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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2000
REGISTRATION NO. 333-35834
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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
4685 MACARTHUR COURT, SUITE 220
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(1) Unit(3) Price Fee
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Common Stock 6,274,001(2) $1.32 $8,281,681 $2,186.36
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(1) 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. Shares
issuable pursuant to the Protective Warrant, (as defined in this
Registration Statement) are not covered by Rule 416. 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.
(2) The number of shares registered is based on 125% of the shares issued to the
Selling Shareholders, including shares issuable upon exercise of the Term
Warrants. The additional shares are intended to cover any shares issuable
pursuant to the Protective Warrant.
(3) Based on the closing price of the Common Stock on the American Stock
Exchange on April 24, 2000.
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
6,274,001 SHARES
FRANKLIN TELECOMMUNICATIONS CORP.
COMMON STOCK
These shares of common stock are being offered by certain of our
current shareholders. We issued the shares, or reserved the shares for issuance,
to the shareholders in connection with investments made in the Company in March
2000.
The selling shareholders 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 brokers or dealers to sell the
shares. For additional information on the selling shareholders' possible methods
of sale, you should refer to the section of this prospectus entitled "Plan of
Distribution." The selling shareholders may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with the sale of their
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 , 2000.
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You should rely only on information contained or incorporated by
reference in this prospectus. See "Information Incorporated by Reference."
Neither we nor the selling shareholders 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. 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.
THE 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 the 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 the last three fiscal
years, and have a significant accumulated deficit. Our operating losses have
resulted from a number of factors, including reduced demand for 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 the 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 the shares is highly speculative and we
cannot assure you that you will realize any return on your investment or that
you will not lose your entire investment.
THE ARRANGEMENTS WITH THE SELLING SHAREHOLDERS COULD CAUSE DILUTION OF EXISTING
SHAREHOLDERS
As described in "The Selling Shareholders," we entered into a
Securities Purchase Agreement under which the selling shareholders purchased
units, with each unit consisting of 10,000 shares and a Term Warrant to purchase
2,500 shares. The price per Unit was $15,000. The exercise price of the Term
Warrants is $2.50 per share. The Term Warrants become exercisable in March 2001
and expire in March 2005.
In addition, the selling shareholders were issued Protective Warrants
in connection with the transactions. The Protective Warrants provide that if the
market price of the Common Stock is less than $1.50 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 selling shareholders
are entitled to purchase a
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certain number of shares at $.01 per share, based on a formula. The formula is
designed to ensure that the total market value of the shares issued under the
Securities Purchase Agreement, when increased by the value of any shares
issuable upon exercise of the warrant, equals the initial purchase price of the
units, subject to certain adjustments. Thus, the number of shares issuable under
the Protective Warrant is determined by subtracting the selling shareholder's
original investment, divided by 1.5, from 75% of the price on the effective date
(but in no event lower than $1.00) Thus, for example, for an investor who paid
$100,000 for the Units, if the market price of the Company's Common Stock were
to decline to $1.40 per share, the investor's Protective Warrant would be
exercisable to purchase 28,571 shares. If the market price were to decline to
$1.00 per share, an additional 33,334 shares would be issuable to the investor.
(See "The Selling Shareholders"). 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.
On ________, 2000, the effective date of the Registration Statement of
which this Prospectus is a part, the market price was $____, so the Protective
Warrant will become exercisable in accordance with the terms described above.
OUR SUBSIDIARY, FNET, POSES CERTAIN RISKS.
Several years 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.
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.
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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 meet changing
technology, pricing considerations and other market factors. The business could
be severely impacted if the Company 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
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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.
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
systemwide 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.
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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 ITS 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
our 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 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.
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In September 1998, two regional Bell operating companies, US West and
BellSouth, advised Internet telephony providers that the regional companies
would impose access charges on Internet telephony traffic. In addition, US 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, US 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 the Company's
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 the Company's 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.
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
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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 us.
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 of 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.
