As filed with the Securities and Exchange Commission on July 26, 2002
Registration No. 333-91560
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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mPHASE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 7385 22-2287503
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
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587 Connecticut Avenue
Norwalk, Connecticut 06854-1711
Telephone: (203) 838-2741
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
Martin S. Smiley
Chief Financial Officer
mPHASE TECHNOLOGIES, INC.
587 Connecticut Avenue
Norwalk, Connecticut 06854-1711
Telephone: (203) 831-2242
Telecopy: (203) 853-3304
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |__|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
|--|
If this form is a post-effective amendment filed pursuant to Rule
462(d) 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
Proposed Proposed
Title of each class of Amount to be maximum offering maximum aggregate Amount of
securities to be registered registered price per share(1) offering price(1) registration fee(2)
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Common stock, no par value 38,532,319 $0.27 10,403,726 $957.14(3)
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
basis of the average of the bid and ask prices per share of our common stock, as
reported on the OTC Bulletin Board, on June 25, 2002.
(2) Pursuant to Rule 429 promulgated under the Securities Act, this registration
statement shall be deemed to amend Registration Statement on form S-1,
Registration No. 333-63262, with respect to a total of 5,420,375 shares, which
have not been sold purusant to such Registration Statement.
(3) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION
8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, July 26, 2002
PROSPECTUS
mPHASE TECHNOLOGIES, INC.
38,532,319 Shares of Common Stock
This prospectus relates to the resale of up to 38,532,319 shares of
common stock, of which 18,495,461 shares are issued and outstanding and up to
20,036,858 shares may be issued upon exercise of warrants held by the selling
stockholders. The selling stockholders listed on page 43 may sell the shares
from time to time.
Our common stock is listed on the Over-the-Counter Bulletin Board under
the symbol "XDSL.OB" The last reported sales price of our common stock on July
23, 2002 was $.19 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 4.
Our principal executive offices are located at 587 Connecticut Avenue,
Norwalk, Connecticut 06854-1711. Our phone number is (203) 838-2741.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED ANY OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is __, 2002.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................2
FORWARD-LOOKING STATEMENTS.....................................................2
SUMMARY FINANCIAL DATA.........................................................3
RISK FACTORS...................................................................4
USE OF PROCEEDS...............................................................13
PRICE RANGE OF COMMON STOCK...................................................13
SELECTED FINANCIAL DATA.......................................................14
SELECTED QUARTERLY FINANCIAL DATA.............................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................16
BUSINESS......................................................................21
LEGAL PROCEEDINGS.............................................................32
OUR MANAGEMENT................................................................32
STOCK OPTIONS.................................................................35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................40
SELLING STOCKHOLDERS..........................................................43
PLAN OF DISTRIBUTION..........................................................47
DESCRIPTION OF SECURITIES.....................................................49
LEGAL MATTERS.................................................................51
EXPERTS.......................................................................51
WHERE YOU CAN FIND ADDITIONAL INFORMATION.....................................51
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THOSE
DOCUMENTS TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED
WHERE IT IS LEGAL TO SELL THESE SECURITIES.
THE DELIVERY OF THIS PROSPECTUS OR ANY ACCOMPANYING SALE DOES NOT IMPLY THAT:
(1) THERE HAVE BEEN NO CHANGES IN OUR AFFAIRS AFTER THE DATE OF THIS PROSPECTUS;
OR (2) THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS.
PROSPECTUS SUMMARY
You should read this Prospectus Summary together with the more detailed
information contained in this prospectus, including the risk factors and
financial statements and the notes to the financial statements. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those discussed in the forward-looking
statements. Factors that might cause such a difference include those discussed
in the Risk Factors section and elsewhere in this prospectus.
mPHASE TECHNOLOGIES, INC.
We develop and sell high-speed broadband communications equipment and
software using Digital Subscriber Line technology, commonly referred to as DSL.
Our principal product, the Traverser(TM) Digital Video and Data Delivery System
(herein referred to as "DVDDS"), which we call the Traverser(TM), may be used by
U.S. and international telephone companies to simultaneously deliver digital
television programming, high-speed Internet access and voice services over the
existing copper telephone wire infrastructure.
Our products allow these communications service providers to
substantially reduce their cost of offering enhanced DSL services by using a
technology which does not require fiber optic cable to be installed in their
subscribers' neighborhoods. Communications service providers deploying the
Traverser(TM) can offer digital television, data and voice services as a bundled
product or offer each service separately, depending on subscriber demand and the
service providers' objectives. We believe the Traverser(TM) (especially in
international markets) allows telephone service providers to penetrate the
multi-channel television programming market and compete with cable access
television and direct broadcast satellite service providers. We believe that by
using the Traverser(TM), telephone companies will be able to capitalize on, and
compete effectively in, the market for integrated television, data and voice
services.
In addition to designing, manufacturing and selling the hardware and
software necessary to deliver converged communications services over telephone
wires, mPhase has also secured appropriate relationships and licenses with
content originators in the U.S. for television programming. Our established
relationships and contracts allow telephone companies to secure rights to and
purchase a full compliment of television programming directly from our
subsidiary company, mPhaseTelevision.Net, Inc. (herein referred to as
"mPhaseTV"). By utilizing mPhaseTV's content services, customers of mPhase do
not have to spend the substantial amount of time and resources required to
negotiate their own contracts with individual content providers. We believe the
establishment of mPhaseTV helps to facilitate the sale of the Traverser(TM)
system by streamlining the process for a telephone company to also become a
television service provider.
We principally market the Traverser(TM) system to independent telephone
companies in the United States and international telephone companies to enable
them to offer bundled services and better compete in the emerging market for
integrated voice, data and video services. We believe the Traverser(TM) offers
the most cost-effective and reliable multi-service solution for traditional
telecommunication service providers available today.
Since our inception in October 1996, our primary operating activities
have consisted of designing, manufacturing and testing Traverser(TM) products,
establishing relationships with third party equipment developers and contract
manufacturers, and commencing test trials and preliminary sales and marketing
efforts. We have not yet derived significant revenue from sales of the
Traverser(TM).
We have installed a commercially ready system at Hart Telephone in
Hartwell, GA and BMW Manufacturing in Spartansburg, SC. Hart Telephone currently
has approximately 109 subscribers receiving 90 channels of television,
high-speed Internet and voice services over their existing copper telephone
lines. BMW has deployed 44 units and intends to expand the size of their
installation this summer. Additionally, mPhase has a number of trial systems
installed in other countries that it hopes to convert to commercial
installations.
The Traverser(TM) is priced competitively compared to our competitors'
equipment and is relatively simple to deploy and maintain. Additionally, mPhase
intends to release a cost-reduced version of the Traverser(TM) system in the
calendar 4th quarter of this year. mPhase is presently negotiating with a
contract engineering group that is part of an established telecommunications
company to achieve significant cost reductions.
1
We have generated revenue from the sale of ancillary components related
to our DSL technology, including our proprietary POTS filter shelves. We
generated approximately $1,948,351 million from the sales of our POTS Splitter
Shelves from July 2001 through March 31, 2002. For the year ending June 30, 2001
sales from our POTS Splitter Shelves were approximately $10.5 million.
THE OFFERING
Common stock offered: Up to 38,532,319 shares of common stock, of
which 18,495,461 shares are issued and
outstanding and up to 20,036,858 shares may
be issued upon exercise of warrants held by
the selling stockholders.
Common Stock to be outstanding
after this offering: Approximately 57,949,508 shares of common
stock. This does not include an aggregate of
34,018,692 shares that are reserved for
issuance pursuant to outstanding employee
stock options, non-employee stock options
and warrants.
Use of proceeds: We will not receive any proceeds from the
sale and issuance of the common stock
included in this offering. However, we will
receive approximately $19,247,935 upon
exercise of all of the warrants by the
selling stockholders, which would be used
for general working capital.
Risk Factors: An investment in our common stock is subject
to significant risks. You should carefully
consider the information set forth in the
"Risk Factors" section of this prospectus as
well as other information set forth in this
prospectus, including our financial
statements and related notes.
Dividend policy: We do not expect to pay dividends on our
common stock in the foreseeable future. We
anticipate that all future earnings, if any,
generated from operations will be retained
to develop and expand our business.
Plan of Distribution: The shares of common stock offered for
resale may be sold by the selling
stockholders pursuant to this prospectus in
the manner described under "Plan of
Distribution." OTC Bulletin Board symbol:
XDSL.OB
We have applied for trademarks on certain marks which relate to the
following products: Traverser(TM), INI, Intelligent Network Interface, DVDDS,
Digital Video and Data Delivery System. This prospectus also contains product
names, trade names and trademarks of ours as well as those of other
organizations. All other brand names and trademarks appearing in this prospectus
are the property of their respective holders.
FORWARD-LOOKING STATEMENTS
In addition to the other information contained in this prospectus,
investors should carefully consider the risk factors disclosed in this
prospectus, including those beginning on page 8, in evaluating an investment in
the common stock. This prospectus includes "forward-looking statements". All
statements other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any projections of
earnings, revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of
the foregoing. In some cases, forward-looking statements can be identified by
the use of terminology such as "may", "will", "expects", "plans", "anticipates",
"estimates", "potential", or "continue" or the negative thereof or other
comparable terminology.
2
Although we believe that the expectations reflected in the
forward-looking statements contained herein and in such incorporated documents
are reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to inherent risks and uncertainties,
including but not limited to the risk factors set forth above and for the
reasons described elsewhere in this prospectus. All forward-looking statements
and reasons why results may differ included in this prospectus are made as of
the date hereof, and we assume no obligation to update any such forward-looking
statement or reason why actual results might differ.
SUMMARY FINANCIAL DATA
The summary financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical consolidated financial statements
and notes included in this prospectus. The statements of operations data from
October 2, 1996 (date of inception) to June 30, 1997 are derived from financial
statements that have been audited by Schuhalter, Coughlin & Suozzo, LLC,
independent auditors. The statement of operations data for the years ended June
30, 1998, 1999, 2000 and 2001 are derived from financial statements that have
been audited by Arthur Andersen included in this prospectus. The statement of
operations data for the nine months ended March 2001 and March 2002 and the
balance sheet data as of March 31, 2002 are derived from the unaudited financial
statements reviewed by Arthur Andersen, LLP and Rosenberg Rich Baker Berman &
Company respectively included in this prospectus and include all adjustments
(consisting of normal recurring items) that management considers necessary for a
fair presentation of the financial statements. The results for the nine months
ended March 31, 2002 are not necessarily indicative of the operating results to
be expected in the future.
Nine Months Ended
From Imception Year Ended June 30, March 31,
(October 2, 1996) --------------------------------------------------------------------------------
to June 30 1997 1998 1999 2000 2001 2001 2002
---------------- (Unaudited) Unaudited)
STATEMENT OF OPERATIONS DATA:
Total revenues $ -- $ -- $ -- $ 279,476 $ 10,524,134 $ 10,055,006 $ 1,948,351
Costs and Expenses:
Cost of sales -- -- -- 131,756 5,804,673 5,339,634 1,711,811
Research and development 192,502 2,297,282 3,562,901 10,156,936 10,779,570 8,699,948 2,907,256
Licensing fees 37,500 450,000 -- -- -- -- --
General and administrative 540,722 1,259,801 4,683,109 17,516,216 16,150,711 8,966,355 5,376,709
Depreciation and amortization 10,522 29,131 410,303 471,101 660,372 459,464 538,255
Non-cash compensation charge -- 13,002,605 10,343,114 1,170,903 950,070 480,727
---------- ----------- ------------ ------------ ------------ ------------ -----------
Operating loss 781,246 4,036,214 21,658,918 38,339,647 24,042,095 (14,360,465)
Other income (expense), net -- (304,845) (1,161,622) 20,000 -- -- 123,858
Interest income (expense) -- -- (17,804) 158,105 43,361 40,812 (16,898)
---------- ----------- ------------ ------------ ------------ ------------ -----------
Net loss $ (781,246) $(4,341,059) $(22,838,344) $(38,161,542) $(23,998,734) $(14,319,653) $(8,959,447)
Basic and diluted net loss
per share* $ (.10) $ (.46) $ (1.42) $ (1.41) $ (0.72) $ (.44) $ (.19)
Shares used in basic and
diluted net loss per share* 7,806,487 9,336,340 16,038,009 26,974,997 33,436,641 32,684,012 47,346,671
As of March 31, 2002
BALANCE SHEET DATA:
Cash and cash equivalents $ 310,643
Working capital (deficit) ($1,577,550)
Total assets $ 8,062,330
Total stockholders' equity $ 866,133
* Does not include any common stock equivalents since their effect would be
anti-dilutive.
3
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risks before making an investment
decision. You should also refer to the other information set forth in this
prospectus, including our financial statements and the related notes.
RISKS RELATED TO FINANCIAL ASPECTS OF OUR BUSINESS
We expect to incur substantial net losses for the foreseeable future
and we need to raise substantial additional capital.
We expect to generate operating losses and negative cash flow into the
foreseeable future because we must fund our sales, marketing and promotional
activities, our equipment production efforts and our continued research and
development activities to maintain our technology and develop new technology. We
expect to fund these activities through additional public or private offerings
of our stock. We had net losses, including non-cash charges of approximately
$8.9 million (unaudited) and $24 million for the nine month period ended March
31, 2002 and the fiscal year ended June 30, 2001, respectively. We cannot be
certain when and if we will achieve sufficient revenues in relation to our
expenses to become profitable. We believe that increasing our revenues will
depend in large part on our ability to:
- raise additional capital;
- finalize the commercial design of the Traverser(TM)and its
management software;
- decrease the overall cost of our system significantly;
- generate significant revenue from sales of the Traverser(TM);
- penetrate international markets;
- gain market acceptance for our products and increase our market
share based upon the timing, strength and success of our sales
efforts and our strategic and commercial alliances;
- develop effective marketing and other promotional activities to
penetrate our target customer base;
- develop strategic and commercial relationships that balance our
current and long-term ability to capitalize on our technology; and
- generate and sustain substantial revenue growth while maintaining
reasonable expense levels.
