SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20546
FORM 10-KSB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
Small Business Issuers
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
FONECASH, INC
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(Name of Small Business Issuer in its charter)
Delaware 22-3530573
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State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
90 Park Avenue, Suite 1700, New York, New York 10016
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 984-0641
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Securities to be registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
COMMON STOCK, par value $.0001 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ X ]
Number of shares of Common Stock outstanding: 14,899,056
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FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Common Equity and Related Stockholder Matters
Item 6 Management's Discussion and Analysis or Plan of Operation
Item 7 Financial Statement
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and related Transactions
Item 13 Exhibits and reports on Form 8-K
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PART I
Item 1 -Business
Fonecash, Inc. (the "Company") was incorporated under the laws of the State of
Delaware on August 7, 1997 and is engaged in the payment processing of
transactions for banks and their merchants through its terminals and proprietary
system. The Company is in the process of developing a wired and wireless gateway
to convert consumers' credit and debit card information collected by mobile
merchants into a format that can be processed by banks. The Company will act as
a payment system service provider between banks, mobile merchants and their
customers. The Company will charge merchants a fixed transaction fee to process
their payments.
The Company remains in development stage and has no operating profits to date.
It is still in the process of acquiring additional funds, training personnel,
manufacturing its products, and developing its markets.
The Company incurred operating losses of $1,878,498 during 2001. The Company
spent a total of $58,200 on Research and Development from Inception to December
31, 2001. The Company expects its accumulated deficit to grow for the
foreseeable future.
The Company's Operations to Date
The Company is developing a system of processing credit cards for an under
served community of low volume merchants and in-home salespersons consisting of
a fixed wire or wireless terminal and a system of computers, utilizing
established communications networks, both wired and wireless, for processing the
data from credit and debit cards.
Terminals are electronic collectors of credit and debit data from the magnetic
stripe or Smart Card. In the case of debit and credit cards the Fonecash system
will collect the data from the card when a merchant accepts it for payment of
goods or services. This data will then be transmitted to processors where the
validity of the card number is confirmed and the amount of the purchase is
authorized to the cardholder's account. Settlement occurs when the collected and
stored data is sent to the card issuing bank which charges the customer's
account and electronically deposits payment in the merchant's bank account,
usually within 24 - 48 hours.
The Company intends to market a product line and a complete processing system
that aims to be of high quality and simple to operate. The Company, and not the
individual merchant, will take the responsibility for closing the day's receipts
and uploading the data to a third party payment processor, such as Paymenttech,
Visanet, or First Data Resources, for settlement, which results in payments
being deposited in the merchants' bank account within 48 hours. Because the
Company, will not only provide a terminal, but also, will provide a service that
facilitates the collection of daily payment receipts, and will transmit these
electronic receipts for payment and deposit of funds to each merchant, the
Company believes that it will be able to compete with the current makers of
terminals. The Company also believes that it will be able to compete with
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payment processors who only support terminalswhich transmit credit card data to
them after the merchant has manually collated the day's electronic receipts
which are then transmitted to the payment processor.
The Company has never operated under any other name, nor has it ever been
involved with any bankruptcy, receivership or similar proceeding or engaged in
any material reclassification, merger, consolidation, or purchase or sale of
assets.
Much of the Company's effort from inception to the present has been focused on
the design and engineering of the products, and the making of molds for the
volume manufacturing process. Before manufacturing, testing for Federal
Communications Commission (FCC) approval was completed and the Company's
terminals are certified for Parts 15 and 68 of the FCC Rules & Regulations (Code
of Federal Regulations, 47, Parts 15 & 68) which pertain to all devices that are
attached to the telephone network in the United States.
Payment Processing
The Industry
The industry is generally referred to as the transaction payment industry and is
divided into two major segments. In one segment are the manufacturers of
hardware, known as terminals, which are electronic devices for capturing the
data from some medium, such as a magnetic stripe on a plastic card, or from data
stored on a microchip embedded on a plastic card.
In the other segment of this industry are the transaction payment processors,
such as First Data Corporation (FDC), Paymentech, Nova Information Systems and
several other smaller processors, who, when the data from these terminals is
transmitted to their computers by wired or wireless transmission, verify the
card as being valid and authorize the purchase for the specific amount indicated
by the merchant.
The Verification, Authorization and Settlement Process
When a consumer presents a Visa or Mastercard to a merchant in payment for goods
or services, the clerk swipes the card through an electronic terminal that
connects by phone lines or a wireless network to a card processor (FDR,
Paymentech, or others) whose servers access the Visa/Mastercard network to get
verification that the card is valid and to get authorization for the amount to
be charged to the cardholder so that the amount does not exceed the cardholder's
credit limit. If the authorization transaction succeeds, the cardholder's bank
that issued the credit card will put a "hold" for the purchase amount so that,
when the settlement or deposit transaction takes place, the funds will be
available to pay the merchant. An approval number is generated and the merchant
has the cardholder sign a receipt which is kept on file by the merchant for up
to six years.
Settlement can take place at any time, but typically, it is done at the end of
the merchant's workday. All the credit card transactions since the last
settlement period will be communicated to the payment processor's servers over a
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phone line. The payment processor submits a "Deposit Transaction" through the
Visa/Mastercard network, in effect debiting the amount of the purchase from the
cardholder's card issuing bank and depositing these funds into the merchant's
sponsoring bank. It all takes place in minutes or seconds depending on the
transactions to be settled.
The FoneCash Technology
Currently there are two models of the Fonecash fixed wired terminal, one a desk
model and another is a hand-held model, which are manufactured by Yue-Shoung,
Ltd. in Taiwan, and currently, the Company is also developing a wireless,
hand-held terminal that will process transactions over a cellular network.
Fonecash fixed wired terminals operate on a different system than the terminals
currently sold by its competitors, utilizing an Interactive Voice Response (IVR)
network - which means that the merchant is being prompted through the various
steps involved in taking credit cards for payment of goods and services and
connected to the Company's servers which uses commercially available software
developed by Atomic Software of Atlanta and certified to connect to various
payment processors, such as First Data Resources and Paymentech, who then,
connect to the Visa/Mastercard networks for verification, authorization and
settlement services. The process of verification, authorization and settlement
is the same for the Company's system, except that the Company's servers are
in-between the Company's terminals and the payment processor's servers. The
Company believes that this will eliminate the resistance of the payment
processors to certifying new terminals because their servers do not "see" what
terminal is transmitting data; all their servers see is a stream of data from
another server (computer). The Company's system is intended to capture the
transactions of small merchants onto its servers and bundle the transactions
together for settlement so that the volume is greater and thus become more
attractive to the payment processors because of the increased transactions,
which translated into a rise in revenues.
Competition
The Company does not believe that it faces competition from existing
manufacturers or payment processors, which operate in the traditional
transaction processing industry, because those companies are not interested in
low volume merchants, and low volume merchants resist the cost related to
automated terminals. The Company intends to target the very segment of the
market which these companies neglect because of their low volume. Management
believes that the fonecash system's simplicity and ease of operation will make
it attractive to these merchants even if they are able to obtain service from
the larger companies offering terminals and payment processing services.
Moreover, the Company knows of no other companies planning to target this market
niche, or which offer both terminals and payment processing services under one
system.
Terminal Manufacturers
According to The Nilson Report, a bi-monthly publication of the credit payment
systems industry, in Oxnard, California, the leader among the terminal makers is
Verifone, a U.S. based company. It is generally conceded that Verifone has
market share of 65% of the terminal market worldwide, based upon delivery and
installation of products.
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Hypercom was founded in Australia, and has a U.S. base in Phoenix, Arizona and
is a privately held company. Management believes Hypercom is the second largest
maker of on-line stationary terminals with approximately 16% share of the market
for sale and installation of these electronic devices.
Lipman is an Israeli based maker of terminals and, since 1995 has gained some 10
per cent of the market for sales of these terminals.
Dassault and Ingenico are both French companies and, along with some other
makers, such as Goldstar of South Korea, make a line of terminals used mostly in
these companies respective domestic markets. The Company believes their sales
amount to no more than 10,000 units a year. These three makers, along with all
the other smaller firms, amount to 9% of the market for terminals.