THE SELLING SHAREHOLDERS
In March of 2000 the Company entered into a Securities Purchase
Agreement with a group of investors introduced to the Company by LBE Capital,
LLC, a placement agent located in Atlanta, Georgia. Under the Securities
Purchase Agreement, the investors purchased 402.27 units, each unit consisting
of 10,000 shares and a Term Warrant to purchase 2,500 shares at an exercise
price of $2.50 per share. The purchase price per Unit was $15,000, for total
gross proceeds of $6,033,985.
The Term Warrants allow the investors, in the aggregate, to purchase an
additional 1,005,675 shares at an exercise price of $2.50 per share. The Term
Warrants become exercisable in March 2001 and expire in March 2005. If the
Protective Warrants become exercisable, they are exercisable only for a period
of sixty days following the effective date of the Registration Statement.
In addition to the Term Warrants, the investors received Protective
Warrants, which are warrants to purchase an indeterminate number of shares at an
exercise price of $.01 per share. The purpose of these Warrants is to protect
the investors 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 they remain 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. 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 $1.50 per share. Thus, if the market price on the date this Registration
Statement becomes effective exceeds $1.50 per share, no shares are issuable upon
exercise of the warrant. If the market price of the Company's Common Stock were
to fall below $1.50 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.
In connection with the transaction, the Company also issued Agency
Warrants to purchase 200,000 shares to persons associated with LBE Capital, LLC,
also at an exercise price of $2.50, as a portion of the commission payable in
the transaction. The Agency Warrants are immediately exercisable and expire in
March 2005.
All of the Warrants are subject to adjustment in the event of stock
splits, stock dividends, and other capital changes.
The Company is also required to register the resale of all of the
shares issuable under the Securities Purchase Agreement, including the shares
issuable upon exercise of the Term Warrants and the Protective Warrants, and to
register the shares issuable upon exercise of the Agency Warrants.
8
<PAGE> 10
The following table sets forth certain information as of March 31,
2000, regarding the ownership of the common stock by the selling shareholders
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
Selling ------------------------- Shares -----------------------
Shareholder Number Percentage Offered(1) Number Percentage
----------- --------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Crescent International, Ltd. 2,263,493 6.6 1,499,914 763,579 2.2
B. Morgan Pridemore 1,463,640 4.2 1,463,640 -0- -0-
Merced Partners Limited Partnership 999,595 2.9 999,595 -0- -0-
Lakeshore International, Ltd. 500,319 1.5 500,319 -0- -0-
Gundyco in Trust for RRSP 550-98866-19 495,108 1.4 495,108 -0- -0-
Jack C. Blankenship and Kristin Peters 400,257 1.2 400,257 -0- -0-
Frank G. Mauro 350,096 1.0 340,096 10,000 *
Ellis A.G. 225,144 .7 225,144 -0- -0-
C.H. Woodward 150,096 .4 150,096 -0- -0-
Enigma Investments Limited 150,096 .4 150,096 -0- -0-
David Kern Peteler 10,000 * 10,000 -0- -0-
</TABLE>
------------------
* Less than 1%
(1) Includes 4,022,667 shares issued and outstanding, 1,005,667 shares issuable
upon exercise of Term Warrants and 1,045,667 shares potentially issuable
upon exercise of Protective Warrants. The shares which may be issuable upon
exercise of the Protective Warrants are estimated, and are allocated among
the holders of Protective Warrants on a pro rata basis.
Neither the selling shareholders nor any of their officers or directors
have held any positions or office or had any other material relationship with
the Company or any of its affiliates within the past three years. Crescent
International, Ltd., Lakeshore International, Ltd., Frank G. Mauro and Ellis
A.G. have participated in past private offerings by the Company. Kristin Peters
is the adult daughter of Frank W. Peters, Chief Executive Officer of the
Company, and Jack C. Blankenship is his son-in-law.