Slower revenue growth than we anticipate or operating expenses that
exceed our expectations would materially harm our business. If we achieve
profitability, we cannot be certain that we will be able to sustain or increase
that profitability in the future.
Our limited operating history makes it difficult for you to evaluate
our business and prospects.
As of March 31, 2002, we received no purchase orders for the
Traverser(TM) or programming content offered by our subsidiary mPhaseTV. Our
revenue of approximately $10,524,134 for the fiscal year ended June 30, 2001 and
$1,948,351 for the nine months ended March 31, 2002 was derived largely from
sales of our DSL component products. We generated $20,000 and $5,500 from sales
of trial versions of the Traverser(TM) product for the fiscal years ended June
30, 2000 and June 30, 2001 respectively and $97,700 from the sales of the
Traverser(TM) in the nine months ended March 31, 2002. As a result, we have only
a limited operating history and no sales of our principal product upon which you
may evaluate our business and prospects. You should consider our prospects in
light of the heightened risks and unexpected expenses and difficulties
frequently encountered by companies in an early stage of development. These
risks, expenses and difficulties, which are described further in this section
entitled "Risk Factors", particularly apply to us because the market for
equipment that delivers voice, data and video services is new and rapidly
evolving. Due to our limited operating history, it will be difficult for you to
evaluate whether we will successfully address these risks.
4
Because our sales cycle is lengthy and variable, the timing of our
revenues is difficult to predict, and we may incur marketing expenses with no
guarantee of future sales.
Our potential customers view the purchase of the Traverser(TM) as a
significant and strategic decision. As a result, our customers, the foreign and
domestic telecommunications service providers, will typically undertake
significant evaluation and testing of our products before deployment. This
evaluation process frequently results in a lengthy sales cycle, typically
ranging from six months to more than a year. Furthermore, we are targeting
international communications service providers, which operate under a number of
different telecommunications equipment compliance standards. These international
service providers will require that we receive local standards approval before
we are able to enter into field trials or definitive sales agreements.
Furthermore, because we are selling a new product with limited real environment
exposure, tests and trials may not necessarily result in purchases of the
Traverser(TM).
Before a customer places an order, we may incur substantial sales and
marketing expenses and expend significant management efforts. In addition,
because our customers are both domestic and foreign telecommunications service
providers, product purchases may frequently be subject to unexpected government
regulatory, administrative, processing and other delays on the part of our
customers. Moreover, purchase orders for our products may have lengthy payable
periods because of payment delay from our customers. As a result, sales
forecasted attributable from a potential customer may not be realized and this
could result in lower than expected revenues.
We may not be able to obtain sufficient financing to fund our business
and, as a result, we may not be able to grow and compete effectively.
We expect to incur substantial expenses to develop and market our
products. We expect to generate losses into the foreseeable future, so we do not
expect that the income from our operations will be sufficient to satisfy our
cash requirements. We may need additional capital if we need to respond to
unforeseen technological or marketing hurdles, or if we desire to take advantage
of unanticipated opportunities. Therefore, we will need to seek additional
financing from public or private sources. Our success in raising enough
additional financing to satisfy our capital requirements will depend on a number
of factors, including:
- market conditions;
- the success of our product development efforts;
- our operating performance; and
- investor sentiment.
The status of these factors may make the timing, amount, terms and
conditions of additional financing unattractive for us. In addition, to the
extent that we are able to obtain additional financing through the issuance of
equity securities, our stockholders may experience dilution. If we obtain
financing through loans or any other type of debt financing, we may become
subject to restrictions on our spending or ability to pay dividends. Funds may
not be available at the time or times needed on terms acceptable to us, if at
all. If adequate funds are not available, or are not available on acceptable
terms, we may not be able to take advantage of market opportunities, to develop
products or to otherwise respond to competitive pressures effectively.
Our operations may become strained due to our growth.
Upon successful testing and introduction of the Traverser(TM), we will
need to expand our marketing and sales efforts, operations and production, as
well as provide customer support. Our management, personnel, systems,
procedures, controls and customer service may be inadequate to support such
expansion. We expect significant strains on our order and fulfillment process,
our quality control systems and customer support once the sales of the
Traverser(TM) commences. To manage expansion effectively, we must implement and
improve our operational systems, procedures, controls and customer service on a
timely basis and increase our staff or obtain these services through third party
contractors. We will also require capital to attain this growth and management.
If we are unable to properly manage operations, controls and customer support,
or secure financing to implement this growth, our operating results, reputation
and customer relationships could be harmed.
5
Our financial condition has, in the opinion of our outside auditors
based upon their audit of our financial statement for the fiscal year ended June
30, 2001, created substantial doubt as to our ability to continue as a going
concern through June 30, 2002.
RISKS RELATED TO OUR PRODUCT AND OUR TARGET CUSTOMER MARKET
A significant market for our products may not develop if telephone
companies do not successfully deploy broadband services such as high-speed data
and video.
Many telephone companies have recently begun offering high-speed data
services. Most telephone companies have not offered multi-channel video services
at all. Unless telephone companies make the strategic decision to enter the
market for providing broadband services, a significant market for our products
may not develop. Sales of our products largely depend on the increased use and
widespread adoption of broadband services and the ability of our customers to
market and sell broadband services, including video services, to their
customers. Certain critical issues concerning use of broadband services are
unresolved and will likely affect their use. These issues include security,
reliability, speed and volume, cost, government regulation and the ability to
operate with existing and new equipment. Even if telephone companies decide to
deploy broadband services, this deployment may not be successful. Telephone
companies may delay deployments of broadband services. Factors that could cause
telephone companies not to deploy, to delay deployment of, or to fail to deploy
successfully the services for which our products are designed include the
following:
- industry consolidation;
- regulatory uncertainties and delays affecting telephone companies;
- varying quality of telephone companies' network infrastructure and
cost of infrastructure;
- upgrades and maintenance;
- inexperience of telephone companies in obtaining access to video
programming content from third party providers;
- inexperience of telephone companies in providing broadband services
and the lack of sufficient technical expertise and personnel to
install products and implement services effectively;
- uncertain subscriber demand for broadband services;
- inability of telephone companies to predict return on their
investment in broadband capable infrastructure and equipment; and,
- decreased capital expenditures by telephone companies.
Unless our products are successfully deployed and marketed by telephone
companies, we will not be able to achieve our business objectives and increase
our revenues.
Government regulation of our customers and related uncertainty could
cause our target customers to delay the purchase of our products.
Our target market consists of domestic and international
telecommunications service providers. Domestic communications service providers
are regulated by The Federal Communications Commission, or FCC. They also
require that equipment located at their facilities comply with FCC, NEBS, UL and
ANSI standards. International telecommunications service providers operate under
a number of various equipment compliance standards and are regulated by their
respective governments and agencies. These international service providers will
require that we receive local government and regulatory approval before we are
able to enter into field trials or definitive sales agreements.
6
In the U.S., The Telecommunications Act of 1996 requires regional Bell
operating companies, to offer their competitors cost-based access to some
elements of their networks. These telephone companies may not wish to make
expenditures for infrastructure and equipment required to provide broadband
services if they will be forced to allow competitors access to this
infrastructure and equipment. The FCC recently announced that, except in limited
circumstances, it will not require incumbent carriers to offer their competitors
access to the facilities and equipment used to provide high-speed data services.
Nevertheless, other regulatory and judicial proceedings relating to telephone
companies' obligations to provide elements of their network to competitors are
pending.
The uncertainties caused by both foreign and domestic regulatory
proceedings may cause telephone companies to delay purchasing decisions. The
outcomes of any regulatory proceedings may cause these telephone companies not
to deploy services for which our products are designed or to further delay
deployment. Additionally, telephone companies' deployment of broadband services
may be slowed down or stopped because of the need for telephone companies to
obtain permits from city, state, federal or foreign national authorities to
implement infrastructure for products such as ours. Any delay in deployment of
products by our customers could harm our sales.
Our potential customers will not purchase our products if they do not
have the infrastructure necessary to use our products.
The Traverser(TM) is based on the use of copper telephone wire. The
copper wire infrastructures installed and maintained by telephone companies vary
in quality and reliability. A significant portion of the existing networks have
been installed and repaired over many years and are out of date. The copper
wiring used by telephone companies is also unshielded, making data transmission
susceptible to interference. In addition, copper wiring has a basic transmission
property that causes the signal quality to degrade rapidly as the frequency
increases or the distance traveled by the signal increases. As a result of these
limitations, the Traverser(TM) may not be a viable solution for customers
requiring service at performance levels beyond the current limits of copper
telephone wire and this could harm our sales.
Successful implementation of the Traverser(TM) is highly dependent on
the telephone companies' commitment and ability to continue to maintain their
infrastructure so that it will operate at a consistently high performance level.
Copper wire infrastructure upgrades may be costly, and telephone companies may
not have the necessary financial resources. This is particularly true for the
smaller independent telephone companies and international telephone companies
who are an important part of our target market. If our potential customers lack
the adequate infrastructure, we may not be able to sell the Traverser(TM) to
them and generate the revenues we anticipate.
Additionally, in order to utilize our products to offer digital video
services, our potential customers may need to build a digital headend to receive
video broadcasts and install fiber optic cable from these stations to their
central offices. The capital expenditures required to install the earth stations
may exceed the financial resources of our potential customers. There can be no
assurance that our potential customers will make the investment necessary to
upgrade their facilities in order to use our products.
Telecommunications service providers are already offering direct
broadcast services.
Certain telecommunications service providers, such as Bell Canada, are
currently offering Direct Broadcast Services, commonly referred to as "DBS", a
technology which provides multiple channel digital television through satellite
distribution to individual satellite dish receptors located at the home. Because
there are telecommunications service providers that sell DBS services, these
telecommunications service providers already provide their subscribers with
access to a digital television service and do not require our technology to
provide digital video services.
Some telecommunications service providers are also re-selling DBS.
Since these telecommunications service providers receive a commission for the
sale of DBS services, they are aligned with DBS providers. These affiliations
make it more difficult for us to market the Traverser(TM). Telecommunications
service providers allied with DBS broadcasters are able to market digital
television services to their subscribers, but are not required to take on the
responsibility of managing or distributing the television content.
7
RISKS RELATED TO OUR INDUSTRY
Intense competition in the telecommunications equipment market could
limit or prevent our profitability.
The telecommunications equipment market is characterized by swift
technological change. Several available technologies such as fiber optic cable,
co-axial and hybrid co-axial cable, wireless transmission, satellite
transmission and voice and video transmission using Internet Protocol compete
with DSL for market share. Communications service providers may also use other
technologies such as ISDN (Integrated Services Digital Network) or fiber-based
DSL solutions to deploy high-speed services comparable to those provided by our
Traverser(TM) products.
Our direct competitors are other equipment companies that supply DSL
technology including Next Level Communications, 2Wire, ADC telecom, Advanced
Fiber Communications, Alcatel, Lucent, Copper Mountain, Innovia, Ericson,
Minerva, Turnstone, Westell, TuT Systems, Motorola, Marconi Communications, NEC,
Nokia, Paradyne, Samsung, Siemens, Texas Instruments, DVTel, Inc., Pace Micro
Tech., Imagic TV, Myrio, VBrick.
If we are unable to compete effectively in the telecommunications
market or, in particular, the market for DSL telecommunications equipment, our
revenue and future profitability may be materially adversely affected. Most of
our current and potential competitors have significantly greater selling and
marketing experience, technical capability and manufacturing and financial
resources. Our competitors may be able to predict future market trends more
accurately than we can and, as a result, develop new technologies that compete
with our products or even render our products obsolete.
Although we believe that our products have certain technological
advantages over our competitors, realizing and maintaining such advantages will
require a continued high level of investment in research and development,
marketing and customer service and support. Additionally, new competitors with
greater market presence and financial resources may enter our market, thereby
further intensifying competition.
The demand for our products may not develop.
Technologies that compete with our products include
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If our potential
customers choose these alternative technologies to deploy high-speed services,
our business, financial condition and results of operations could be harmed. Our
technology may not be able to compete effectively against these technologies on
price, performance or reliability. While we believe a market exists for our
products, there can be no assurance that our products will gain wide market
acceptance or that we will be able to maintain any market share through
innovation. The development of our DSL products is a complex and uncertain
process requiring accurate anticipation of technological and market trends. We
may not be successful in our development or introduction of new products.
Our equipment is subject to regulation and certification.
The Federal Communications Commission requires that telephone equipment
used in central offices and in residences and businesses be certified in
accordance with Parts 15 and 68 of its rules and regulations. Part 15 specifies
a maximum allowable amount of electromagnetic radiation from an electronic
device in a commercial or residential environment at specific frequencies. Part
68 tests the equipments resistance to lightning strikes. The Underwriters
Laboratories (UL) 1950 standard applies to our customer premise equipment called
the Intelligent Network Interface.
8
National Equipment Bureau of Standards (NEBS) testing is also
recommended for telco equipment and successful completion of such test is
required by many domestic telcos in order for them to purchase such equipment.
It assures a telco that the equipment is reliable. The testing covers a large
range of requirements including criteria for personnel safety, protection of
property, and operational continuity. NEBS also covers physical requirements
including: Space Planning, Temperature, Humidity, Fire, Earthquake, Vibration,
Transportation, Acoustical, Air Quality and Illumination; and electrical
criteria including: Electrostatic Discharge (ESD), Electromagnetic Interference
(EMI), Lightning and AC Power Fault, Steady State Power Induction, Corrosion, DC
Potential Difference, Electrical Safety and Bonding and Grounding. In addition,
Underwriters Laboratories also requires certain safety standards be tested and
certified.