Payment Processors - Barriers to Entry
All credit cards transactions must be cleared through a transaction payment
processor, and all automatic credit card terminals which connect directly to the
computers of the transaction payment processors must be certified by the
transaction processor. Certification involves testing the capabilities of the
terminal software by repeated transmission of test data which simulate real
transactions, in order to prove to the transaction processor that the terminal
software is compliant with all requirements of the processor's computer system.
Transaction processors are not anxious to fully certify and support new
transaction equipment because it is expensive to provide customer assistance to
a large number of terminal models. Every piece of newly certified terminals
translates to higher training cost for their customer service personnel and,
therefore, they try to stick with one piece of equipment.
Strategies to Overcome Barriers to Market
The Company believes that the resistance of the transaction processors to the
introduction of new terminals is overcome because the Fonecash terminal is not
supported by the processor but by the Company. The processor merely receives a
stream of data in digital form from the Company's computers for the benefit of
low volume merchants with merchant account numbers who would not be utilizing
the processors because of the lack of an electronic terminal. These low volume
merchants represent an enlarged customer base for the processors, acquired with
very little effort or expense on their part.
In addition to a different method of handling the processing of data, the
Company makes a line of products that are simple in design; do not need an
external power source and are as easy to operate as an ordinary telephone. The
combination of these factors the Company believes are sufficient to overcome
opposition from the established payment processors and the resistance of low
volume merchants to the purchase of more expensive equipment and services.
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Risks from Competitors
Even though the Company believes it has strategies to overcome barriers to entry
into this industry and that it has no direct competitors in its specific market,
the terminal manufacturers and the payment processors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than the Company. Many of these companies have extensive customer
bases and strong customer relationships that they could leverage, including
relationships with the Company's potential customers. These companies also have
significantly more established customer service organizations than the Company
will be able to develop. In addition, these companies may adopt aggressive
pricing policies. There can be no assurances that that the Company will be able
to counter the impact or the level of the pricing.
Employees
The Company employs 3 full time employees in the United States; 2 employees in
Shanghai, China and 14 engineers in Kaoshiung, Taiwan who are engaged in
development of the Company's products and the development of the Company's
software and firmware operating system.
The Target Market
The Company believes that the following four potential markets for its products
and system will experience the highest benefit and, therefore, these potential
markets are the first priority for the Company's future sales efforts. While the
Company has sold none of its products or services into these markets, the
Company believes that the benefits of its products and services will increase
the potential of sales to these specific targets.
1. M-Commerce. The Company anticipates that a large market for the fonecash
wireless terminal will be the traveling sales representative. The terminal is
portable and ideal for this application. The salesperson carrying this unit
could be selling cosmetics, household products, insurance policies,
encyclopedias or a number of other items. After a demonstration of products or
an explanation of services, the in-home salesperson could accept payment by
credit or debit card by merely attaching the fonecash terminal to the standard
telephone. While the Company has not sold any of its products to in-home sales
persons, it believes that use of the fonecash terminal by in-home salespersons
represents a significant potential.
2. Home Installed Unit. The Company believes that new programs such as
secure Pay Per-View TV, home banking, home shopping clubs, groceries delivered
to the home, restricted Internet access, payments of income taxes, and a variety
of other programs, that demand some form of pre-payment will become increasingly
prevalent. Payment by means of a verified and authorized credit card will be
available through the fonecash terminal. The telephone system is the largest
wide area network (WAN) in the world and its use in connecting to almost every
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merchant gives the fonecash terminal the capability to act as a payment device
for most any service. The fonecash terminal is user installed, cheap enough to
be considered a give-away item, and will be positioned to address multiple
markets because its Interactive Voice Response (IVR) system which will be
installed on computers will be designed to handle up to thousands of separate
customers. Payment using a terminal is superior to speaking the credit card
number to a merchant on the telephone because one is not revealing the credit
card number to a unknown person, thus avoiding one of the ways credit card
numbers are stolen and sold to thieves who can use the data to make purchases or
sell the data to others who will use the credit card fraudulently.
3. Pre-Pay Calling Card Activation. The Company believes that the pre-pay
telephone calling card market has been evolving for years and that such cards
are now used widely in developed countries. In the United States, pre-pay
telephone calling cards are often sold behind the counter at small merchant
locations such as neighborhood 7/11 or gas station convenience stores. Since the
cards are delivered ready to be used by anybody, this has created the problem
for the merchant who has to protect these cards from being stolen and therefore
has to keep the cards behind the counter out of sight of the potential
customers. The better arrangement would be to have the card located on stands
throughout the store instead of behind the counter. The fonecash terminal solves
this problem. When installed on the merchant's telephone line, the fonecash
terminal allows the merchant to swipe the telephone card after it has been
purchased and activate the card by swiping it through the fonecash terminal.
This advantage means the merchants can place cards anywhere in the store knowing
they are useless plastic until activated by the terminal. The use of the
fonecash terminal to activate cards also gives the provider other unique
advantages such as tracking sales, recharging cards on the fly, credit card
purchases for cards, credit card authorization services, and many other new
services.
4. Low Volume Merchants These are merchants with fewer than 20 credit card
transactions a month. These merchants have the ability to take credit cards in
payment for purchase of goods and services because various banks have opened up
merchant bank accounts for these merchants. These merchants, however, have no
electronic transaction terminal. These merchants take credit card transactions
by making a paper impression of the card, then, after having the cardholder sign
a receipt, they take these paper receipts to a bank where they are then
processed with the funds being received in the merchant's account 4-5 days
later. The process is long and the delay in depositing the funds causes serious
cash flow problems for the merchant. Because the Company makes and will market a
high quality, simple to operate terminal, it anticipates that it will be able to
attract many of these low volume merchants who are seeking a fast, simple and
easy to operate solution to their processing needs.
The Company's Future Strategy
The Company's goal is to establish itself as a prominent force in the automated
transaction industry by pursuing the following strategies:
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o Develop other markets for transaction automation, such as in-home
sales and the home market, wireless transmission and accessing
Social Security benefits and payment of income taxes.
o Target the low volume, paper based merchants which the Company
estimates number approximately 1.3 million accounts by some 83
banks and financial institutions in the United States.
o Develop opportunities for transaction automation in the
international payment processing market, which the Company
believes, is largely untapped and potentially larger than the
U.S. market.
o Entering new segments of the payment processing market by
developing terminals for in-home use to transfer money onto
pre-pay telephone cards.
Management of the Company believes that the foregoing factors are the key
elements of its operational strategy.
Sources of Revenues
Through December 31, 2001, the Company had revenue of $10,840 from sale of its
products. If the Company can realize its goals as set forth above, revenue could
potentially come from fees that merchants and banks would pay to the Company for
its terminals and use of its processing system.
Manufacturing
The manufacturing of the Company's products is out-sourced to Yue-Shoung, Ltd.,
or in English, Ever Prosperity Electronics Corp. an electronic manufacturer of
telephones and telephone equipment, located in Taiwan, with revenues of $150
million in 1999. This supplier makes a line of electronic products, including
touch screen displays, close-circuit video security systems, video telephones
and similar electronic products. The Company has no relationship with Yue-Shoung
other than as supplier to buyer, except that the Company has agreed that
Yue-Shong will be the Company's exclusive supplier until the molds have to be
re-placed. Manufacturing is done under a purchase order issued to Yue-Shong by
Advance Information Data (ADI), Taiwan, which terms of payment are one-third
cash deposit at the start of making the mold for production of the plastic
housing; one-third cash payment at the start of the production run, and
one-third cash payment at the completion and inspection of the final product.
The Company reimburses ADI for payment made under its existing agreement with
ADI for consulting and procurement services.
Marketing Strategy
The Company intends to establish up to three master distributors in the United
States with the most likely candidates being current Independent Sales
Organizations (ISO's) who are already engaged in the business of distributing
automated credit card processing terminals to established merchants who have
been approved by their sponsoring banks. These ISO's have trained commissioned
sales persons and have an interest in placement of any terminal in the market
regardless of manufacturer.