PLAN OF DISTRIBUTION
The shares of common stock are being offered on behalf of the selling
shareholders, 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
shareholders, or by pledgees, donees or transferees of, or other successors in
interest to, the selling shareholders, 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
9
<PAGE> 11
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 stock may be effected
through one or more of the following methods: (i) ordinary brokers'
transactions; (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. The selling shareholders 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. Each of the selling
shareholders has represented that he or it does not intend to engage in short
sales of the Company's Common Stock. Two of the selling shareholders, Merced
Partners Limited Partnership and Lakeshore International, Ltd., have disclosed
that they engage in hedging transactions in the normal course of business,
including with respect to the Company's Common Stock, but that they do not
intend to use the shares for the purpose of unwinding any hedging transactions.
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 shareholders 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 shareholders 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
shareholders can presently estimate the amount of such compensation. The Company
knows of no existing arrangements between the selling shareholders and any other
shareholders, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares of common stock.
The selling shareholders 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 shareholders 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 shareholders 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
Madison Street, 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 prospectus. Information
that we file with the SEC subsequent to the date of this prospectus will
10
<PAGE> 12
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 Reports on Form 10-Q for the three months ended
September 30, 1999, December 31, 1999 and March 31, 2000; 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.
11
<PAGE> 13
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
----
Forward-Looking Statements...........................2
The Business.........................................2
Risk Factors.........................................2
The Selling Shareholders.............................8
Plan of Distribution.................................9
Information Incorporated by Reference
and Other Available Information....................10
Experts.............................................11
Legal Matters.......................................11
6,274,001 SHARES
COMMON STOCK
FRANKLIN TELECOMMUNICATIONS CORP.
----------
PROSPECTUS
----------
, 2000
<PAGE> 14
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred or to be incurred by the Company in connection
with the preparation and filing of this Registration Statement are estimated to
be as follows:
Printing and duplication expenses.........................$ 3,000
Registration fee.......................................... 2,186
Legal fees and expenses................................... 4,500
Accounting fees and expenses.............................. 2,000
Transfer Agent fees....................................... 300
Miscellaneous............................................. 514
-------
Total....................................................$12,500
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws provide that the Company may indemnify its
officers and directors, and may indemnify its employees and other agents, to the
fullest extent permitted by California law. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
officers, directors or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed 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.
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 (previously filed).
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
10.2 Form of Securities Purchase Agreement, dated as of March 16,
2000, between Registrant and the investors (previously filed).
10.3 Form of Protective Warrant (previously filed).
10.4 Form of Term Warrant (previously filed).
10.5 Registration Rights Agreement, dated as of March 16, 2000
(previously filed).
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
(previously filed).
23.2 Consent of Haddan & Zepfel LLP (included as part of
Exhibit 5.1) (previously filed).
II-1
<PAGE> 15
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> 16
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 June 20, 2000.
FRANKLIN TELECOMMUNICATIONS CORP.
By: /s/ FRANK W. PETERS
-------------------------------
Frank W. Peters
President
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
authorizes the agent for service named in this Registration Statement, with full
power to act alone, to file one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Registration Statement.
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement was signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
/s/ FRANK W. PETERS Chief Executive Officer and a Director June 20, 2000
----------------------------------
Frank W. Peters
(2) Principal Financial and
Accounting Officer
/s/ THOMAS RUSSELL Chief Financial Officer and a Director June 20, 2000
----------------------------------
Thomas Russell
(3) Directors
/s/ ROBERT S. HARP* Director June 20, 2000
----------------------------------
Robert S. Harp
/s/ HERB MITCHELL* Director June 20, 2000
----------------------------------
Herb Mitchell
Director June , 2000
----------------------------------
Sidney Smith
* By Frank W. Peters, Attorney-in-Fact
</TABLE>
II-3
<PAGE> 17
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 (previously filed).
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
10.2 Form of Securities Purchase Agreement, dated as of March 16,
2000, between Registrant and the investors (previously filed).
10.3 Form of Protective Warrant (previously filed).
10.4 Form of Term Warrant (previously filed).
10.5 Registration Rights Agreement, dated as of March 16, 2000
(previously filed).
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
(previously filed).
23.2 Consent of Haddan & Zepfel LLP (included as part of
Exhibit 5.1) (previously filed).
----------------
* 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.