The Central Office Traverser(TM) equipment is currently undergoing NEBS
testing that will include FCC Part 68 and FCC Part 15 certification. The current
Customer Premise Intelligent Network Interface Traverser(TM) equipment is FCC
Part 68 and FCC Part 15 certified and is UL listed. The Traverser(TM) has not
completed all certification testing and there can be no assurance that it will
be fully certified. In the event that the Traverser(TM) fails any portion of the
certification testing, the product may need to be redesigned, we may incur
significant increases in our development expenses and the production of the
Traverser(TM) will be delayed. We can not sell the Traverser(TM) if we are not
able to obtain certification and we will not be able to conduct our plan of
operations as currently contemplated.
Our products may become obsolete.
Our position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance will depend in part upon
our ability to enhance existing products and develop and introduce new products
that keep pace with:
- the increasing use of the Internet;
- the growth in remote access by telecommuters;
- the increasingly diverse distribution methods for high quality
digital video; and
- other industry and technological trends.
We expect that our continued and future product development efforts
will continue to require substantial investments. We may not have sufficient
resources to make the necessary investments. If we fail to cost-effectively
develop new products that quickly respond to new competition and customer
requirements, the demand for our products may fall and we could lose revenues.
OTHER RISKS ASSOCIATED WITH OUR BUSINESS
We depend on a third party to develop our products.
We rely upon the Georgia Tech Research Corporation ("Georgia Tech"), an
affiliate of the Georgia Institute of Technology, for research involved with the
development of our digital technology and products. We have entered into a Basic
Ordering Research Agreement with Georgia Tech, which includes a series of
delivery orders providing guidelines for the research and development of
portions or components of the Traverser(TM). Georgia Tech developed working
prototypes and the version 1.1 Traverser(TM). Our business will be materially
adversely affected if Georgia Tech does not perform its responsibilities under
the agreement on an acceptable basis or terminates our relationship and we are
unable to replace their development services on a prompt basis, if at all.
We license critical technology from Georgia Tech, Microphase
Corporation and Globespan Semiconductor, Inc. (formerly AT&T Paradyne, Inc.) for
use in our Traverser(TM) product line. Georgia Tech has granted us the exclusive
worldwide license to use and re-sell the patented Digital Video and Data
Delivery System technologies in the Traverser(TM). We are attempting to reach an
agreement with Georgia Tech whereby they will agree to convert a portion of the
approximately $1.8 million in payables currently owed by mPhase into mPhase
common stock at a price to be negotiated. These negotiations, have not, as of
the date hereof resulted in an agreement and no assurances can be given that
such an agreement will be reached. Our non-exclusive license agreement with
GlobeSpan Semiconductor provides us with the ability to use their patented CAP
RADSL technology in our DSL products. In the event that any of our licensing
agreements are not renewed or are terminated, there can be no assurance that we
would be able to find similar technology for use in the Traverser(TM). In such
event, we would not be able to sell the Traverser(TM) and carry out our plan of
operations. Our licensing agreements may also be subject to significantly higher
licensing fees in the future which could substantially increase our production
costs. Such an increase could substantially impact our profitability or cause us
to increase the price of the Traverser(TM) and eliminate an important advantage
our product has over competitive equipment.
9
Our success depends in part on our ability to protect our intellectual
property. Georgia Tech Research Corporation has been awarded (i)patent
#6,154,772 dated November 28, 2000 entitled System and Method For the Delivery
of Digital Video and Data over a Communications Channel, (ii)patent #6,208,666
dated March 27, 2001 entitled System and Method for Maintaining Timing
Synchronization in a Digital Video Network and (iii)patent #6,323,789 issued
November 27, 2001 entitled Method and Apparatus for Combining Plurality of
8B/10B Encoded Data Streams.
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. >From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims asserting that the Traverser(TM) and
component parts infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could have a material adverse effect on our
business, financial condition or results of operations. In the event of an
adverse result in any litigation with third parties that could arise in the
future, we could be required:
- to pay substantial damages, including paying treble damages if we
are held to have willfully infringed;
- to halt the manufacture, use and sale of infringing products;
- to expend significant resources to develop non-infringing
technology; and/or
- to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail. In
addition, we indemnify our customers for patent infringement claims, and we may
be required to obtain licenses on their behalf, which could subject us to
significant additional costs.
We depend on third-party manufacturers.
We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. We rely primarily on outside manufacturers
to manufacture our products. The efficient operation of our business will
depend, in large part, on our ability to have such outside companies manufacture
our products in a timely manner, cost-effectively and in sufficient volumes
while maintaining consistent quality. Any manufacturing disruption could impair
our ability to fulfill orders and could cause us to lose customers.
Our products use components that may not be available due to excessive
market demand. Shortages of these components could increase significantly our
costs and adversely impact our profitability. If we are not able to obtain
component parts for our equipment, then our sales will be adversely impacted
because we may not be able to deliver our equipment to customers in a timely
manner.
We have common management with affiliates who supply us with
components.
10
Necdet F. Ergul, our Chairman of the Board, Ronald A. Durando, our
President and Chief Executive Officer, and Gustave T. Dotoli, our Chief
Operating Officer, respectively, are officers of Microphase Corporation. Necdet
F. Ergul is a major shareholder of Microphase Corporation. Microphase
Corporation currently develops prototypes and does limited production of passive
components for the Traverser(TM), and our DSL component products, including the
POTS Splitter Shelves. Microphase also provides resources and technology related
to the development of the Traverser(TM), and other DSL products. Microphase may
not be the most economical provider of these components and resources and
conflicts of interest may arise due to the relationship between us and
Microphase. In addition, we will pay to Microphase a royalty comprised of three
percent of any commercial product sales of any DSL-related technologies.
Ronald A. Durando and Gustave T. Dotoli are also president and
vice-president, respectively, of PacketPort.com. Inc. a company that develops
Internet Protocol Telephony products and services. PacketPort.com, Inc. is in
the process of launching a complete line of Voice-over-DSL (VoDSL) products.
Janifast Ltd. a Hong Kong corporation, is the manufacturer that
produces our components which includes POTS Splitter, the prototype
Traverser(TM)and may produce such components for us in the future. Necdet F.
Ergul, Ronald A. Durando and Gustave T. Dotoli are controlling shareholders of
Janifast Ltd. with an aggregate ownership interest of greater than 75% of
Janifast Ltd. Mr. Durando is Chairman of the Board of Directors of Janifast Ltd.
and each of Messrs. Dotoli and Ergul are Directors of Janifast Ltd.
We depend on key personnel.
Our success depends upon the services of our senior management and key
technical personnel, including our Chief Executive Officer, Ronald A. Durando,
our Chief Operating Officer, Gustave T. Dotoli, our Chief Technology Officer,
David Klimek and our Chief Financial Officer and General Counsel, Martin S.
Smiley. The loss of the services of any of these executive officers or any of
our key management, sales or technical personnel could have a material adverse
effect on our business and prospects. In addition, our success is largely
dependent upon our ability to hire highly qualified managerial, sales and
technical personnel. These individuals are in high demand and we may not be able
to attract the caliber or quantity of staff that we need.
Our stock price is likely to be highly volatile and could drop
unexpectedly.
The price of our common stock has been volatile and may fluctuate
substantially. The stock market has periodically experienced significant price
and volume fluctuations that have affected the market prices for the securities
of technology companies such as our company. As a result, investors in our
common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects.
Additionally, our stock price may be subject to substantial
fluctuations in response to a variety of factors, including:
- problems encountered when testing the Traverser(TM);
- fluctuations in quarterly operating results;
- changes in reports by financial analysts;
- announcements of strategic relationships, acquisitions or capital
commitments by us or our competitors;
- recent technological innovations;
- new products or services offered by us or our competitors;
- changes in key personnel;
- changes in strategic relationships with third parties by us or our
competitors; and
- sales of common stock;
Many of these events or factors are beyond our control.
11
Anti-takeover provisions in our charter documents and New Jersey law
could prevent or delay a change in control of our company that a
stockholder may consider favorable.
Certain provisions of our certificate of incorporation and by-laws
could be amended, with shareholder approval, to make it more difficult for a
third party to acquire control of us, even if such change in control would be
beneficial to or favored by our shareholders. For example, provisions of our
certificate of incorporation could include:
- prohibiting cumulative voting in the election of directors;
- restricting business combinations with interested stockholders;
- issuance of preferred stock without stockholder approval;
- the existence of a rights plan which would have the effect of
providing some holders of our common stock with a premium of the
market price of our stock;
- limiting the persons who may call special meetings of stockholders;
and
- establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can
be acted on by stockholders at stockholder meetings.
As a New Jersey corporation, we are also subject to the New Jersey
Shareholders Protection Act contained in Section 14A:10A-1. In general, Section
14A:10A-1 prohibits a publicly-held New Jersey corporation from engaging in a
"business combination" with an "interested shareholder" for a period of five
years following the date the person became an interested shareholder, unless,
among other things:
- the Board of Directors approved the transaction in which such
shareholder became an interested shareholder prior to the date the interested
shareholder attained such status; and
- the business combination is approved by the affirmative vote of the
holders of at least 66 2/3% of the corporation's voting stock not beneficially
owned by the interested shareholder at a meeting called for such purpose.
A "business combination" generally includes a merger, sale of assets or
stock, or other transaction resulting in a financial benefit to the interested
shareholder. In general, an interested shareholder is a person who, together
with affiliates and associates, owns, or within five years prior to the
determination of interested shareholder status, did own, 10% or more of the
corporation's voting stock.
Future sales by holders of our common stock, warrants and the selling
stockholders may cause the market price of our stock to decline.
Our stock price may decline as a result of sales of a large number of
shares in the market after this offering, or the perception that such sales
could occur. These factors also could make it more difficult for us to raise
funds through future offerings of common stock. A large volume of sales by the
selling stockholders could have a significant adverse impact on the market price
of our common stock.
12
USE OF PROCEEDS
The selling stockholders will receive the proceeds from the resale of
the shares of common stock. We will not receive any proceeds from the resale of
the shares of common stock by the selling stockholders. However, we will receive
approximately $19,247,935 if all of the warrants to purchase shares of common
stock registered under this prospectus are exercised, which would be used for
general working capital.
PRICE RANGE OF COMMON STOCK
The primary market for our common stock is the OTC Bulletin Board,
where it trades under the symbol "XDSL.OB". The following table sets forth the
high and low closing bid prices for the shares for the periods indicated as
provided by the National Quotation Bureau, Inc. The quotations shown reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not represent actual transactions.
Year/Quarter High Low
---- ---
Fiscal year ended June 30, 1999
First Quarter $4.25 $0.75
Second Quarter 3.65625 1.5625
Third Quarter 5.625 1.875
Fourth Quarter 8.75 2.90625
Year/Quarter High Low
---- ---
Fiscal year ended June 30, 2000
First Quarter $9.25 $2.96875
Second Quarter 6.1875 2.50
Third Quarter 19.125 6.50
Fourth Quarter 14.125 6.00
Fiscal year ended June 30, 2001
First Quarter $9.25 $3.00
Second Quarter 5.9375 1.4688
Third Quarter 3.38 1.22
Fourth Quarter 2.61 1.03
Fiscal year ended June 30, 2002
First Quarter $1.67 $.31
Second Quarter .86 .31
Third Quarter .62 .27
Fourth Quarter .50 .23
As of June 25, 2002, we had approximately 57,949,508 shares of common
stock outstanding and approximately 15,000 stockholders. The last reported sales
price of our common stock on July 23, 2002 was $.19 per share.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock
and do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. Any future determination to pay cash dividends
will be at the discretion of the board of directors and will be based upon our
financial condition, operating results, capital requirements, plans for
expansion, restrictions imposed by any financing arrangements and any other
factors that the board of directors deems are relevant.
13
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements and notes
included in this prospectus. The statement of operations data from October 2,
1996 (date of inception) to June 30, 1997 and for the year ended June 30, 1998,
and the balance sheet data as of June 30, 1997 and 1998, are derived from
financial statements that have been audited by Schuhalter, Coughlin & Suozzo,
LLC, independent auditors, and are included in this prospectus. The statement of
operations data for the years ended June 30, 1999, 2000 and 2001, and the
balance sheet data as of June 30, 2000 and 2001, are derived from financial
statements that have been audited by Arthur Anderson LLP, independent auditors,
and are included in this prospectus. The statement of operations data for the
nine months ended March 31, 2001 and March 31, 2002, and the balance sheet data
as of March 31, 2002, are derived from unaudited financial statements reviewed
by Arthur Andersen LLP, and Rosenberg Rich Baker Berman & Company, respectively,
included in this prospectus and include all adjustments (consisting of normal
recurring items) that management considers necessary for a fair presentation of
the financial statements. The results for the nine months ended March 31, 2002
are not necessarily indicative of the operating results to be expected in the
future.
Nine Months Ended
-----------------
From Inception March 31,
(October 2, -----------
1996) to June Year-Ended June 30, 2001 2002
------------- ------------------- ---- ----
30, 1997 1998 1999 2000 2001 (Unaudited) (Unaudited)
--------- ---- ---- ----- ----
(in thousands, except share data)
---------------------------------
STATEMENT OF OPERATIONS DATA:
Total revenues $ - $ - $ - $ 279 $10,524 $10,055 $1,948
Costs and Expenses:
Cost of sales - - - 132 5,805 5,340 1,712
Research and Development 192 2,297 3,563 10,157 10,780 8,700 2,907
Licensing Fees 37 450 - - - -
General & administrative 541 1,260 4,683 17,516 16,151 8,966 5,377
Depreciation and 11 29 410 471 660 459 538
Amortization
Non-cash compensation charge - - 13,003 10,343 1,171 950 480
Operating loss (78l) (4,036) (21,659) (38,340) (24,043) (14,360) (9,066)
Other income (expense), net - (305) (1,162) 20 - 124
Interest income (expense) - - (18) 158 43 41 (17)
Net Loss $(781) $(4,341) $(22,839) $(38,162) (24,000) (14,319) (8,959)
Basic and diluted net loss (.10) (.46) (1.42) (1.41) (.72) (.44) (.19)
per share
Shares used in basic and 7,806,487 9,336,340 16,038,009 26,974,997 33,436,641 32,684,012 47,346,671
diluted net loss per share
(1)
From Inception Nine Months Ended
(October 2, 1996) Year Ended June 30, March 31,
to June 30 1997 1998 1999 2000 2001 2001 2002
---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
(in thousands, except share data)
BALANCE SHEET DATA:
Cash and cash equivalents $162 $ - $7,978 $6,432 $ 31 $ 255 $ 311
Working capital (deficit) (212) (3,073) 4,936 3,557 (1,458) 274 (1,578)
Total assets 369 2,175 10,624 11,184 8,997 9,672 8,062
Long-term obligations, - - - - 90 - 460
net of current portion
Total stockholders' equity (deficit) $(23) $(915) $6,974 $7,329 $1,865 $ 3,592 $ 866
14
SELECTED QUARTERLY FINANCIAL DATA
The statement of operations data as of the periods indicated below are
derived from unaudited financial statements and include all adjustments
(consisting of normal recurring items) that management considers necessary for a
fair presentation of the financial statements.