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The Company intends to engage a firm in 2002 to create promotional brochures
regarding the Company's terminals and services, emphasizing price, quality and
support services. This material is expected to be sold at cost to distributors
to be used in their sales presentation. Annually, the Company plans to
participate in 4 to 6 forums and exhibitions, such as the Retail Merchants'
Show, the Debit Forum, the American Bankers' Association, the Fraud and Security
Forum, the COMDEX show, where wireless products and innovative computer and
telecommunication products are presented, and the Food and Restaurant
exhibition. The Company also intends to engage a firm to design and place
advertisements in several of the industry's leading publications, including
Credit Card Management, the Blue Book Directory of the Credit Card Industry and
P0S News, a monthly publication from Faulkner & Gray, a publisher in New York.
The Company's own marketing executives also intend to visit executives and
decision makers among the banks and processors. At this level, cost and
performance are top priorities, as banks are looking for solutions to overhead
and insisting that any change results in increased profits.
In addition, the Company often faces additional competitive factors in foreign
countries including, preferences for national makers of terminals, difficulties
in obtaining necessary certifications and government tariff policies. Finally,
the Company believes that it will need to continue to introduce products
containing enhanced features and additional application software programs in
order to remain competitive. There can be no assurance that the Company will he
successful.
The Company intends to establish up to three master distributors in the United
States with the most likely candidates being current Independent Sales
Organizations (ISO's) who are already engaged in the business of distributing
automated credit card processing terminals to established merchants who have
been approved by their sponsoring banks. These ISO's have trained commissioned
sales persons and have an interest in placement of any terminal in the market
regardless of manufacturer.
Additional Risks Factors
An investment in the Company's common stock involves a high degree of risk.
Investors should consider the following risk factors and the other information
in this registration statement carefully before investing in the Company's
common stock. The Company's business and results of operations could be
seriously harmed if any of these risks actually happen.
The Company's Limited Operating History May Prevent it From Achieving Success.
The Company's inception date was August 1997. It has a limited operating
history, which may prevent it from achieving success. The Company's has had
limited revenues and it operating profits are unproven. It will encounter
challenges and difficulties frequently encountered by early-stage companies in
new and rapidly evolving markets. Chief among these challenges and difficulties
are:
o persuading banks to out-source their paper-based merchant accounts;
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o finding and hiring personnel with an expertise in computer software
and hardware technology;
o banking;
o credit card processing.
The Company may fail to address any of these challenges and the failure to do so
would seriously harm the Company's business and operating results. It has
limited insights into trends that may emerge and affect the Company's business.
The Company has Incurred Losses and Expects Future Losses
The Company has experienced operating losses in each period since inception and
expects to incur losses in the future. On December 31,2001, the Company had an
accumulated deficit of $3,728,847. The Company expects to increase its operating
expenses. As a result, the Company will need to achieve revenues and profits.
The Company's failure to achieve revenues would seriously harm the Company's
business and operating results. In fact, the Company may not have any revenue
growth.
Future Operating Results Will Likely Fluctuate
The Company's quarterly operating results will likely vary significantly in the
future. As a result, period-to-period comparisons of the Company's operating
results will not be meaningful and should not be relied upon as indicators o the
Company's future performance. In the future, the Company's operating results may
be below the expectations of securities analysts and investors. The Company's
failure to meet these expectations would likely depress the market price of the
Company's common stock. To date, the Company has not had sufficient operating
results to gauge any period-to-period fluctuations. In the future, he company
expects to receive revenues from one-time initiation fees when banks and
merchants connect to the company's system and from ongoing fees that will be
fixed amount per transaction. The revenues received in any period will vary with
the number a size of transactions that are processed through the Company's
system. The Company may be able to add to its number of bank and merchants by
increasing its marketing efforts and thereby expand the overall number of
transactions and generate more transaction fees. However, its ability to add
banks and merchants will depend in part upon the speed with which the wish to
begin transacting business over the Company gateway system.
The Company Depends on the Growth of Its Customer Base
The Company's success is substantially dependent on the growth of its customer
base of merchants and banks that use its products and system. If the Company
fails to develop a customer base sufficient to ensure profits, its business and
operating prospects would be seriously harmed. The Company's ability to attract
customers will depend upon on a variety of factors, including the price and the
quality of the Company's service as well as the Company's ability to market its
products and services effectively.
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The Company's Markets Are Highly Competitive
The Company's markets are new, rapidly evolving and highly competitive, and it
expects this competition to persist and intensify in the future. The Company's
failure to maintain and enhance its competitive position could seriously harm
its business and operating prospects. It will encounter competition from a
number of sources.
The Company's competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company
Many of these competitors have extensive customer bases and strong customer
relationships that they could leverage, including relationships with the
Company's current and potential customers. These competitors also have
significantly more established customer service organizations than the Company
does. In addition, these competitors may adopt aggressive pricing policies.
The Company Needs to Develop and Expand Its Sales and Marketing Capabilities
The Company needs to expand its marketing and sales operations in order increase
market awareness of the Company's services and generate increased revenues.
Competition for qualified sales personnel is intense, however, and :he Company
may not be able to hire enough qualified individuals in the future. Company
plans to establish marketing offices in other U.S. and Asian locations during
2002, and, thereafter, in Europe and South America by 2003. One office will be
opened in each region initially, and additional offices will be opened if demand
requires. The Company's services require sophisticated sales efforts targeted at
senior management of the Company's prospective customers, which are principally
banks and large international conglomerates.
The Company Must Retain and Attract Key Personnel
The Company's success depends largely on the skills, experience and performance
of the members of its senior management and other key personnel. The Company
needs employees with knowledge of the credit card processing industry, Internet
and computer technology, banking, and Internet security procedures. In the
future, the Company's growth will depend upon its ability to attract and retain
key management personnel.
Reliance on Key Personnel
The Company considers Daniel E. Charboneau and Dr. John Wu to be key employees.
The loss of either of them could seriously harm the Company's business. The
Company will maintain key man insurance on Mr. Charboneau and Dr. Wu, and, while
these policies will protect the assets of the business , the loss of either of
these employees will add a significant burden to the Company's future prospects.
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The Company Depends on Continued Growth of M-commerce
Rapid growth in the use of wireless devices has occurred only recently. As
result, acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of merchants may not adopt, and use the mobile terminal
and other processing services.
Thin Public Market for The Company's Common Stock; Stock Price May Fluctuate
The Company's common stock is sometimes very thinly traded. Its trading price
may not be an accurate reflection of the Company's value. The market price of
the Company's common stock may fluctuate significantly in response to a number
of factors, some of which (such as interest rates, general economic conditions
and trading multiples of comparable companies) are beyond the Company's control,
and some of which (such as operating results and announcements of new products)
are within the Company's control.
Future Sales of Shares Could Affect The Company's Stock Price
If the Company's stockholders sell substantial amounts of the Company's common
stock in the public market, the market price of the Company's common stock could
fall. Of the Company's outstanding common stock as of December 31, 2001, 33 % is
eligible for sale in the public market immediately.
Shareholders Will Receive No Dividends
The Company has never paid dividends and has no current plans to do so. Given
the Company's financial position, it is unlikely that it will pay any. dividends
in the foreseeable future. The Company plans instead to retain earnings, if any,
to fund internal growth.
Proprietary Rights
The Company signed an exclusive, worldwide License Agreement for the technology
developed by Mr. Thomas Ulrich and, originally patented in 1987. Yearly
maintenance fees, however, were not paid for four years and the intellectual
property rights lapsed. Therefore any other developer may attempt to use the
technology at this time, unless Mr. Ulrich decides to attempt to re-instate his
patent, or sell the right to do so to another. The Company, however, considers
the technology valuable and believes that the niche market is large enough to
accommodate several developers. In the main, however, the Company relies on
copyrights to protect its operating system and various other software programs,
as well as relying primarily upon its know-how, rather than patents, to develop
and maintain its competitive position. The Company enters into confidentiality
agreements with its employees and third parties. However, there can be no
assurance that others will not develop products and internal safeguards
equivalent or superior to those of the Company, or that the confidentiality
agreements and internal safeguards upon which the Company relies will be
adequate to protect its interests
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Government Approval and Regulation
Government regulatory policies affect charges and terms for both private line
and public network service. Therefore, changes in such policies which make it
more costly to communicate on such networks could adversely affect the demand
for terminals. The Company must also obtain product certification on the
applicable communications network both in the United States and other countries.
