Peters
(2) Principal Financial and Accounting Officer
/s/ THOMAS RUSSELL Chief Financial Officer and a December 10, 1999
- ----------------------------------------------------- Director
Thomas Russell
(3) Directors
/s/ PETER S. BUSWELL President and a Director December 10, 1999
- -----------------------------------------------------
Peter S. Buswell
/s/ ROBERT S. HARP* Director December 10, 1999
- -----------------------------------------------------
Robert S. Harp
/s/ HERB MITCHELL* Director December 10, 1999
- -----------------------------------------------------
Herb Mitchell
</TABLE>
- --------------
*By Frank W. Peters, Attorney-in-Fact
II-3
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
3.1* Restated Articles of Incorporation of Franklin
Telecommunications Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
5.1+ Opinion of Haddan & Zepfel LLP
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
10.2+ Stock Purchase Agreement, dated August 30, 1999 between
Registrant and Crescent International Ltd.
10.3+ Warrant, dated September 15, 1999, issued To Crescent
International Ltd. (Early Put Warrant)
10.4+ Warrant, dated August 30, 1999, issued To Crescent
International Ltd. (Incentive Warrant)
10.5+ Registration Rights Agreement, dated August 30, 1999 between
the Registrant and Crescent International Ltd.
10.6+ Amendment to Stock Purchase Agreement, dated September 15,
1999 between Registrant and Crescent International Ltd.
10.7+ Amendment to Registration Rights Agreement, dated September
15, 1999 between Registrant and Crescent International Ltd.
10.8+ Letter Agreement, dated September 15, 1999 between Registrant
and Crescent International Ltd.
23.1+ Consent of Singer, Lewak, Greenbaum & Goldstein LLP
23.2+ Consent of Haddan & Zepfel LLP.
- -----------------
* Incorporated by reference from Registrant's Registration Statement on
Form S-1 (No. 333-24791), filed with the Commission on April 9, 1997, and
incorporated herein by reference.
+ Previously filed.