Three months ended
September 30 December 31 March 31
(in thousands, except share amounts)
FISCAL 2002 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues $ 537 $ 545 $ 866
Costs and Expenses:
Cost of Sales 457 530 725
Research and development 1,111 1,257 539
General and administrative 2,644 1,471 1,262
Depreciation and amortization 193 209 136
Non-cash compensation charge 218 170 92
Operating loss (4,086) (3,092) (1,888)
Interest income (expense) (10) (1) (6)
Gain on Debt Extinguishment 33 5 86
Net Loss (4,063) (3,088) (1,808)
Basic and diluted net loss per share $ (.10) $ (.07) $ (.03)
Shares used in basic and diluted net
loss per share (1) 42,037,506 44,645,458 55,606,168
Three months ended
September 30 December 31 March 31 Year End Ended
thousands, except share amounts) June 30, 2001
FISCAL 2001 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues $ 1,865 $ 5,231 $ 2,959 $ 10,524
Costs and Expenses: Cost of Sales 872 2,779 1,689 5,805
Research and development 3,162 3,318 2,220 10,780
General and administrative 3,125 2,968 2,873 16,151
Depreciation and amortization 123 136 200 660
Non-cash compensation charge 362 356 232 1,171
Operating loss (5,779) (4,326) (4,255) (24,043)
Interest income 28 8 4 44
Net loss $ (5,751) $ (4,318) $ (4,251) $ (23,999)
Basic and diluted net loss per share $ (.18) $ (.13) $ (.12) $ (.72)
Shares used in basic and diluted net
loss per share 31,562,727 32,324,964 34,205,000 33,436,641
Three months ended
September 30 December 31 March 31 Year End Ended
(in thousands, except share amounts) June 30, 2001
FISCAL 2000 QUARTERLY
STATEMENT OF
OPERATIONS DATA:
Total revenues $ -- $ -- $ 40 $ 240
Costs and Expenses:
Cost of sales -- -- 19 113
Research and development 1,491 1,904 2,858 3,904
General and administrative 1,164 1,184 7,542 7,626
Depreciation and amortization 114 116 118 123
Non-cash compensation charge 46 42 5,234 5,022
Operating loss (2,815) (3,246) (15,731) (16,548)
Other income, net -- -- -- 20
Interest income 18 41 57 42
Net loss $ (2,797) $ (3,205) $ (15,674) $ (16,486)
Basic and diluted net loss per share $ (.11) $ (.12) $ (.56) $ (.55)
Shares used in basic and diluted net
loss per share 24,942,965 25,907,602 27,743,996 29,729,060
15
Three months ended
September 30 December 31 March 31 June 30
(in thousands, except share amounts)
FISCAL 1999 QUARTERLY
STATEMENT OF
OPERATIONS DATA:
Total revenues $ - $ - $ - $ -
Costs and Expenses:
Cost of sales - - - -
Research and development 1,119 768 476 1,200
General and administrative 407 1,068 558 2,650
Depreciation and amortization 101 101 101 107
Non-cash compensation charge - - 2,588 10,414
Operating loss (1,627) (1,937) (3,723) (14,371)
Other income (expense), net - - - (1,162)
Interest income (expense) (6) (8) (6) 3
Net loss $ (1,633) $ (1,945) $ (3,729) $ (15,530)
Basic and diluted net loss per share $(.19) $(.13) $(.22) $(.86)
Shares used in basic and diluted net
loss per share 8,384,532 15,174,943 17,159,876 18,141,882
The quarterly earnings per share data above are computed independently
for each of the quarters presented. As such, the sum of the quarterly per common
share information may not equal the full year amounts due to rounding
differences resulting from changes in the weighted-average number of common
shares outstanding.
/1/ Does not include shares on a pro forma basis for all periods presented for
shares which may be issued pursuant to warrants issued in private placements
during the nine months ended March 31, 2002 and included as shares registered by
this prospectus. Common equivalent shares other than the warrants discussed
above have also been excluded from the computation of diluted earnings per share
since their effect is antidilutive.
Year ended June 30, March 31, 2002
1997 1998 1999 2000 2001 (unaudited)
---- ---- ---- ---- ---- -----------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $ 162 $ -- $ 7,978 $ 6,432 31 $ 311
Working capital (deficit) (212) (3,073) 4,936 3,557 (1,458) (1,578)
Total assets 369 2,175 10,624 11,184 8,997 8,062
Long-term obligations, net of current -- -- -- -- 90 460
portion
Total stockholders' equity (deficit) $ (23) $ (915) $ 6,974 $ 7,329 1,865 $ 866
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with
selected financial data, financial statements and the related notes included
elsewhere in this prospectus.
OVERVIEW
We are a development-stage company that has designed, patented and is
currently engaged in the initial commercial deployment of our primary product,
the Traverser(TM). We believe the Traverser(TM) provides a unique "turnkey"
broadband equipment solution that enables telephone companies to deliver
real-time digital video programming, high-speed Internet and voice services over
existing copper telephone lines. We believe that the Traverser(TM) will, in many
instances, provide the most cost effective, reliable and scaleable solution for
telephone companies to provide a comprehensive suite of communications services
utilizing Asymmetric Digital Subscriber Line, or ADSL technology. We believe our
patented technology using a bus architecture overcomes the operational quality
and cost issues historically associated with video over DSL solutions. We also
manufacture and sell POTS Splitter Shelves and micro filters, which are
necessary component products, which are currently being deployed by telephone
companies both in the United States and abroad.
16
mPhase Technologies, Inc was organized on October 2, 1996. On February
17, 1997, we acquired Tecma Laboratories, Inc., a public corporation in a
reverse merger transaction. This resulted in our stock becoming publicly-traded
on the Nasdaq Over-the-Counter Bulletin Board. On June 25, 1998, we acquired
Microphase Telecommunications, Inc. in a stock-for-stock exchange, whose
principal assets included patents and patent applications utilized in our
Traverser(TM) product. On August 21, 1998, mPhaseTV, was organized as a
wholly-owned subsidiary to market interactive television and e-commerce revenue
opportunities. On March 2, 2000 we organized mPhaseTV, a joint venture to
provide digital television programming content to video over DSL providers.
From our inception, our operating activities have related primarily to
research and development, establishing third-party manufacturing relationships
and developing product brand recognition among telecommunications service
providers. These activities included establishing trials and field tests of the
Traverser(TM) product with Hart Telephone Company in Georgia, among others, and
establishing a core administrative and sales organization.
Revenues. To date, all material revenues have been generated from sales
of POTS Splitters Shelves and other DSL component products to a small number of
telecommunications companies. We believe that future revenues are difficult to
predict for a number of reasons. One such reason is, the variability of the
evaluation and investigation period a telephone company requires before
purchasing a product such as the Traverser(TM). Since we believe that there may
be a significant international market for the Traverser(TM), involving many
different countries with different regulations, certifications and commercial
practices than the United States, future revenues are highly subject to changing
variables and uncertainties. Additionally, the recent instability of the
telecommunications market evidenced by the reduction in capital spending across
the whole telecom sector contributes to our difficulty in accurately predicting
future revenues.
Cost of revenues. The costs necessary to generate revenues from the
sale of POTS Splitters Shelves and other DSL components include direct material,
labor and manufacturing. We paid these costs to Janifast Ltd., which has
facilities in the People's Republic of China and is owned by and managed by
certain senior executives and affiliated parties of our company. The cost of
revenues also includes certain royalties paid to Microphase Corporation, a
privately-held corporation organized in 1955, which shares certain common
management with us and is controlled by Ned Ergul, our Chairman. Costs for
future production of the Traverser(TM) product will consist primarily of
payments to contract manufacturers to acquire the necessary components and
assemble the products, as well as future patent royalties payable to Georgia
Tech Research Corporation, ("GTRC").
Research and development. Research and development expenses consist
principally of payments made to GTRC, and Microphase Corporation for development
of the Traverser(TM) product. All research and development costs are expensed as
incurred.
General and administrative. Selling, general and administrative
expenses consist primarily of salaries and related expenses for personnel
engaged in direct marketing of the Traverser(TM) and the POTS Splitter Shelves
and other DSL component products, as well as support functions including
executive, legal and accounting personnel. Certain administrative activities are
outsourced on a monthly fee basis to Microphase Corporation. Finally, we lease
our principal office from Microphase Corporation.
Non-Cash compensation charge. We incurred non-cash compensation charges
of $950,070 and $480,727, respectively, for the periods commencing (i) July 1,
2000 and ended March 31, 2001 and (ii) July 1, 2001 and ended March 31, 2002. We
make extensive use of stock options and warrants as a form of compensation to
employees, directors and outside consultants.
17
NINE MONTHS ENDED MARCH 31, 2002 VS. MARCH 31, 2001
Revenue. Total revenues were $1,948,351 for the nine months ending
March 31, 2002 compared to $10,055,006 for the nine months ending March 31,
2001. The decrease in revenue for the nine month period ended March 31, 2002 as
compared to the nine month period ended March 31, 2001 was due to slowing sales
of the Company's POTS Splitter product line, caused by the general downturn in
the DSL equipment market, including customers that order component products from
the Company. The Company continues to believe that its line of POTS Splitter
products is positioned to be competitively priced with high reliability and
connectivity, and as such has the potential to be a significant part of DSL
deployment worldwide. The Company cannot predict when the current contraction of
DSL deployments will subside.
Cost of Revenues. Cost of sales was $1,711,811 for the nine months
ending March 31, 2002 as compared to $5,339,634 in the prior period. Such cost
of sales represent 88% and 53% for the nine month periods ended March 31, 2002
and 2001 respectively, of gross revenues. These margins have varied dramatically
as the worldwide telecommunications markets have experienced volatility in DSL
deployments, which utilize our component products. Additionally, the Company has
offered discounts to certain customers in the period ended March 31, 2002
causing the margin to decrease.
Research And Development. Research and development expenses were
$2,907,256 for the nine months ending March 31, 2002 as compared to $8,699,948
during the comparable period in 2001. Such expenditures include $400,000
incurred with GTRC for the nine months ended March 31, 2002 as compared to
$3,175,850 during the comparable period in 2001. In addition we incurred
$2,507,256 primarily with Microphase and other strategic vendors for the nine
months ending March 31, 2002 as compared to $5,524,098 during the comparable
period in 2001.
The decrease in research expenditures incurred with GTRC is due to the
Company's nearing completion of the design and manufacture of prototypes of the
set top box and the central office equipment associated with its Traverser(TM)
product in 2001.
Research expenditures incurred with Microphase were related to the
continuing development of the Company's DSL component products, including the
Company's line of POTS Splitters and Microfilters and the Company's newest
product, the iPOTS(TM). We believe the mPhase iPOTS(TM) offers a much needed
solution for the DSL industry; the iPOTS(TM) enables telcos to remotely and
cost-effectively perform loop management and maintenance including line testing,
qualification and troubleshooting. Prior to the introduction of the iPOTS(TM),
loop management could not be remotely performed through a conventional POTS
Splitter without the use of expensive cross connects or relay banks because of
the mandatory DC blocking capacitors in traditional POTS splitters, as required
by the ITU, ANSI and ETSI. The unique (patent pending) iPOTS(TM) circuit allows
most test heads to perform both narrow and wideband testing of the local loop
through the central office POTS Splitter without having to physically disconnect
the POTS Splitter, thereby eliminating the need to dispatch personnel and a
truckroll. The Company anticipates significant demand for this product, as it
significantly reduces the cost of deploying and maintaining DSL services. Also
recently developed is the DSL loop extender product called mPhaseStretch(TM).
This product extends the service distance for the mPhase Traverser(TM) and can
be used in conjunction with other DSL services. The Company anticipates
significant demand for the Stretch loop extender product as it addresses a
primary issue in DSL services.
General and Administrative Expenses. Selling, general and
administrative expenses were $5,376,709 for the nine months ending March 31,
2002 down from $8,966,355 for the comparable period in 2001. The decrease in the
selling, general and administrative costs occurred despite a modest increase of
non-cash charges relating to the issuance of common stock and options to
consultants, which totaled $2,441,659 for the nine months ending March 31, 2002
as compared to $2,319,638 during the comparable period in 2001. The decrease
occurred as a result of the reduction in workforce in Fiscal 2002 and the
reduction in marketing expenses in Fiscal 2002 in response to the current
contraction in the telecommunications equipment market.
Net Loss. The Company recorded a net loss of $8,959,447 for the nine
months ended March 31, 2002 as compared to a loss of $14,319,653 for the nine
months ended March 31, 2001. This represents a loss per common share of $(.19)
for the nine months ending March 31, 2002 as compared to a loss per common share
of $(.44) for the nine months ending March 31, 2001.
18
TWELVE MONTHS ENDED JUNE 30, 2001 VS. JUNE 30, 2000
Revenues. Total revenues for the year ended June 30, 2001 increased to
$10,524,134 from $279,476 for the year ended June 30, 2000. The increase was
primarily attributable to sales of POTS Splitters and other DSL component
products.