Any delays in obtaining necessary certifications with respect to future products
could delay their introduction. In addition, the Federal Communications
Commission requires that the Company's products comply with certain rules and
regulations governing their performance. The Company believes it has complied
with all such rules and regulations with respect to its existing products.
The Company Needs Future Capital
The Company needs to raise funds, and funds may not be available on favorable
terms or at all. Failure to obtain funds on favorable terms could seriously harm
the Company's business and operating results. Furthermore, if the Company issues
additional equity securities, stockholders will experience dilution, and the new
equity securities could have rights senior to those of the holders of the
Company's common stock. If the Company cannot raise funds on acceptable terms,
it will seriously hamper its growth.
Special Note Regarding Forward-Looking Statements
This document contains forward-looking statements. These statements relate to
future events or the Company's future financial performance. In some cases, one
can identify forward-looking statements by terminology. For example, "may",
"will", "should", "expect", "plan", "anticipate", "believe", "estimate",
"predict", "potential", or "continue", or the negative of these terms or other
comparable terminology, indicate forward-looking statements. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, one should specifically consider various factors,
including the risks outlined in the Risk Factors section. These factors may
cause the Company's actual results to differ materially from any forward-looking
statement.
Although it believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. Accordingly, neither the Company nor
any other person assumes responsibility for whether the forward-looking
statements ultimately prove accurate. The Company will not update any of the
forward-looking statements after the date of this registration statement to
conform to actual results or to make changes in the Company's expectations that
occur after the date this registration statement becomes effective.
Item 2. Properties
The Company owns no property. The Company's principal office is located at 90
Park Avenue, Suite 1700, New York, New York 10016 and is part of a commercial
executive suite of offices, maintained by HQ Workplaces which supplies
secretarial services, phone and fax sending and receipt, in addition to
conference rooms rented on an hourly basis. The average cost is between $250 to
$540 a month, depending on the level of services used. The Company leases an
14
additional location of approximately 1200 square feet at 475 Dobbs Ferry Road,
White Plains, New York where it houses computers and inventory on a two-year
lease with an option to renew for another two years. The monthly rental is
$2,250.
Item 3. Legal Proceedings
On April 8, 2002, the Company was served with a Notice of an Administrative
Hearing at the Securities and Exchange Commission (SEC) offices in Washington,
D.C. to be held on April 23, 2002, relating to certain allegations of the
Enforcement Division of the SEC, that a Registration Statement on Form SB-2,
filed on December 26, 2001 and amended thereafter, contained misrepresentations
and omissions of material facts. The Commission seeks to have the ability to
sell shares registered pursuant to the Registration Statement stopped. The
Company is currently in discussions with the SEC to resolve this matter without
a hearing and believes that this matter will be resolved shortly, in a manner
that will not materially affect the ability to operate or to engage in further
financing. The Company has been given an Offer for Settlement, which is
currently under advisement with the Company's attorneys.
Also, on April 8, 2002, in a concurrent action, the Company was served with a
Summons and Complaint, entitled Securities and Exchange Commission, Plaintiff v.
Fonecash, Inc, and Daniel E. Charboneau, Defendants, entered at the United
States District Court, District of Columbia. This action contains the same
allegations as in the Notice of Administrative Hearing, related to alleged
misrepresentations and omission in the filings of the Company. The Company is in
discussions with the Commission related to the resolution of this matter and
believes that a resolution will shortly be reached that will not materially
impact on the operations of the Company.
The Company has been served with a Summons and Complaint from Fleet National
Bank in an action commenced in the Supreme Court of the State of New York,
County of New York entitled, Fleet National Bank v. Fonecash, Inc, Jean-Paul
--------------------------------------------------
Charboneau, Individually and Jiann-Shong Wu, Individually. This action is for
-----------------------------------------------------------
the failure to pay the monthly payments on a Line of Credit with Fleet National
Bank. The Company has filed an Answer and a Request for Documents and is waiting
for a response. The Company intends to defend the action and believes that it
will be resolved in a manner that does not materially impact the Company.
The Company has been threatened with litigation related to the use of Merrill
Communications LLC. Merrill was used to file the Company's filings on the EDGAR
system. They claim that a balance of $21,371.07, including interest is currently
due. The Company has not yet been served with a Complaint by Merrill.
Furthermore, the Company disputes the total amount due to Merrill. The Company
believes that a resolution will be worked out that will not materially affect
the Company. However, if a resolution can not be worked out, a judgment in the
amount sought by Merrill might have a material adverse impact on the operations
of the Company at this point in time.
15
Item 4 Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter. However, the Company did file notification that the majority of shares
entitled to vote, did vote on January 16, 2002, to amend the Certificate of
Incorporation of the Company to change authorized number of shares from
20,000,000 million shares of Common Stock, par value $0.0001 and 5,000,000
shares of preferred stock, par value $0.0001, to 500,000,000 million shares of
Common Stock, par value $0.0001 and 10,000,000 shares of preferred stock, par
value $0.001, for a total of 510,000,000 shares authorized.
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock has traded on the OTC Bulletin Board under the symbol
"FCSH" since July 3, 2000. The following table sets forth the high and low
closing prices for the common stock for the periods indicated:
2001 High Low
Fourth Quarter $0.06 $0.06
Third Quarter $0.10 $0.08
Second Quarter $0.12 $0.10
First Quarter $0.40 $0.34
As of December 31, 2001 there were approximately 270 holders of record of the
common stock. On December 31, 2001, the closing sales price of the Company's
common stock was $0.06 per share.
The Company has not paid any cash dividends on its Common Stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of its earnings, capital requirements, financial
condition and other factors deemed relevant.
The Company's transfer agent is Manhattan Transfer Registrar Co., 58 Dorchester
Road, Lake Ronkonkoma, New York 11779, (516) 585-7341
Recent Sales of Unregistered Securities
The Company issued shares of its common stock to the following shareholders for
cash and for services.
Name Shares
GoCharterCom, Inc 50,000
Joseph Treutlein 50,000
16
Richwoodland Profits Corporation 450,000
Universal Venture (BVI) Limited 450,000
Brian Sheppard 800,000
George F. Amrhein 300,000
Zazoff Associates, LLC 100,000
Devine Nine Investment Club 4,000
Jack Gore 20,000
James H. Hoke 30,612
Vintage Golf, Inc 40,000
Steven L. Adler 17,345
Joel Schneider 20,000
Marc R. Cable 10,000
Fred Kaplan 68,671
Mesirow Financial 33,978
Lewis A. Kaplan 87,345
Ernie Kaplan 40,000
Joseph D. Radcliffe 400,000
Reginald L. Clark 1,200,000
John Stone 800,000
Stockgroup Information Systems, Inc 493,200
Charlotte B. Given 320,000
James E. Czekner 100,000
Julie Thompson 200,000
Sharline Gordon 100,000
Michael S. Krome, Esq 250,000
Ken G. Upton 62,530
Joseph B. LaRocco,Esq 100,000
Item 6 - Management's Discussion and Analysis of Financial Condition and Plan of
Operation
General
The Company has had revenues of $10,840 since its inception in August 1997 due
to the fact that the Company is in the development stage mode for five years.
The Company had a net loss of $3,717,847 since inception to December 31, 2001.
Depreciable assets for this period consisted of $190,305 for production molds,
which have a useful life of three years. $73,380 was considered as a
depreciation expense for this period ending December 31, 2001.
The Company incurred operating losses of $3,717,847 from Inception to December
31,2001. The Company expects its accumulated deficit to grow for the foreseeable
future as total costs and expenses increase due principally to increased
marketing expense associated with its plans to undertake trials of its products
and services. There can be no assurances that the Company will complete
successful trials of its products and services, nor that sufficient revenues
will be generated from the possible sales of such products and services to allow
the Company to operate profitably.
For the period ending December 31, 2001 general and administrative expenses were
$857,798 as compared to $609,234 for the same period in 2000, representing an
17
increase of $248,564. The increase during the period ending December 31, 2001
was primarily due to an expansion of the general operations of the Company,
including legal, accounting, and printing associated with the filing of this
Form 10-SB and amendments with the Securities and Exchange Commission and costs
of raising funds.
Compensation and related benefits during the period ending December 31, 2001 was
$443, 200 and represented $1,200 in cash and 5,400,000 shares, valued at $0.12 a
share for compensation paid to the Company's president and to Dr. John Wu; there
were no compensation expenses for the period ended December 31,2001.
The Company's combined cash and cash equivalents totaled $35,840 for the period
ending December 31,2001. This is an increase of $9,018 from $26,822 for the
period ending December 31, 2001.
The Company does not expect to generate a positive internal cash flow for at
least the next nine months due to expected increase in spending for salaries and
the expected costs of marketing and sales activities.
Property and equipment was valued at $30,320 for the period ending December 31,
2001.
The Company currently has limited internal and external sources of liquidity.
At this time the Company has no material commitment for capital expenditures.
There are no known trends, events or uncertainties that are expected to have a
material impact on the net sales and income from operations once the Company has
the funds needed to purchase the terminals from Taiwan and complete the set up
of its servers. The industry and the needs of the market are well established.
The Company believes that it will serve a niche market with its products and
services that has yet to be served adequately. The Company's business is not
subject to seasonal aspects.
Liquidity and Capital Resources
The Company was incorporated in the State of Delaware on August 7,1997 and has
designed an electronic terminal that could be used by mobile merchants and
in-home salespersons. The Company anticipates that it can generate revenues from
sales of the terminals and from charges collected from each transaction. As of
December 31, 2001, limited revenues have been generated from sales but
management anticipates sales to commence in 2002.
The Company was started by Messrs. Daniel Charboneau, the Chairman of the Board
and Chief Executive Officer, and John Wu, Director and owner of Advance Data
Information, Ltd, a Taiwan based research and development company. Messrs.
Charboneau and Wu have paid certain expenses on behalf of the Company from
personal funds and from Mr. Wu's business.
18
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9 - Directors and Executive Officers
Name Age Position
Daniel E. Charboneau 70 CEO/Chairman/President
John Jiann-Shong Wu 48 Director
Daniel S. MacDonald 66 Director
Michael Wong 35 Director, Vice President/CFO
David Cheung 36 Director, Vice President, Marketing
Yuan T. Jeang 34 Vice President/Engineering
Mr. Charboneau has a five year employment contracts starting in August,1997 and
Dr Wu a five year contract starting from July 1, 1999. The Company retains the
services of its vice presidents as consultants on an as-need basis and does not
pay them a regular salary.
All current directors were appointed to their office in February 2000 and will
hold office until the next annual stockholders' meeting and until their
successors have been elected or qualified or until their death, resignation,
retirement, removal, or disqualification. Vacancies on the board will be filled
by a majority vote of the remaining directors. Officers of the Company serve at
the discretion of the Board of Directors.
None of the directors holds other directorships in other reporting companies.
The Company's management comprises:
Daniel E. Charboneau, CEO/President/Chairman of the Board:
Mr. Charboneau is an experienced management executive with over twenty years of
accomplishments in the area of marketing, sales, organizational development,
manufacturing and profit-center responsibilities. He has worked with several
multi-national companies, including Bechtel International where he was
Organization Development Consultant from 1974 to 1980, and with 3M in Asia from
1980 to 1984. From 1984 to 1987, Mr. Charboneau operated as a consultant to U.S.
and European businesses who were interested in investment in Asia. In 1987, in a
joint venture with A&H, a jewelry maker in Rhode Island, Mr. Charboneau
established a manufacturing plant in Taiwan whose products were exported
worldwide. In addition to his duties on the Board of Directors, Mr. Charboneau
directs the development of technologies, products, markets and manages business
relations with Asian suppliers.
19
John Jiann-Shong Wu, Director/Co-founder:
Born in China, Dr. Wu became an American citizen in 1978 and lives with his
family in San Jose, California when he is not in Taiwan. Educated in Taiwan, Dr.
Wu received His Master Degree in Computer Science from Florida Institute of
Technology and his doctorate in Electrical Engineering from Leland Stanford
Junior University. From 1975 to 1982 he was a Researcher with Taiwan National
Science, and from 1982 to 1988 a Senior Engineer and Project Manager with
General Electric Company in Singapore. From 1989 to 1990, he was a Project
Manager with Digital Equipment Corporation and from 1990 to 1991 he was Senior
Consulting Engineer with Hewlett Packard. Dr. Wu has designed many products,
both hardware and software, and founded his R&D facility to promote better
design of electrical and telephonic products. From 1991 to 1996, Dr. Wu was
co-founder and Vice President of V-Star Electronics, then, from 1997 until
present, Dr. Wu started his own advanced laboratory, Advance Data Information
and became a co-founder in FoneCash.
Daniel S. MacDonald, Director
Mr. MacDonald has 22 years of experience in the mutual fund industry and is a
Certified Financial Planner and holds licenses in real estate, insurance and
securities. He has resided in Japan for from 1962 to 1972 as International
Liaison for the Japanese Chamber of Commerce; he speaks Japanese fluently. From
1972 to 1986, he serves in various capacities with Oppenheimer Management
Corporation, first in San Francisco as Regional Sales Manager and ending in New
York as Senior Vice President and National Sales Manager . In 1989 ,Mr.
MacDonald started MDIC, Inc. in Bronxville, New York, and for the last 11 years
until present, remains as owner and manager of this financial services
corporation specializing in mutual funds.
20
Michael Wong. Director and Chief Financial Officer:
--------------------------------------------------
Born in Malaysia in 1965,he grew up in Singapore. Mr. Wong is a financial
management professional, who received his higher education in Great Britain and
received his BA in Accounting and Finance in 1991. Upon returning to Singapore,
he joined Price Waterhouse as a tax accountant. Four year later, he joined
American International Group, assisting in the business and product development.
Subsequently, he had the opportunity to venture into the China market where he
was involved in business development and infrastructure work. In 1999, he was
involved in corporate restructuring for a chemical company in China and
gradually became interested in environmental and telecommunication sectors.
David Cheung, Director & Vice President of Corporate Marketing
--------------------------------------------------------------
After finishing his higher education in Great Britain and receiving his MBA in
Finance from Lancaster International Business School of Lancaster University, he
joined a subsidiary of Costain Construction as a member of its business
development team, specializing in the hospitality sector. After returning to
Hong Kong, he was involved in several major infrastructures projects, such as
hotels, power plants, roads and bridges, as well as heading up a constancy team
for re-marketing of French clothing manufacturer in China. Mr. Cheung joined the
Emperor Group in 1998 to lead and implement the strategic business management
turn around of the Group's hotel and newspaper divisions. Once back in China, he
became a consultant to companies in the fine chemical processing, the Internet
and the telecommunications sectors.
Yuan Long Jeang, Vice President of Engineering/Research & Development
---------------------------------------------------------------------
Mr. Jeang holds a Ph.D in Electrical Engineering from Chen Kung University,
Taiwan. He was a professor for 10 years and Chief of Image Processing Research
Laboratory of the Kaohsiung Technical University for 10 years. Mr. Jeang was
Chief Designer for Taiwan Films Limited where he managed all technical aspects
of computer generated effects, composit design, 3D production and computer
generated graphics. For the past five years, he worked closely with Dr. Wu
desuigning algorithms for video and data compression, and has developed
standards for cellular phone authentication and encryption.