Cost of revenues. Total cost of revenues increased to $5,804,673 for
the year ended June 30, 2001 from $131,756 for the year ended June 30, 2000 due
to the commencement of sale of POTS Splitter Shelves and other DSL component
products. Operating margins for the period ended June 30, 2001 were 45% based on
the limited number of sales achieved. During the year ended June 30, 2001 there
was a general shortage of POTS Splitter Shelves and other DSL component products
as telecommunication companies worldwide have been aggressively deploying
products as technology. Such margins may be materially smaller in the future as
a result of a greater market balance of supply and demand for such products.
Research and Development. Research and development expenses increased
from $10,156,936 in the year ended June 30, 2000 to $10,779,570 for the year
ending June 30, 2001. Such amount includes $4,564,000 incurred with GTRC for
such twelve-month period ended in 2000 as compared to $3,814,000 during the
comparable period in 2001. Research and development expenses incurred primarily
with respect to Microphase Corporation and Flextronics International, Inc., an
outside contract manufacturer of the Traverser(TM), increased from $3,328,443 to
$3,405,975 for the twelve-month period ended June 30, 2000 as compared to the
twelve-month period ended June 30, 2001 respectively. Research expenditures
incurred with Flextronics were due to our increased efforts in the deployment of
the Traverser(TM), including the design and manufacture of prototypes of the
set-top box and the Central Office POTS Splitter Shelf. mPhase terminated the
manufacturing relationship with Flextronics as part of its own effort to reduce
costs during the first quarter of fiscal 2002. Increased research and
development expenditures incurred with Microphase Corporation and Janifast
Corporation; results are related primarily to the POTS Splitter Shelves and
other DSL component products.
General and administrative expenses. General and administrative
expenses were $16,150,711 for the twelve-month period ended on June 30, 2001 as
compared to $17,516,216 for the same period ended June 30, 2000. The decrease in
administrative costs is a result of the decrease of non-cash charges for the
issuance of options to consultants which totaled $6,227,552 for the year ended
June 30, 2001 as compared to $9,078,311 during the comparable period in 2000,
offset by an increase in salaries and marketing expenses.
Net Loss. We recorded a net loss of $23,998,734 for the twelve months
ending June 30,2001 as compared to a net loss of $38,161,542 for the same period
ended June 30, 2000. This represents a loss per common share of $(.72) for 2001
as compared to $(1.41) for the same period in 2000.
TWELVE MONTHS ENDED JUNE 30, 2000 VS. JUNE 30, 1999
Revenues. Total revenues for the year ended June 30, 2000 increased to
$279,476 from $0 for the year ended June 30, 1999. The increase was primarily
attributable to the initial sales of Pots Splitters Shelves and other DSL
component products.
Research and development. Research and development expenses rose to
$10,156,936 for the year ended June 30, 2000, including a $1,010,375 non-cash
charge for options granted to Hart Telephone, increased expenditures with
Flextronics in connection with their efforts in assisting in our completion of
the Traverser(TM) Version 1.1 and increased expenditures with Microphase
Corporation for the completion of the first generation of component products.
This includes approximately $4,560,000 incurred with GTRC in 2000 compared to
approximately $2,450,000 in 1999. This represents an increase of $6,594,035 from
the fiscal 1999 balance of $3,562,901.
General and administrative expenses. General and administrative
expenses rose to $17,516,216 for the year ended on June 30, 2000 from $4,683,109
for the same period ended June 30, 1999. The increase in the administrative
costs relate to several factors. We increased our marketing and public relation
efforts in anticipation of the deployment of our initial sales of component
products and services. We also incurred substantial non-cash charges for grants
of options and common stock to consultants totaling $9,078,311 in 2000,
including $2,633,400 to (Alphastar International Inc.), a minority co-venturers
of mPhaseTV, $796,350 to a consultant for services with respect to strategic
advisory services and a $1,808,086 charge recorded for the issuance of common
stock in May to recent investors due to a market value adjustment, as compared
to a total of $2,765,453 of such charges for 1999.
19
Net Loss. We recorded a net loss of $38,161,542 for the twelve months
ending June 30, 2000 as compared to a net loss of $ 22,838,344 for the same
period ended June 30, 1999. This represents a loss per common share of $(1.41)
for 2000 as compared to $(1.42) for the same period in 1999.
Liquidity and Capital Resources. At March 31, 2002, mPhase had a
working capital deficit of $1,577,550 as compared to a working capital deficit
of $1,458,227 on June 30,2001.
Through March 31,2002, the Company had incurred development stage
losses totaling approximately $99,080,372 and was in a working capital deficit
position of $1,577,550. At March 31,2002, the Company had approximately $310,643
of cash and cash equivalents and approximately $516,984 of trade receivables to
fund short-term working capital requirements. The Company 's ability to continue
as a going concern and its future success is dependent upon its ability to raise
capital in the near term to:(1)satisfy its current obligations,(2)continue its
research and development efforts, and (3)fund the successful wide scale
development, deployment and marketing of its products.
Historically, the Company has funded its operations and capital
expenditures primarily through private placements of common stock. Management
expects that its ongoing financial needs will be provided by financing
activities and believes that the sales of its line of POTS Splitter products and
other related DSL component products will provide some offset to cash flows used
in operations, although there can be no assurance as to the level and growth
rate of such sales in future periods as seen with quarter to quarter
fluctuations in components sales. At March 31,2002, the Company had cash and
cash equivalents of $310,643, compared to $31,005 at June 30,2001, accounts
receivable and inventory of approximately $516,984 and $4.04 million, compared
to approximately $300,000 of accounts receivable and inventory of $4.3 million
at June 30,2001.
Cash used in operating activities was $2,565,517 during the nine months
ending March 31,2002. The cash used by operating activities principally consists
of the net loss, the net increase in accounts receivable offset by the increase
in depreciation and amortization, the net decrease in inventory, and by non-cash
charges for common stock options and warrants issued for services and increased
accrued expenses. Cash used in investing activities for the nine month period
ended March 31, 2002 was approximately $103,000.
The Company has entered into various agreements with GTRC, pursuant to
which the Company receives technical assistance in developing the Digital Video
and Data Delivery System. The Company has incurred expenses in connection with
technical assistance from GTRC totaling approximately $400,000 and $3,175,850
for the nine months ending March 31, 2002 and 2001 respectively and $13.4
million from the period from inception through March 31, 2002. If and when sales
commence utilizing this technology, the Company will be obligated to pay GTRC a
royalty of 5% of product sales.
In September 2001, certain Board members and Officers subscribed to
purchase up to 2,000,000 restricted shares of the Company's common stock for
$1,000,000; the subscriptions were collected in full by December 31,2001.
The Company plans to continue to invest in technology, hardware and
software in connection with enhancing the functionality of the Traverser (TM),
as well as in achieving wide scale, commercial deployment. The timing, nature
and scope of such continued investment is dependent upon the Company 's ability
to raise sufficient capital.
During the nine months ending March 31, 2002, the Company issued 75,000
at $2.00 per share and 6,797,643 shares of its common stock at $.30 per share,
together with a like amount of warrants with an exercise price of $3.00 and $.30
respectively, in private placements including generating gross proceeds of
$1,943,754 in private transactions pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended with accredited investors. In addition,
certain strategic vendors converted $1,263,062 of accounts payable and accrued
expenses into 1,342,996 shares of the Company 's common stock and 2,353,000
warrants. Such vendors included Microphase Corporation, Janifast Ltd and Piper
Rudnick LLP, mPhase's outside counsel, whose shares and warrants are being
registered as a part of the Selling Shareholder hereafter described.
As of March 31, 2002, mPhase had no material commitments for capital
expenditures.
20
For the nine months ending March 31, 2002, cash used in operating
activities was $2,565,517. The cash used by operating activities principally
consists of the net loss, the net increase in inventory offset by a net increase
in depreciation and amortization, and increased accounts payable. In the nine
months ended March 31, 2002, net cash of approximately $102,595 used in
investing activities consisted of purchases of property and equipment and costs
associated with our licensing of the patents recently granted to GTRC. We have
entered into various agreements with GTRC, pursuant to which we receive
technical assistance in developing the commercialization of our digital video
and data delivery system. We have incurred expenses in connection with technical
assistance from GTRC totaling approximately $2,100,000, $2,450,253, $4,564,000
and $3,814,000, for the years ended June 30, 1998, 1999, 2000, and 2001
respectively, of which approximately $1,870,480 was included in accounts payable
and accrued expenses as of June 30, 2001. Additionally, we incurred expenses in
connection with technical assistance from GTRC totaling approximately
$3,175,850, $400,000 and $13.4 million for the nine months ended March 31, 2001
and 2002, and from the period from inception through March 31, 2002,
respectively. If and when sales commence utilizing this technology, we will be
obligated to pay GTRC a royalty of 5% of product sales.
We intend to continue to invest in technology and telecommunications
hardware and software in connection with the full commercial production of the
Traverser(TM). Since we have strategically determined that the cost to a
prospective telco to build a master headend is substantially reduced owing to
new developments in technology, we have decided that mPhaseTV no longer requires
access to a satellite uplink facility. Thus the amount of capital necessary to
fund mPhaseTV and mPhase has been substantially reduced. Through the nine month
period ended March 31, 2002, in a private placement, we sold 6,229,174 shares of
our common stock at $.30 per share and a like amount of warrants each to
purchase one share of our common stock at an exercise price of $.30 per share
generating gross proceeds of $1,868,751. We issued 568,469 shares of our common
stock and warrants each, to purchase one share of our common stock at $.30 per
share to finders, consultants and investment banking firms in connection with
these private placements. We continue our efforts to raise additional funds
through private placements of our common stock and strategic alliances, the
proceeds of which are required to fund continuing development stage expenditures
and the controlled introductory roll-out of our Traverser(TM) Digital Video and
Delivery System. However, there can be no assurances that we will generate
sufficient revenues to provide positive cash flows from operations or that
sufficient capital will be available when needed or at terms that we deem to be
reasonable.
We have evaluated our cash requirements for fiscal year 2002 based upon
certain assumptions, including our ability to raise additional financing and
increased sales of our POTS splitter. The Company anticipates that it will need
to raise additional monies primarily in private placements of its common stock
with accredited investors during the fiscal year which will end June 30, 2002,
or alternatively we will need to curtail certain expenses as incurred at the
present levels including marketing and research and development expenses. At a
minimum, $1.4 million in additional investment in technology design to reduce
the cost of the Traverser(TM) in connection with the full commercial production
of the Traverser(TM) is necessary over the next 12 months. In the long term, the
Company may invest in excess of one million annually on research and development
of the Traverser(TM) product line based upon sales levels, changes to technology
and the overall success of the Company attaining sufficient financing until such
time as it achieves profitable operations.
Should these cash flows not be available to us, we believe we would
have the ability to revise our operating plan and make certain further
reductions in expenses, so that our resources available at June 30, 2002, plus
financing to be secured during fiscal year 2003, and expected POTS splitter
revenues, will be sufficient to meet our obligations until the end of fiscal
year 2003. We have continued to experience operating losses and negative cash
flows. To date, we have funded our operations with a combination of component
sales and private equity offerings. Management believes that we will be able to
secure the necessary financing in the short term to fund our operations into our
next fiscal year. However, failure to raise additional funds, or generate
significant cash flows through revenues, could have a material adverse effect on
our ability to achieve our intended business objectives.
BUSINESS
Overview
We are a developer of broadband communications equipment and digital
video content designed to allow telephone companies and other emerging
telecommunications equipment service providers to deliver up to 384 channels of
digital television, high-speed Internet and telephone services simultaneously
over the existing copper wire. The Traverser(TM) Digital Video and Data Delivery
System utilizes Asymetric Digital Subscriber Line technology, (ADSL),
specifically Rate Adaptive Digital Subscriber Line (RADSL), to enable
cost-effective and reliable delivery of a full suite of communication services
over the existing telephone infrastructure.
21
We believe the Traverser(TM) provides telephone companies with a high
quality and reliable means of converging communications services. To our
knowledge, the Traverser(TM) is the only platform that does not utilize Internet
Protocol (IP) transmission in any format for the delivery of television services
over telephone wires. By utilizing a non-IP transport, (NIP) we believe certain
quality of service issues that are often associated with IP-based television
delivery systems are negated. The patented bus architecture of our system is
such that all television channels are available to all users all of the time as
opposed to channel availability being based on ratios. Hence, we feel that our
solution is uniquely reliable. Furthermore, because we do not utilize IP
transport for the delivery of video, we do not require the use of potentially
costly servers or routers.
We believe that the Traverser(TM) is the only system that is capable of
providing voice, data and video services to subscribers up to 12,000 feet (up to
20,000 feet with the use of the mPhaseStretch(TM)) from the telephone company's
central office through an end-to-end system over the existing telephone
infrastructure, without requiring telephone companies to upgrade their existing
copper wire networks to fiber optics. Our products do not require fiber
upgrades, therefore we believe that the Traverser(TM) is uniquely positioned to
enable small and mid-sized domestic and international communications service
providers to compete in the market for integrated voice, data and video services
in the most cost effective manner.
Industry Background
In the United States, the telecommunications, cable and satellite
industries are currently undergoing significant technological and regulatory
changes leading to the convergence of voice, Internet and television services.
Many domestic cable companies have upgraded their networks to support the
delivery of high-speed Internet and telephony services to their cable television
subscribers. In order to compete effectively with cable companies that are
infringing upon traditional telephony revenue sources, some telephone companies
are seeking to upgrade their networks to provide their customers with fast and
reliable Internet access, as well as multi-channel television.
Further incentivizing telecommunications providers in the United States
and abroad to offer advanced communications services is the fact that local and
long distance calling revenues are declining. The proliferation of wireless
telephony coupled with the advent of new technology such as Voice over DSL or
Voice over IP has negatively affected telephone companies' traditional revenue
source, i.e., plain old telephone services. Despite all of these pressures,
however, it is unclear how quickly telephone companies will move toward
deploying full service communications networks such as the Traverser(TM) given
the recent significant reduction of capital expenditures and market
capitalization of companies in the telecommunications sector.