Item 10 - Executive Compensation
For the year ending December 31, 2001, Mr. Charboneau was paid cash in the
amount of $1,200 as compensation on his employment agreement of $120,000. He was
also issued 2,100,000 common shares, in lieu of compensation.
Directors do not currently receive any cash compensation.
21
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the stock ownership of each person known by the
Company to be a beneficial owner of five percent (5%) or more of the Company's
equity securities, each Director and executive officer individually and all
Directors and Officers of the Company as a group. Each person has sole voting
and investment power with respect to the shares shown unless otherwise
indicated. As of March 31, 2000, there were 5,303,005 shares issued and
outstanding.
Name & Address Class Amount Owned Shares Beneficially
of Beneficial Owned % of Class
Owner
-----------------------------------------------------------------------------
Daniel E. Charboneau Common 4,111,387 28.0
215 Central Park Ave.
Hartsdale, NY 10530
John Jiann-Shong Wu Common 2,000,000 13.0
21 Street, 6 Fl, No.211
Chung-Cheng 4 Road
Kaoshiung, Taiwan
Total Shares of Officers and 6,111,387 41.0%
Directors as a Group
There are no arrangements either presently or planned that will results in a
change of control of the Company.
Item 12 - Certain Relationships and Related Transactions
On April 10, 2001, pursuant to an agreement with Richwoodland Profits
Corporation ("RPC") and Universal Venture Limited "UVL"), each a British Virgin
Island holding company, the Company has acquired all of the voting stock of four
foreign companies that were wholly-owned by RPC and UVL in return for 900,000
shares of common stock of the Company, valued at $.50 per share. The companies
acquired are start-up companies that have no assets, liabilities, revenue,
expenses and results of operations. The investment in the companies has been
reported entirely as goodwill, as there is no value in the companies.
The four acquired companies are Universal Information Technology, (Hong Kong)
Limited, a company which has developed a video compression technology for
Internet and wireless applications Firstech Ventures (Hong Kong) Limited, a
company that locates engineering services for environmental projects in China,
especially land fill projects, waste water and waste oil treatment facilities,
and waste liner projects, Tech Unity Technology, (Hong Kong) Limited, which
engages in gathering information and research about business opportunities in
China for dissemination among U.S. and Australian bidders, and Fonecash.com
(Hong Kong) Limited, a company engaged in the wireless processing of credit and
debit cards for the mobile merchants.
22
Item 13 - Exhibits, Financial Statements and Reports on Form 8-K
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENT
(Inception to December 31,2001)
Independent Auditor's Report
Balance Sheet
Statement of Income(Loss)
Statement of Changes in Stockholders' Equity
Statement of Cash Flow
Notes to Financial Statement
23
STEWART H. BENJAMIN
CERTIFIED PUBLIC ACCOUNTANT, P.C.
27 SHELTER HILL ROAD
PLAINVIEW, NY 11803
TELEPHONE: (516) 933-9781
FACSIMILE: (516) 827-1203
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
FoneCash, Inc.
White Plains, New York
I have audited the accompanying consolidated balance sheets of FoneCash, Inc. (a
Delaware corporation in the development stage) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended and for the period
August 7, 1997 (inception) to December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these consolidated financial statements based on my
audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FoneCash, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for the years then ended and from August 7, 1997 (inception)
to December 31, 2001, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company's significant net losses raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Stewart H. Benjamin
STEWART H. BENJAMIN
CERTIFIED PUBLIC ACCOUNTANT, P.C.
Plainview, New York
April 12, 2002
24
FONECASH, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
------
December 31, December 31,
2001 2000
----------- -----------
Current assets:
Cash $ -- $ 1,822
Accounts receivable 10,840 --
Inventory 177,800 35,000
Prepaid expenses 25,000 25,000
----------- -----------
213,640 61,822
----------- -----------
Property and equipment, net 30,320 103,700
----------- -----------
Other assets:
Technology rights, net 2,000 3,000
Other -- 116
----------- -----------
2,000 3,116
----------- -----------
$ 245,960 $ 168,638
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 161,478 $ 83,513
Due to officer/stockholder 478,691 683
Notes payable 196,024 122,953
----------- -----------
836,193 207,149
----------- -----------
Stockholders' deficit :
Preferred stock; $.0001 par value; authorized -
10,000,000 shares; issued - none -- --
Common stock; $.0001 par value; authorized -
500,000,000 shares; issued and outstanding -
14,899,056 shares in 2001 and 5,951,372 in 2000 1,490 595
Additional paid-in capital 3,127,624 1,801,743
Treasury stock, 500 shares at cost (1,500) (1,500)
Deficit accumulated during the development stage (3,717,847) (1,839,349)
----------- -----------
(590,233) (38,511)
----------- -----------
$ 245,960 $ 168,638
=========== ===========
The accompanying notes are an integral part of the financial statements.
25
FONECASH, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
Aug. 7, 1997
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
2001 2000 2001
----------- ----------- -----------
Revenue:
Sales $ 10,840 $ -- $ 10,840
Cost of sales 5,662 -- 5,662
----------- ----------- -----------
Gross profit 5,178 -- 5,178
Interest income 18 4,577 5,211
----------- ----------- -----------
Total revenue 5,196 4,577 10,389
----------- ----------- -----------
Costs and expenses:
Depreciation 73,380 75,258 190,305
Amortization 1,116 1,074 3,368
Research and development, related party 58,200 21,150 432,256
Officer's compensation 443,200 195,229 713,429
Impairment of investment in related party -- -- 50,000
Impairment of investment in subsidiaries 450,000 -- 450,000
General and administrative 857,798 609,234 1,888,878
----------- ----------- -----------
1,883,694 901,945 3,728,236
----------- ----------- -----------
Net loss $(1,878,498) $ (897,368) $(3,717,847)
=========== =========== ===========
Basic and diluted loss per common share $ (.19) $ (.23)
=========== ===========
Weighted average common shares outstanding 9,930,238 3,948,428
=========== ===========
The accompanying notes are an integral part of the financial statements.