Over the past several years, telephone companies around the world have
made significant upgrades to their infrastructure and network equipment.
However, the primary means of connecting a telephone subscriber, either
residential or commercial, to a telephone company's central office is via a
twisted copper pair connection. This connection is commonly referred to as the
"last mile." The last mile of copper wire networking represents the slowest
portion of the communications infrastructure and often acts as a bottleneck in
the delivery of higher bandwidth data and video traffic. We estimate that over
140 million businesses and homes in the United States are served by the copper
infrastructure in the last mile, and the worldwide installed base of copper
lines exceeds one billion.
22
One of the technologies deployed by telephone companies in the last
mile today to enable high-speed access is Digital Subscriber Line, or DSL. A
growing number of local exchange carriers are deploying DSL to offer high-speed
Internet access services on existing copper lines. DSL allows telephone service
providers to leverage the underutilized capacity of the telephone line, offer
multiple services on the same line and deliver high-speed data as a dedicated,
"always-on" service. According to telecommunications research firm Point-Topic,
at the end of 2001, there were approximately 18.7 million DSL connections in
service, representing a 188% growth from the previous year. According to
Point-Topic, DSL service now exceeds cable modems 5 to 1.
There are multiple "flavors" of DSL that are deployed around the world
today. The most common flavor is ADSL with other flavors such as SH.DSL and VDSL
gaining in popularity. Each flavor of DSL operates slightly differently and
enables different up and downstream bitrates, with VDSL being the most robust of
all the flavors. While VDSL may enable greater bandwidth as compared to other
flavors, it requires service providers to deploy fiber-to-the-neighborhood
because VDSL can only travel over copper out to 3,000 to 4,000 feet.
The United States is lagging other parts of the world in terms of
deploying DSL services. However, at the time this document is being written new
U.S. legislation is being posed in Congress that could spur deployments along.
For instance, the proposed Tauzin-Dingel bill would eliminate the treatment of
data services in the same manner as long distances services from a regulatory
standpoint. If this bill were to be passed, the larger regional bell operating
companies (RBOCs) will have greater freedom with regard to offering data
services. The industry speculates that the passing of a bill such as this could
result in a nationwide increase in the deployment of DSL networks by the larger
incumbent carriers.
Even though competitive pressures and incentives exist in the United
States for telephone service providers to rollout a complete suite of
communications services, including television, it is unclear at what rate this
deployment will progress. The most recent economic downturn has resulted in an
industry-wide slowing of the telecommunications equipment sector. The pullback
in telecommunications-related spending is particularly apparent among US-based
telephone companies. However, we do believe that the international community
will continue to progress, albeit at a slower rate than previously thought and
that our most immediate sales opportunities exist abroad.
Our Solution
By combining the benefits of DSL technology with digital video
transmission capability, the Traverser(TM) is designed to alleviate the last
mile data bottleneck and provide a cost-effective solution for integrated voice,
video and data services to the end user. By using the existing installed public
telephone infrastructure in the local loop, the Traverser(TM) supports
high-speed communications without requiring costly infrastructure such as fiber
optics.
The mPhase Traverser(TM) DVDDS is a complete end-to-end system. mPhase
Technologies, designs, develops and manufactures all of the elements required
for its customers to enhance their service platform. Specifically, the mPhase
Traverser(TM) System consists of Central Office Equipment (CO), Management
Software and Customer Premises Equipment (CPE). Service providers wishing to
deploy the mPhase Traverser(TM) System need to build a digital video headend to
receive television content. This includes installing a satellite receiving dish,
as well as video grooming equipment and software to manage the video content. At
the digital headend local off-air channels are received and digitized and then
combined with the signals received via satellite. The headend can be co-located
with a single central office or remotely located and connected to each Central
Office via dark fiber. mPhase does not manufacture headend equipment. However,
it has established preferred vendor relationships with a number of headend
equipment manufacturers.
The mPhase Traverser(TM) System includes Central Office equipment,
known as the mPhase Universal Access Shelf. The Access Shelf integrates the
video signals from the headend with the Internet and voice signals. The outputs
of the Access Shelf are DSL lines capable of carrying a single video stream,
high-speed data and plain old telephone service (POTS).
Upon reaching the home or business, the DSL line is fed into the mPhase
Intelligent Network Interface (INI), which functions as a digital set-top box.
The INI separates the three signals and routes them to their respective devices
-- the video signal to the television, the data signal to the computer and the
voice signal to the telephone.
23
The mPhase Traverser(TM) was designed to function over the installed
copper infrastructure. Unlike other technologies based on VDSL (very fast
digital subscriber line) technology, the Traverser(TM) does not require that a
telco build out a fiber network. Instead, the Traverser(TM) transmits voice,
broadcast television and data entirely over copper, up to 12,000 feet (2.2
miles), by adding mPhase's newly developed product, the mPhaseStretch(TM), voice
video and data can be delivered to subscribers as far as 20,00 feet from a
central office. This unique advantage makes the Traverser(TM) significantly more
compelling relative to VDSL-based solutions by enabling telcos to serve almost
100% of its customers without having to upgrade its existing infrastructure in
any way thereby saving telcos time and costs.
Another unique benefit the mPhase Traverser(TM) System offers relative
to competition is the fact that digital television signals are transmitted in
native MPEG-2 format over the DSL spectrum. At no point does the Traverser(TM)
System deliver television signals in an IP or MIP encapsulated in ATM format. By
delivering television via a point-to-point connection, we believe the
Traverser(TM) ensures reliable picture quality and avoids operational and
quality of service problems typically associated with IP-based video delivery
platforms. Importantly, the Traverser(TM) utilizes a patented bus architecture.
This unique design makes all of the television channels available to all users
all of the time as opposed to making availability of channels based on ratios.
We believe that none of the other broadband alternatives that utilize
the existing copper infrastructure for the local loop have the cost and coverage
advantages as our product does. We believe that communications service providers
will seek to build upon their investment in copper wire by utilizing their
infrastructure for transmission of digital services rather than pursuing costly
fiber or hybrid fiber coaxial cable upgrades. Our equipment is engineered to
provide flexibility to enable telephone companies to cost-effectively deploy
multiple services to a large numbers of subscribers. It is for these reasons
that we believe that our equipment enables communications service providers to
generate incremental revenues from their existing subscribers and respond to
increased competition without significant capital expenditures.
We believe the demand for high-speed broadband access solutions, such
as the one provided by the Traverser(TM), is significant and will continue to
grow with the increase in demand for high-quality, digital television
programming, the proliferation of widespread Internet usage and the increase in
congestion caused by data intensive applications and transmissions over the
installed copper wire infrastructure.
In addition to selling the Traverser(TM), mPhase also has established
affiliation agreements with most of the major television networks in the U.S.
Through its subsidiary company, mPhaseTV, mPhase can resell certain television
content to telcos interested in becoming television providers. This product
helps to facilitate the sale of the Traverser by reducing the amount of time and
resources needed for a telco to acquire all of the necessary contracts on its
own.
mPhase also has developed a line of DSL component products that help to
reduce DSL installation, deployment and maintenance costs for telcos. These
products include a POTS Splitter Shelf that offers one of the highest density
solutions on the market, as well as a line of DSL in-line micofilters and
customer premises splitters. These before mentioned products enable voice and
data to travel over the same DSL line without interference and are critical to
any DSL deployment. In addition, mPhase has recently introduced the Intelligent
POTS Splitter (iPOTS). This product functions the same as a traditional POTS
Splitter but includes what we describe as "intelligent functionality".
Intelligent functionality gives the telco operator the ability to automatically
and remotely qualify the loop for DSL service by temporarily bypassing the
Splitter. Bypassing the splitter gives the operator a clear view of the line and
reduces the cost of DSL deployment and maintenance by eliminating the need for
an operator to have to physically disconnect the line from the splitter for
testing purposes. Finally, mPhase introduced a new product, the
mPhaseStretch(TM) or loop extender, in May 2002. The loop extender works in
conjunction with the Traverser(TM) essentially doubling the service radius and
allowing the delivery of voice, video and data out to at least 20,000 feet.
24
Business Development, Organization, and Acquisition Activities
We were incorporated in New Jersey in 1979 under the name Tecma
Laboratory, Inc. In 1987, we changed our name to Tecma Laboratories, Inc. As
Tecma Laboratories, Inc., the Company has primarily engaged in the research,
development and exploitation of products in the skin care field. On February 17,
1997, we acquired Lightpaths, Inc., a Delaware corporation, which was engaged in
the development of telecommunications products incorporating DSL technology, and
we changed our name to Lightpaths TP Technologies, Inc.
On January 29, 1997, we formed another wholly-owned subsidiary called
TLI Industries, Inc. The shares of TLI were spun off to our stockholders on
March 31,1997 after we transferred the assets and liabilities, including
primarily fixed assets, patents and shareholder loans related to the prior
business of Tecma Laboratories. As a consequence of these transactions, we
became the holding company of our wholly owned subsidiary, Lightpaths, Inc. on
February 17, 1997.
On June 2, 1997, we completed a reverse merger with Lightpaths TP
Technologies, Inc. and changed our name to mPhase Technologies, Inc.
On June 25, 1998, we acquired Microphase Telecommunications, Inc., a
Delaware corporation, by issuing 2,500,000 shares of our common stock.
Microphase Telecommunications' principal assets were patents and patent
applications utilized in the development of our proprietary Traverser(TM)
technology.
In March 2000, we entered into a joint venture with Alphastar
International, Inc. to form a company called mPhase Television.net, Inc.,
("mPhaseTV") in which we held a 50% interest. On May 1, 2000, we acquired an
additional 6.5% interest in mPhaseTV, and made it one of our consolidated
subsidiaries.
On March 14, 2000, we entered into an agreement with BMW Manufacturing
Corp., located in South Carolina. Under the agreement, we installed version 1.0
of the Traverser(TM) for BMW's telephone transmission network. BMW has agreed
that, upon its notice and consent, we will be able to demonstrate to potential
customers the functioning system at BMW's facilities. BMW has made two (2)
subsequent purchases increasing the size of its deployment to 44 unique units.
Our flagship installation, Hart Telephone, has completed the build and
development of its digital headend during fourth quarter of 2001. The completion
of their digital headend marks the move from beta to commercial deployment of
the Traverser(TM) platform. Hart currently has approximately 100 customers
receiving about 90 channels of television services. Currently, we do not have
sufficient quantities of Version 1.0 of the Traverser(TM) in inventory to
support large scale deployment in Hartwell. As further discussed below, we
anticipate being able to meet product demand toward the end of this calendar
year.
mPhase has initiated development of Version 2.0 of the Traverser(TM)
with a major, experienced research and development organization. Version 2.0
will be a cost-reduced version of Version 1.0, offering the same functionality
for with substantial reduction in cost. We expect Version 2.0 to be commercially
available for deployment in Hartwell, as well as other locations, in Winter
2002. We believe such cost reduced product will increase the competiveness of
the Traverser(TM) against other competing technologies in the global
marketplace.
Our revenue, historically, has been derived from sales of component
telephone equipment parts, the majority of which has come from our sales of POTS
Splitter Shelves. In our fiscal year ended June 30, 2001, and through the third
quarter of our fiscal year 2001 ended March 31, 2002 we generated approximately
$10.5 million and $1.95 million in revenue, respectively, from the commercial
sale of our component products. Our other component products, including Filters
and Central Office POTS Filter Shelves, are marketed to other DSL equipment
vendors. We do not believe that the sales of our Traverser(TM) will be
materially impaired by the sale of these component products to these potential
competitors.
mPhase is in the process of evaluating a full range of contract
manufacturers, including manufacturers outside of the U.S. We believe that there
are many qualified manufacturers around the world. mPhase is likely to contract
with multiple companies depending on which countries the Traverser(TM) is
deployed and depending upon cost-competitiveness.
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Our Products & Services
Our principle product is the Traverser(TM) Digital Video and Data
Delivery System. Since our inception in 1996, our operating activities have
centered on developing, building, and testing the Traverser(TM); establishing
relationships with third party developers and manufacturers, and commencing
sales and marketing. To date we derived revenue from our initial commercial
deployment with Hart Telephone as well as from the sale of our first industrial
application with BMW Manufacturing.
The Traverser(TM) consists of network elements located at a programming
and control center owned by the telephone company, the central office and at the
subscriber's residence or business. The key elements of the Traverser(TM) are
the System Management Workstation, the POTS Splitter Shelves, the Access
Shelves, and the Intelligent Network Interfaces.
[FLOW CHART]
Digital television content is received via satellite at the programming
control center. At the programming control center, local broadcast channels are
also integrated into the programming received by satellite. Digital television
content is then transmitted over fiber to the central office(s). At each central
office, digital television, Internet and traditional telephone services are
combined by the Traverser(TM) for delivery to subscribers over existing
telephone wires. Once received at the home or office, the Intelligent Network
Interface distributes the digital television content, Internet and telephone
signals to their respective devices.
The unique, patented bus architecture utilized by the Traverser(TM)
allows a plurality of channels to be delivered to a plurality of users all of
the time. Unlike other IP based video transport systems, the Traverser(TM) does
not require video storage or video multicasting servers; all digital television
content is transported to all users in real time, native MPEG-2 format.
The Traverser(TM) enables communications service providers to send
reliable, MPEG-2 digital-quality television over the installed copper wires, in
addition to high-speed Internet transmission and voice services, allowing them
to compete effectively with cable operators and satellite services for
subscribers in the last mile. The Traverser(TM) technology provides 4 Mbps of
bandwidth for digital video delivery with an additional 2Mbps for Internet
services, which is up to 40 times faster than regular 56k dial-up Internet
services. The Traverser(TM) utilizes technology we license exclusively from
Georgia Tech and DSL technology which we license non-exclusively from Globespan
Semiconductor, Inc. Georgia Tech provided a significant portion of the
engineering research and design to develop the Traverser(TM). The Traverser(TM)
also utilizes an advanced filter technology developed by Microphase Corporation,
a company with which we share common management.