26
FONECASH, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders' Equity
For the Period August 7, 1997 (Inception) to December 31, 2001
Deficit
Accumulated
Common Stock Additional Treasury Stock During the
-------------------------- Paid-in ------------------------ Development
Shares Amount Capital Shares Amount Stage
----------- ----------- ----------- ---------- ----------- ------------
Balances, August 7, 1997 (inception) -- $ -- $ -- -- $ -- $ --
Common stock issued for services
and costs advanced, valued at
$.0001 per share 2,000,000 200 -- -- -- --
Common stock issued for services,
valued at $.15 per share 200,000 20 29,980 -- -- --
Net loss for the period (61,404)
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31, 1997 2,200,000 220 29,980 -- -- (61,404)
Sale of common stock ($.4156 per share) 204,500 20 84,965 -- -- --
Net loss (95,211)
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31, 1998 2,404,500 240 114,945 -- -- (156,615)
Sale of common stock ($.7622 per share) 1,098,505 110 837,160 -- -- --
Services contributed by the
president of the Company -- -- 60,000 -- -- --
Common stock issued for services,
valued at $.81 per share 333,333 33 269,967 -- -- --
Net loss (785,366)
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31, 1999 3,836,338 383 1,282,072 -- -- (941,981)
Sale of common stock ($1.25 per share) 25,000 3 31,247 -- -- --
Common stock issued for services,
valued at $.11 per share 1,466,667 147 157,353 -- -- --
Common stock issued for services,
valued at $.5312 per share 623,367 62 331,071 -- -- --
Purchase of treasury stock -- -- -- 500 (1,500) --
Net loss (897,368)
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31, 2000 5,951,372 $ 595 $ 1,801,743 500 $ (1,500) $(1,839,349)
Common stock issued for services,
valued at $.12 per share 6,959,708 696 858,080 -- -- --
Sale of common stock ($.017 per share) 1,087,976 109 17,891 -- -- --
Common stock issued in acquisition
of subsidiaries, valued at $.50 per share 900,000 90 449,910 -- -- --
Net loss (1,878,498)
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31, 2001 14,899,056 $ 1,490 $ 3,127,624 500 $ (1,500) $(3,717,847)
=========== =========== =========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
27
FONECASH, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
Aug. 7, 1997
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
2001 2000 2001
----------- ----------- ------------
Cash flows from operating activities:
Net loss $(1,878,498) $ (897,368) $(3,717,847)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 73,380 75,258 190,305
Amortization 1,116 1,074 3,368
Cash surrender value of life insurance -- 17,732 --
Common stock issued for services 858,776 488,633 1,707,609
Common stock issued in acquisition of subsidiaries 450,000 -- 450,000
Write-down of lost inventory 26,538 -- 26,538
Changes in assets and liabilities
Increase in accounts receivable (10,840) -- (10,840)
(Increase) decrease in inventory (169,338) 10,143 (204,338)
Increase in prepaid expenses -- -- (25,000)
Decrease in utility deposit -- 250 --
Increase (decrease) in accounts payable 77,965 73,723 161,478
----------- ----------- -----------
Net cash used in operating activities (570,901) (230,555) (1,418,727)
----------- ----------- -----------
Cash flows from investing activities:
Organization costs -- -- (368)
Purchases of property and equipment -- (95,625) (220,625)
Acquisition of patent rights -- -- (5,000)
----------- ----------- -----------
Net cash used in investing activities -- (95,625) (225,993)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from short-term debt 95,150 139,674 242,324
Repayment of short-term debt (22,079) (24,221) (46,300)
Increase (decrease) in amounts
due to an officer/stockholder 478,008 (25,903) 478,691
Purchase of treasury stock -- (1,500) (1,500)
Proceeds from sale of common stock 18,000 31,250 971,505
----------- ----------- -----------
Net cash provided by financing activities 569,079 119,300 1,644,720
----------- ----------- -----------
Net increase (decrease) in cash (1,822) (206,880) --
Cash at beginning of year 1,822 208,702 --
----------- ----------- -----------
Cash at end of year $ -- $ 1,822 $ --
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
28
Note 1 - Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
-------------------------------------------------
The financial statements presented are those of FoneCash, Inc. and its
subsidiaries, a development stage company (the "Company"). The Company was
incorporated under the laws of the State of Delaware on August 7, 1997. The
Company has acquired the rights to market a patented electronic terminal that is
used by retail merchants and in-home salespersons when payment is made with a
credit or debit card. Revenues are expected to be generated from sales of the
terminals and from transaction charges to banks.
The Company has limited operations and in accordance with Statement of Financial
Accounting Standards No. 7 (SFAS #7), the Company is considered a development
stage company.
Business Combination
--------------------
On April 10, 2001, pursuant to an agreement with Richwoodland Profits
Corporation ("RPC") and Universal Venture Limited ("UVL"), each a British Virgin
Island holding company, the Company has acquired all of the voting stock of four
foreign companies that were wholly-owned by RPC and UVL in return for 900,000
shares of common stock of the Company, valued at $.50 per share. The companies
acquired are start-up companies that have no assets, liabilities, revenue,
expenses and results of operations. The investment in the companies has been
reported entirely as goodwill, as there is no value in the companies.
The four acquired companies are Universal Information Technology, (Hong Kong)
Limited, a company which has developed a video compression technology for
Internet and wireless applications; Firstech Ventures (Hong Kong) Limited, a
company that locates engineering services for environmental projects in China,
especially land fill projects, waste water and waste oil treatment facilities,
and waste liner projects; Tech Unity Technology, (Hong Kong) Limited, which
engages in gathering information and research about business opportunities in
China for dissemination among U.S. and Australian bidders; and Fonecash.com
(Hong Kong) Limited, a company engaged in the wireless processing of credit and
debit cards for the mobile merchants.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated or completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase business combination must meet
to be recognized and reported apart from goodwill. The Company has adopted the
provisions of Statement 141 in reporting the business combination.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. Statement 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
29
Statement 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. The Company has adopted
the provisions of Statement 142 and has written the goodwill associated with the
business combination down to zero, as no future benefit can be determined. An
impairment loss of $450,000 has been reflected in the consolidated statements of
operations.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reporting amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
-------------------------
Accounts
--------
For purposes of reporting cash flows, cash and cash equivalents include checking
and money market accounts and any highly liquid debt instruments purchased with
a maturity of three months or less.
Receivable
----------
The Company considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful accounts is required.
Inventory
---------
Inventory is stated at the lower of cost or market, with cost determined on a
first-in, first-out basis and market based on the lower of replacement cost or
realizable value.
Property and equipment and depreciation
---------------------------------------
Property and equipment are stated at cost. Depreciation for both financial
reporting and income tax purposes is computed using combinations of the straight
line and accelerated methods over the estimated lives of the respective assets.
Molds are depreciated over 3 years and tools and test equipment are depreciated
over 5 years. Maintenance and repairs are charged to expense when incurred. When
property and equipment are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts and any
gain or loss is credited or charged to income.
30
Intangible Assets
-----------------
Intangible assets consist primarily of patent rights. Intangible assets are
amortized on a straight-line basis over five years. Amortization expense was
$1,116 and $1,074 for the years ended December 31, 2001 and 2000, respectively.
Long-lived Assets
-----------------
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by an asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of carrying amount or fair value less costs to
sell.
Fair Value of Financial Instruments
-----------------------------------
The fair value of the Company's payables due to an officer/stockholder is not
practicable to estimate due to the related party nature of the underlying
transactions and the indefinite payment terms.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
Loss Per Common Share
---------------------
Loss per common share is computed by dividing the net loss by the weighted
average shares outstanding during the year.
Note 2 - Stockholders' Equity (Deficit)
Common Stock
------------
Since December 31, 2000, the Company has issued 4,809,708 shares of common stock
for promotional, legal and consulting services, valued at $.14 per share, as
well as 2,150,000 shares of common stock to an officer for compensation, valued
at $.08 per share. The Company has also sold 1,087,976 shares of common stock at
$.017 per share. The Company has issued 900,000 of common stock valued at $.50
per share in exchange for four foreign companies, as previously discussed.
31
Dividends may be paid on outstanding shares as declared by the Board of
Directors from time to time. Each share of common stock is entitled to one vote.
Stock Options
-------------
At December 31, 2001 the Company has reserved and granted 800,000 shares of
common stock for issuance in connection with the stock option plan at an
exercise price of $.50 per share. No options have been exercised as of December
31, 2001.
Preferred Stock
---------------
No shares of the Company's preferred stock have been issued or are outstanding.
Dividends, voting rights and other terms, rights and preferences of the
preferred shares have not been designated but may be designated by the Board of
Directors from time to time.
Note 3 - Income Taxes
There is no provision for income taxes since the Company has incurred net
operating losses. At December 31, 2001, the Company has net operating loss
carryforwards of $3,250,085, which may be available to offset future taxable
income through 2021. A deferred tax asset has not been recorded for the net
operating loss carryforwards due to uncertainties as to the ultimate realization
of the deferred tax asset.
Note 4 - Prepaid Expenses
Prepaid expenses consists of a down payment of $25,000 on April 29, 1999 for the
cost of printing brochures containing product and company information. The
printing costs will be charged to income as the brochures are distributed. No
brochures have been distributed as of December 31, 2001.
Note 5 - Property and Equipment
Property and equipment consisted of the following at December 31, 2001 and 2000:
2000 2001
----------- -----------
Molds $ 208,500 $ 208,500
Tools and test equipment 12,125 12,125
----------- -----------
220,625 220,625
Less accumulated depreciation 190,305 116,925
----------- -----------
$ 30,320 $ 103,700
Depreciation expense of $73,380 and $75,258 was charged to operations for the
years ended December 31, 2001 and 2000, respectively.
32
Note 6 - Technology Rights
On November 1, 1997 the Company entered into a license agreement with Thomas J.