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The Traverser(TM) is utilized in conjunction with popular
telecommunications transport protocols such as Dense Wave Division Multiplexing,
Digital Signal-Level 3, Synchronous Optical Network, Synchronous Digital
Hierarchy, Asynchronous Transfer Mode or frame relay and is highly adaptable. In
addition, it is transparent to the Telco's voice switch and digital loop carrier
and supports emergency service operation and relieves dial-up Internet switch
congestion.
Component Parts
POTS Splitter Shelves
A Plain Old Telephone Service (POTS) Splitter Shelf is a low pass/high
pass filter that separates voice and data transmissions. POTS Splitter Shelves,
are necessary to permit simultaneous voice and data transmissions over the same
twisted copper wire pair. POTS Splitter Shelves and the individual cards that
populate the shelf (one card for each subscriber) separate and re-combine
traffic traveling along each copper wire into the analog voice portion of a
transmission and the digital data portion, so that each component can travel
independent of the other. This product allows for increased clarity of both
voice and data information and decreased "cross talk", or interference.
Intelligent POTS Splitter (iPOTS)
mPhase has also developed an innovative line of "intelligent" products.
Included in this product line are the iPOTS, or Intelligent POTS Splitter and
the UniversalBypass. These products facilitate automated and remote testing of
lines for DSL services through the use of its "intelligent functionality".
Intelligent functionality is the ability to temporarily bypass the POTS Splitter
so that full metallic testing can be performed without having to physically
disconnect a traditional POTS Splitter. These products reduce the operational
costs of provisioning and maintaining DSL services.
The iPOTS is a complete solution which includes a POTS Splitter as well
as the bypass or "intelligent" functionality and the UniversalBypass is a module
containing the intelligent functionality which can be used with any vendor's
POTS Splitter.
mPhaseStretch(TM)
mPhase has recently introduced a new product known as the
mPhaseStretch(TM). This product is a loop extender that enhances the performance
of the Traverser(TM) System my extending its transmission distance for the
delivery of voice, video and data up to 20,000 feet. The mPhaseStretch(TM) is a
powered device that is placed on the line at approximately 9,000 feet or before
the signal degrades. The addition of the Stretch gives mPhase, what the Company
believes to be the greatest serviceable distance radius for the delivery of
converged services. A universal version of the Stretch(TM), or a version
interoperable with other vendor's DSLAM equipment is scheduled to be released
later this year.
Microfilters
We have developed a complete line of microfilters, including a 2 and 4
pole filter for use in single and multi-phone households, as well as a NID
Splitter.
mPhase Television.Net, Inc.
mPhaseTV provides contracts, licensing agreements, marketing and legal
support to service providers interested in deploying television over DSL.
mPhaseTV has established licensing agreements and partnerships with content
originators thus allowing service providers to offer its subscribers a full
complement of television programming. It is important to note that the role of
mPhaseTV has changed since its inception. Originally, mPhaseTV was to act as a
content aggregator, downlinking a complete lineup of channels, digitizing those
channels and uplinking them via satellite for further delivery to each telco
site. The benefit of mPhaseTV acting as a content aggregator was that service
providers would not have to build a full-scale headend that included encoders,
and other equipment. However, recent advances in technology have significantly
reduced the costs for a telephone company to build a full scale headend.
Therefore the role of mPhaseTV is now limited to providing the appropriate
licenses and relationships as opposed to offering a content aggregation
solution. Telephone companies purchasing content through mPhaseTV are still
required to build a full-scale digital headend.
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We contributed the initial funding for the mPhaseTV, by lending it
$1,000,000 at 8% per annum interest. The loan is repayable to us in common stock
at the time that mPhase Television qualifies for listing in the NASDAQ Small Cap
Market. We also contributed $20,000 in cash to the joint venture and granted
options to Alphastar to purchase 200,000 shares of our stock for $4.00 per
share. The agreement requires Alphastar to provide mPhase Television the right
to transmit television broadcasts over Alphastar's digital satellite network. On
May 1, 2000, we acquired an additional 6.5% interest in mPhase Television for an
additional $1,500,000 in cash. We report mPhaseTV as a consolidated subsidiary.
As part of its cost reduction efforts, mPhase is currently
renegotiating its joint venture relationship with Alphastar International, Inc.
that established mPhaseTV. Under such arrangement, mPhaseTV leased the rights to
use Alphastar's earth station satellite uplink and downlink facility in Oxford,
CT. Such facilities enables mPhaseTV to aggregate television content from the
multiple networks and content providers eliminating the need for telco's in the
United States from building a master headend as an additional cost to the
Traverser(TM). Recent developments in technology have significantly reduced the
cost of such master headend facilities which eliminates the need for mPhase to
aggregate television content. mPhaseTV continues to serve as a strategic asset
for selling the Traverser(TM) by having secured the rights to transmit over DSL
over 90 television channels directly from the content providers eliminating the
need for a U.S. telco purchasing the Traverser(TM) from having to assemble such
rights itself from each of the content providers. mPhase currently owns a 56%
controlling interest in mPhaseTV.
Research and Development Activities
We have designed the Traverser(TM) and its ancillary component parts in
conjunction with Georgia Tech Research Institute which conducts a majority of
our digital research and development for the Traverser(TM) line of products.
Microphase Corporation contributed the analog technology incorporated in the
design of the Traverser(TM), as well as providing ongoing development of analog
components for the Traverser(TM). mPhase has initiated negotiations for the
development of Version 2.0 with a major, well established research and
development organization to compliment Georgia Tech. Version 2.0 will be a
cost-reduced version of Version 1.0, offering the same functionality at a
significantly reduced cost. We anticipate that Georgia Tech will be involved in
a reduced role with the development efforts of Version 2.0.
As of June 30, 2001, we had been billed approximately $13,400,000 for
research and development conducted by Georgia Tech, of which approximately
$1,870,480 remained outstanding. On March 26, 1998, we entered into a license
agreement with Georgia Tech which owns the Digital Video and Data System
technology. Georgia Tech has granted us the exclusive license to use and re-sell
this technology in the Traverser(TM). We pay Georgia Tech royalties between 3%
to 5% on the sales of the Traverser(TM). The agreement expires automatically
when the patents covering the invention expire. As previously indicated, we are
negotiating with Georgia Tech to amend certain provisions of the agreement.
Market
Our primary business is to develop and market the Traverser(TM) to
domestic and international telephone companies and other communications service
providers. We position the Traverser to be the most cost-effective, reliable,
scaleable and easy to operate video over ADSL solution on the market.
From a competitive standpoint, the Traverser(TM) offers a number of
unique features. The key point of difference between the Traverser(TM) and other
systems is our unique, patented video delivery method. The Traverser(TM), unlike
any other system on the market, delivers video over copper in a non-Internet
Protocol (or NIP) based format. As a result, we believe that the Traverser
avoids many of the operational challenges and quality of service issues
typically associated with IP-based video delivery.
Beyond that, we believe our product to be extremely cost effective.
mPhase is in the process of conducting cost reduction measures, and intends to
release an even more cost-effective solution toward the end of this calendar
year.
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mPhase has developed a number of effective sales tools it uses with its
sales team and distributor partners. These tools include a highly customizable
return on investment model. This tool allows our potential customers to
appreciate the financial value the Traverser System adds. We also have a number
of technical white papers that discuss our system overall, as well as comparing
it to IP-based video delivery systems. Finally, mPhase has the Hart and BMW
installations in the US where it encourages potential customers to visit, and
see the Traverser System operational first-hand. Trial and deployment sites such
as Hart Telephone and BMW both host potential customers interested in visiting
an installation.
mPhase markets its products in the US to small, independent telephone
companies. We believe our product is ideal in markets where the population is
dispersed with relatively long loop lengths. We further encourage telephone
companies to work together and share a common head end to reduce their capital
expenditures. In fact, mPhase has established several co-marketing relationships
with manufacturers of digital head end equipment whereby each company references
potential sales leads to the other. Relationships such as these allow mPhase
greater reach in terms of contact with potential customers, as well as help to
streamline the sales process for the Traverser(TM).
mPhase also markets the Traverser(TM) System to international telephone
companies. Telephone companies around the world are experiencing negative
pressures on their calling revenues, encroaching competition from technologies
which were at one time complimentary (e.g., cable) and a need to increase their
per subscriber revenue. Outside of the United States, telcos are particularly
reliant on their copper infrastructure, as few countries have upgrades their
infrastructure to optics. Beyond that, the options for pay-tv services outside
the U.S. are, for the most part, limited. Consumers living abroad have less
access to digital television, leaving international telcos well-positioned to
capture a large percentage of the market. Hence, we believe the market
conditions that exist abroad are stronger for our product than those that exist
domestically.
While mPhase believes it will experience some success in the U.S., in
anticipates greater success in the international community. mPhase is focused
over the next several quarters on securing 1 to 2 large international telephone
companies as customers. To that end, it has several trials scheduled with major
international incumbent telcos.
mPhase is in the process of building reliable, reputable and productive
distributors and resellers. It is in the process of finalizing its official
certification process of distributors and resellers. The company then intends to
aggressively pursue relationships with distributors and resellers abroad that
have telecommunications experience and existing telephone company customers. We
believe that by capitalizing upon these kinds of relationships, mPhase will be
able to reach a greater international audience faster.
Patents and Licenses
We have filed and intend to file United States patent and/or copyright
applications relating to some of our proposed products and technologies, either
with our collaborators, strategic partners or on our own. There can be no
assurance, however, that any of the patents obtained will be adequate to protect
our technologies or that we will have sufficient resources to enforce our
patents.
Because we may license our technology and products in foreign markets,
we may also seek foreign patent protection. With respect to foreign patents, the
patent laws of other countries may differ significantly from those of the United
States as to the patentability of our products or technology. In addition, it is
possible that competitors in both the United States and foreign countries, many
of which have substantially greater resources and have made substantial
investments in competing technologies, may have applied for, or may in the
future apply for and obtain, patents which will have an adverse impact on our
ability to make and sell our products. There can also be no assurance that
competitors will not infringe our patents or will not claim that we are
infringing on their patents. Defense and prosecution of patent suits, even if
successful, are both costly and time consuming. An adverse outcome in the
defense of a patent suit could subject us to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require us
to cease our operations.
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The intellectual property owned and licensed by us falls into two
general categories, analog and digital intellectual property. We have a pending
patent application which was filed in June 1999 claiming priority to three
provisional patent applications for the analog portion of our technology used in
relation to the Traverser(TM) product.
Our DSL filter technology enables increased video clarity over copper
wire, longer transmission distances and decreased signal error rate. The
intellectual property related to the DSL filters includes:
- low pass filter shelves and POTS Splitters, which combine the
Traverser(TM)DSL spectrum from the traditional voice service; and;
- ADSL filters, which are filters that conform to the worldwide DSL
standard and are utilized in the transmission of data and voice
service at up to 8 Mbps. We believe that both of these components
are key to providing a DSL signal at sufficient quality and service
distances for combined video and data delivery.
We license our digital intellectual property. We also have an
exclusive, worldwide license to manufacture and market products using the
technology developed by Georgia Tech under our contract with them. The exclusive
license with Georgia Tech is applicable for the duration of their patent
protecting the system design and other technology related to the Traverser(TM).
The licensed patented and patent-pending technology developed at
Georgia Tech covers the capabilities of the Traverser(TM).
A patent for the System and Method for the Delivery of Digital Video
and Data over a Communications Channel was issued on November 28, 2000 to the
Georgia Tech Research Corporation.
The digital intellectual property that we license provides several
unique aspects of the Traverser(TM). Among these is the backplane design, which
provides every subscriber the ability to view any channel available. All
subscribers in a given system could be watching the same channel, or could be
watching different channels with no degradation of service. The proprietary
design, which does not incorporate a Digital Subscriber Line Access Multiplexer
architecture, makes the Traverser(TM) a true broadcast system rather than a mere
video delivery system.
The patent issued on March 27, 2001 to the Georgia Tech Research
Corporation for the System and Method for Maintaining Timing Synchronization in
a Digital Video Network covers the development of the Framer and the Framer
chip. The Framer is an Integrated Circuit which gives the Traverser(TM) the
capability of allocating both the downstream and upstream bandwidth into
virtually any application required. This feature allows the Traverser(TM) to
deliver both MPEG-2 Digital Video and Internet data simultaneously and also
allows for future applications of the Traverser(TM). This technology is
exclusively licensed worldwide to mPhase Technologies, Inc.
The patent issued on November 27, 2001 to the Georgia Tech Research
Corporation for the Method and Apparatus for Combining a Plurality of 8B/10B
Encoded Data Streams addresses video data transport between digital headends and
the access network serving subscribers. A further patent is pending covering
other methods of video program transport.
We also have patents pending that protect:
- the software management and control of the individual Traverser(TM)
links, the DVDDS, and the channel changing methodology and interface
to the electronic program guide at the customer site through the
Intelligent Network Interface;
- apparatus and methods of remote control of the Intelligent Network
Interface; and,
- systems and methods to provide subscribers means to playback
previously recorded video content.
We purchase from GlobeSpan telecommunication rate adaptive DSL chipsets
used in the Traverser(TM).
We also rely on unpatented proprietary technology, and we can make no
assurance that others may not independently develop the same or similar
technology to ours or otherwise obtain access to our unpatented technology. If
we are unable to maintain the proprietary nature of the Traverser(TM)
technology, our future operations would likely be adversely affected.
30
Regulation
The Federal Communication Commission, or FCC, and various state public
utility and service commissions, regulate most of our potential domestic
customers. Changes to FCC regulatory policies may affect the accessibility of
communications services, and otherwise affect how telecommunications providers
conduct their business. These regulations may adversely affect our potential
penetration into certain markets. In addition, our business and results of
operations may also be adversely affected by the imposition of certain tariffs,
duties and other import restrictions on components which we obtain from
non-domestic component suppliers. Changes in current or future laws or
regulations, in the U.S. or elsewhere, could materially adversely affect our
business.