Ulrich. Under this agreement the Company will acquire an exclusive license to
use the technology, pertaining to telephone line powered applications, for the
primary purpose of utilizing the licensor's invention for sales of products and
services. The Company is required to make payments of $30,000 for a
non-refundable license execution fee based upon capital funding, and for
royalties based upon gross sales of all licensed products sold. As of December
31, 2001 a license execution fee of $5,000 was capitalized and is being
amortized over the remaining life of the patent of 5 years. The balance of the
license execution fee of $25,000 is due upon funding of an Initial Public
Offering or any other financing exceeding $500,000. The agreement also provides
for a royalty of 3% of the gross sales of all licensed products and an annual
minimum fee of $10,000 in 2000 and $20,000 for each year thereafter. In
addition, minimum sales revenues of $500,000 for the year 2000 to a total $2
million in sales for the year 2003 and thereafter were agreed to. No additional
payments were made under the license agreement during the year ended December
31, 2001.
Note 7 - Notes Payable
Notes payable consisted of the following at December 31, 2001 and 2000:
2001 2000
--------- ---------
Line of credit with Fleet Bank, unsecured, guaranteed by the
president of the Company, interest at 2.75% above prime,
monthly payments equal to 2% of principal balance, was due
November 2001. The Company is in default with respect to the
terms of this note. Legal action has been taken by the bank
as of the date of this report. $107,645 $91,716
SBA note payable to Habib American Bank, unsecured, interest
at 2.75% above prime, payable at $1,604 per month including
interest, due September 1, 2002 16,866 31,237
Credit card balances payable to 10 different credit card
issuers with credit lines totaling $62,700, monthly minimum
payments totaling $3,081, including interest at various
rates ranging from 13.4% to 27.99% 65,887 --
Demand note payable to an individual, unsecured,
interest at 7%, due December 31, 2002 5,626 --
--------- ---------
$196,024 $122,953
========= =========
33
Interest expense on notes payable of 10,586 and $10,344 was charged to
operations for the years ended December 31, 2001 and 2000, respectively.
Note 8 - Going Concern
The Company's consolidated financial statements have been prepared in conformity
with principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. As shown in the consolidated financial statements,
the Company has incurred significant net losses and as of December 31, 2001,
reflects a deficit accumulated during the development stage of $3,717,847. The
Company has not commenced its planned principal operations. The Company's
continued existence is dependent on its ability to generate sufficient cash flow
or raise additional capital to meet its obligations on a timely basis. The
Company has been exploring sources to obtain additional equity or debt
financing. Without realization of additional capital, it would be unlikely for
the Company to continue as a going concern. Accordingly, the Company's
continuation as a going concern is in substantial doubt and the financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue in existence.
Note 9 - Litigation
The Company was served with a summons and complaint for failure to pay the
monthly payments on its line of credit with Fleet National Bank. Pursuant to the
lawsuit, the Company would be liable to Fleet National Bank for the outstanding
principal balance of $107,645 plus attorney's fees. Management has indicated its
intentions to defend the action and will repay the principal balance in monthly
installments upon receipt of capital contributions from investors.
Note 10 - Related Party Transactions
The Company was indebted to officers/stockholders in the amount of $478,691 as
of December 31, 2001, which includes $270,000 for unpaid salary, $58,200 for
research and development expenses, as discussed below, and $150,491 for
merchandise purchases and expenses advanced on behalf of the Company. There are
no specific terms for repayment.
The Company has leased its executive offices and storage facilities from the
president of the Company under a month-to-month operating lease since the
Company's inception. Rent expense amounted to $14,990 for 2001, and $18,102 for
2000.
The Company utilizes Advance Data Information Corporation ("ADI"), a Taiwan
corporation owned by a director/stockholder of the Company, as its research and
development laboratory. Research and development expenses under this arrangement
totaling $58,200 and $21,150 were charged to operations during the years ended
December 31, 2001 and 2000, respectively.
Note 11 - Consulting Agreements
On February 4, 1998 the Company entered into a consulting agreement with East
Coast Entertainment, Inc. ("ECE") requiring payments of $50,000 per year in
monthly installments once the Company attains gross revenues of $300,000. ECE
will assign administrative duties including but not limited to, publicity,
advertising, public relations, investor relations programs, news releases,
hiring of all necessary outside contractors for any specialized projects,
printing and development of the Company's annual reports, preparation of any
design, print or art work, camera ready art, distribution of reports and
34
corporate releases to State and Federal securities agencies. ECE is entitled to
$100,000 annually once the Company achieves $500,000 in gross revenues. ECE is
entitled to participate in the Company's stock option plans and group health
plans pursuant to the same terms that apply to all senior key executives and
other employees of the Company. The agreement is renewable annually for a period
of ten years. No expenses have been recognized under this arrangement for the
year ended December 31, 2001.
The Company entered into another consulting agreement with Advance Data
Information Corporation ("ADI"), a Taiwan corporation owned by Dr. Wu, a
director/stockholder of the Company, in which ADI will act as the research and
development laboratory for the Company. The Company shall have exclusive
ownership rights to any and all products that are developed as a result of this
agreement. The Company has issued 200,000 shares of its common stock to Dr. Wu
in August 1997, valued at $.15 per share, 333,333 shares in June 1999, valued at
$.81 per share, and 1,466,667 shares in December 2000, valued at $.11 per share
for services rendered.
Note 12 - Contract for Deployment and Installation Services
Pursuant to a letter of intent dated June 5, 1999 between the Company and Fusion
Capital Corp. ("Fusion"), a Florida corporation, the Company agreed to purchase
a majority of the common stock of Fusion. The Company simultaneously issued a
loan to Fusion of $37,000 to be granted in 10 installments of $3,700 from June
14, 1999 through August 16, 1999. Ten separate promissory notes of $3,700 were
executed, each providing for interest at a rate of 6% and each of the ten notes
payable within 12 months from the date of issuance with the first payment due on
June 14, 2000. The balance due on the notes of $37,990 on December 31, 1999
included accrued interest of $990.
In April 2000, the Company entered into negotiations with Fusion for deployment
and installation services for 500 terminals which the Company planned for its
trials with merchants in order to prove its revenue concept. On May 1, 2000, the
Company and Fusion entered into a Contract for Deployment and Installation,
whereby the principal balance of the notes totaling $37,000 was converted to an
advance payment pursuant to the contract, as reflected in the statements of
operations, and the accrued interest of $990 was written off.
35
Exhibits
The Following list describes the exhibits filed as part of this Annual Report on
Form 10-KSB:
Exhibit Number Description of Document
-------------- -----------------------
3.1 Certificate of Incorporation as filed on August 7,1997*
3.2 Amendment to Certificate of Incorporation as filed on
November 4, 1997*
3.3 Bylaws*
4.1 Form of Stock Certificate*
10.1 Employment Agreement dated August 1,1997 by and between the
Company and Mr. Daniel E. Charboneau*
10.2 Consulting Agreement with East Coast Entertainment dated
February 4,1998*
10.3 Consulting Agreement with Advance Data Information dated
October 10,1997*
10.4 Employment Agreement dated August 7,1997*
10.5 Employment Agreement dated July 1, 1999 by and between
the Company and John Jiann-Shong Wu. *
10.6 Deployment and Installation Agreement with Fusion Capital
Corp, dated May 1, 2000.* *
* Incorporated by reference to Registration Statement on Form 10-SB, filed with
the Securities and Exchange Commission on December 30,1999, as amended.
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on behalf by the
undersigned, thereunto duly authorized on April 14, 2001
FoneCash, Inc.
By:/s/ Daniel E. Charboneau
-------------------------------
Daniel E. Charboneau
President and Chief Executive
Officer
36
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated and on the dates indicated.
SIGNATURE TITLE DATE
------------------ --------- -------
/s/Daniel E. Charboneau Director, President April 14, 2002
-----------------------
Daniel E. Charboneau
/s/John Jiann-Shong Wu Director April 15, 2002
-----------------------
John Jiann-Shong Wu
/s/ Daniel S. MacDonald Director April 15, 2002
-----------------------
Daniel S. MacDonald
/s/ Michael Wong Director April 15, 2002
-----------------------
Michael Wong
/s/ David Cheung Director April 15,2002
-----------------------
David Cheung
37