Competition
The telecommunications equipment market is characterized by swift
technological change. Currently, communications service providers have the
option to offer several broadband solutions in the last mile, including the
existing ISDN or T-1 technologies offered by telephone companies, fiber optic
cable or hybrid coaxial cable upgrades and wireless and satellite delivery
methods. Communications service providers may use these other technologies
instead of DSL to offer their subscribers broadband access.
There is currently a bill in Congress that, if passed, could have
positive effects on the telecommunications industry overall and mPhase in
particular. The Tauzin-Dingle bill basically reduces the regulatory pressures on
the larger incumbent telephone companies in the U.S. It is speculated that this
reduced pressure on the RBOCs could result in greater spending among these
companies and potentially more funding available for Traverser(TM)-like
products.
Based upon current telecommunications industry standards and domestic
deployment methodologies, we believe that DSL can compete favorably with these
other technologies. In particular, telephone companies and other copper-wire
based service providers, which are interested in maximizing the installed copper
wire infrastructure from the standpoint of cost effectiveness and ease of
development, will favor DSL or other copper-based broadband technologies.
Our competitors that sell DSL systems like the Traverser(TM) or other
technologies which incorporate broadband solutions over copper wire include:
Next Level Communications, 2Wire, ADC telecom, Advanced Fiber Communications,
Alcatel, Fujitsu, Lucent, Copper Mountain, Innovia, Ericson, Minerva, Turnstone,
Westell, Teradyne, TuT Systems, Motorola, Marconi Communications, NEC, Nokia,
Paradyne, Samsung, Siemens, DVTel, Inc., Pace Micro Tech. In addition, we
compete with Myrio Corporation and ImagicTV, Inc. who provide infrastructure
software products to deliver multi-channel digital television over telephone
networks by using Internet Protocol.
Relative to other platforms that converge voice, video and data -
mPhase is the only non-Internet-Protocol platform that we are aware of on the
market. However, there are other platforms that enable the same suite of
services to be delivered using IP based TV service over DSL.
Next Level Communications offers a VDSL platform enabling the delivery
of voice, video and data over copper telephone wires. However, because its
platform is based on VDSL, it requires telcos to have a fiber to the
neighborhood infrastructure. For some telcos the cost of this type of
infrastructure upgrade is prohibitive. Alcatel also offers a similar platform,
however, their platform utilizes an IP-transport.
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Employees
We presently have ten (10) full employees, two (2) of whom are also
employed by Microphase Corporation. See the description in the section entitled
"Certain Relationships and Related Transactions." Properties.
- We maintain our corporate headquarters at 587 Connecticut Avenue,
Norwalk, Connecticut 06854, under a facilities agreement with
Microphase. The agreement with Microphase provides that we lease
office space, lab facilities and administrative staff on a
month-to-month basis for $51,340 per month.
- We also maintain an office and research facility at Georgia Tech in
Atlanta, Georgia as part of our basic ordering agreement with
Georgia Tech.
LEGAL PROCEEDINGS
The Company has recently been advised that, following an investigation
by the staff of the Securities and Exchange Commission, the staff intends to
recommend that the Commission file a civil injunctive action against Packetport
and its Officers and Directors. Such recommendation relates to alleged civil
violations by Packetport and such Officers and Directors of various sections of
the Federal Securities Laws. The staff has alleged civil violations of Sections
5 and 17(a)of the Securities Act of 1933 and Sections 10(b)and 13(d)of the
Securities Exchanges Act of 1934. As noted in other public filings of mPhase,
the CEO and COO of mPhase also serve as Directors and Officers of Packetport.
Such persons have advised mPhase that they deny any violation of law on their
part and intend to vigorously contest such recommendation.
From time to time we may be involved in various legal proceedings and
other matters arising in the normal course of business.
OUR MANAGEMENT
Executive Officers and Directors
Our officers and directors, and their ages, as of May 20, 2002, are as
follows:
Name Age Position(s)
------ --- ---------------
Necdet F. Ergul 78 Chairman of the Board and Director
Ronald A. Durando 45 President, Chief Executive Officer and Director
Gustave T. Dotoli (2) 66 Chief Operating Officer and Director
Martin S. Smiley 54 Executive Vice President, Chief Financial Officer & General Counsel
David L. Klimek 48 Chief Technology Officer and Director
Anthony H. Guerino, Esq. (1)(2) 55 Director
Abraham Biderman (1)(2) 52 Director
Michael P. McInerney 46 Director
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
The following is biographical information about each of our Officers
and Directors.
NECDET F. ERGUL has served as our Chairman of the Board since October
1996 with the exception of a three-month period in 2000 when he temporarily
resigned. Mr. Ergul also currently serves as the President and Chief Executive
Officer of Microphase Corporation, a leading developer of military electronic
defense and telecommunications technology, which he founded in 1955. He is also
a Director of Janifast Ltd. In addition to his management responsibilities at
Microphase, he is active in engineering design and related research and
development. Mr. Ergul holds a Masters Degree in Electrical Engineering from the
Polytechnic Institute of Brooklyn, New York.
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RONALD A. DURANDO is a co-founder of mPhase Technologies, Inc. and has
served as our President, Chief Executive Officer and a Director since its
inception in October 1996. In addition, Mr. Durando has been the Chief Operating
Officer of Microphase Corporation since 1994. From 1986 to 1994, he was
President and Chief Executive Officer of Nutley Securities, Inc., a registered
broker-dealer. He is also Chairman of the Board of Janifast Ltd., a Hong Kong
corporation for operational and manufacturing companies in China. Mr. Durando is
also President and Chief Executive Officer and Director of PacketPort.com, Inc.
GUSTAVE T. DOTOLI has served as our Chief Operating Officer and a
Director since our inception in October 1996. In addition, Mr. Dotoli has been
the Vice President of Corporate Development of Microphase Corporation since
December of 1996. Mr. Dotoli is also a Director and Vice President Corporate
Secretary of PacketPort.com, Inc. He formerly was the President and Chief
Executive Officer of the following corporations: Imperial Electro-Plating, Inc.,
World Imports USA, Industrial Chemical Supply, Inc., SISCO Beverage, Inc. and
Met Pack, Inc. Mr. Dotoli received a B.S. in Industrial Engineering from
Fairleigh Dickinson University in 1959.
DAVID KLIMEK is a co-founder of mPhase Technologies, Inc. and has
served as our Chief Technology Officer since June 1997 and as Director of
Engineering since its inception in October 1996. Mr. Klimek joined our Board of
Directors in October 1996. >From 1990-1996, Mr. Klimek owned and operated
Mashiyach Design, Inc., an engineering consulting firm. He has more than 18
years of technical engineering and design expertise and presently holds 14
individual or co-authored U.S. patents. From 1982 to 1990, Mr. Klimek was the
R&D manager of Digital Controls, Inc. Mr. Klimek holds a B.S. in Electrical
Engineering from Milwaukee School of Engineering, Milwaukee, Wisconsin.
MICHAEL P. MCINERNEY is President of Lintel, Inc. subsidiaries; Hart
Telephone Company, a 10,000-line local exchange carrier in Northeast Georgia,
Hart Communications, a telecommunication company, Hart Cable, a cable television
company and Diversified Golf. Mr. McInerney was Vice President of Lintel, Inc.
from 1994 until he became President in 2001. From 1991 to 1994, Mr. McInerney
was Executive Director of Standard Telephone Company. In the period from
1980-1991, Mr. McInerney was a regional manager, state manager and an account
executive with AT&T. Mr. McInerney earned a Masters of Business Administration
degree at Winthrop College and a B.S. degree at the University of Vermont.
ANTHONY H. GUERINO has been a member of the Board since February 23,
2000. Since December 1997, Mr. Guerino has been an attorney in private practice
in New Jersey. Prior thereto, Mr. Guerino served as a judge of the Newark
Municipal Courts for over twenty (20) years, periodically sitting in the Essex
County Central Judicial Processing Court at the Essex County Courthouse. Mr.
Guerino has been a chairperson for and member of several judicial committees and
associations in New Jersey, and has been an instructor for the Seton Hall School
of Law's Trial Moot Court Program.
ABRAHAM BIDERMAN has been a member of our board since August 3, 2000.
Mr. Biderman is Executive Vice President of Lipper & Company; Executive Vice
President, Secretary and Treasurer of The Lipper Funds; and Co-Manager of Lipper
Convertibles, L.P. Prior to joining Lipper & Company in 1990, Mr. Biderman was
Commissioner of the New York City Department of Housing, Preservation and
Development from 1988 to 1989 and Commissioner of the New York City Department
of Finance from 1986 to 1987. He was Chairman of the New York City Retirement
System from 1986 to 1989. Mr. Biderman was Special Advisor to former Mayor
Edward I. Koch from 1985 to 1986 and assistant to former Deputy Mayor Kenneth
Lipper from 1983 to 1985. Mr. Biderman is a Director of the Municipal Assistance
Corporation for the City of New York. Mr. Biderman graduated from Brooklyn
College and is a certified public accountant.
MARTIN SMILEY joined us as Executive Vice President, Chief Financial
Officer and General Counsel on August 20, 2000. With over twenty years
experience as a corporate finance and securities attorney and as an investment
banker, Mr. Smiley serves as mPhase's strategic financial leader. Prior to
joining the company, Mr. Smiley served as a Principal at Morrison & Kibbey,
Ltd., a mergers and acquisitions and investment banking firm from 1998 to 2000,
and as a Managing Director for CIBC Oppenheimer Securities from 1994 to 1998. He
served as a Vice President of Investment Banking at Chase Manhattan Bank from
1989 to 1994, and as a Vice President and Associate General Counsel for Chrysler
Capital Corporation from 1984 to 1989. Mr. Smiley graduated with a B.A. in
Mathematics from the University of Pennsylvania and earned his law degree from
the University of Virginia School of Law.
33
Board Committees
Our Board of Directors has an audit committee and a compensation
committee. The audit committee approves of our independent accountants and
determines the appropriateness of their fees, reviews the scope and results of
the audit plans of the independent accountants, oversees the scope and adequacy
of our internal accounting control and record-keeping systems and confers
independently with the independent accountants. The audit committee consists of
Messrs. Biderman, and Guerino. Consistent with NASD regulations, an audit
charter was developed and adopted by the Board and the audit committee on August
2, 2000. Certain provisions of the Audit Committee Charter have been temporarily
suspended by the Board of Directors due to resignations of three (3) outside
directors.
The compensation committee makes recommendations to our Board of
Directors regarding our stock incentive plans and all matters of compensation.
The compensation committee consists of three (3) Directors, Messrs. Biderman,
Dotoli and Guerino.
Director Compensation
For their attendance of Board and Committee meetings, we compensate the
Directors in cash as well as in the form of stock options granted under our
Stock Incentive Plan, which grants are included in the table "Security Ownership
of Certain Beneficial Owners and Management" and the notes thereto.
Executive Compensation
The following table sets forth, for the fiscal year ended June 30, 2001 and the
two previous fiscal years, the compensation paid by us to, as well as any other
compensation paid to or earned by,
- our Chief Executive Officer; and
- our four most highly compensated executive officers, other than the
Chief Executive Officer, whose compensation during the fiscal year
ended June 30, 2001 was greater than $100,000 for services rendered
to us in all capacities during such year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------- ----------------------
Securities
Underlying
Name And Restricted Stock Options/Sars
Principal Position Year Salary Bonus Award(S) (Shares) (Shares)
------------------ ---- ------ ----- ----------------- ----------
Ronald A. Durando(1)(2) 2001 395,004 -- -- 1,225,000
Chief Executive Officer 2000 312,920 2,398,032 157,500 250,000
and President 1999 250,000 275,000 400,000 562,500
Gustave T. Dotoli (1) 2001 342,917 -- -- 860,000
Chief Operating Officer 2000 231,670 362,000 232,500 175,000
1999 175,000 100,000 175,000 300,000
2001 175,577 -- -- 110,000
David L. Klimek(1) 2000 106,500 30,000 -- 50,000
Chief Technology Officer 1999 77,138 35,000 275,000 150,000
Martin S. Smiley (3) 2001 l63,435 -- -- 670,000
Executive VP, Chief Financial Officer
& General Counsel
34
(1) Includes management fees of $30,000 and a Director's stipend of
$15,000.
(2) Does not include a $15,000 stipend as a director in year 2000.
Bonus compensation includes contractual stock bonus award of
226,715 shares in year 2000 having a value of $1,714,532 as of
June 30, 2000. For a description of the bonus formula, see the
description of Mr. Durando's Employment Agreement below.
(3) Martin Smiley joined the Company on August 20, 2000.
No individual named above received prerequisites or non-cash
compensation during the years indicated which exceeded the lesser of $50,000 or
an amount equal to 10% of such person's salary. No other executive officer
received compensation and bonuses that exceeded $100,000 during any year.
STOCK OPTIONS
The following table sets forth certain information concerning
individual issues of options made during the year ended June 30, 2001 to our
executive officers named in the summary compensation table above. For the fiscal
year ended June 30, 2001, we granted options to acquire up to an aggregate of
2,710,000 shares to employees, directors and consultants.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
-------------------------------------------------------------------------------------------------------------------------------
% of Total
Options Weighted Weighted
Granted to Average Market Exercise Price Potential Realizable Value at Assumed
Options Employees or Base on Annual Rates of Stock Price Appreciation
Granted in Fiscal Price Grant Expiration for 5 year Option Term
Name (#) 2001 ($/Share) Date Date 0% 5% 10%
-------------------------------------------------------------------------------------------------------------------------------
Ronald A. Durando 1,225,000 21.8 $1.00 $1.04 2006 $52,350 $406,042 $834,555
Gustave T. Dotoli 860,000 15.3 1.01 1.05 2006 $34,500 $284,413 $586,697
Martin Smiley 670,000 11.9 2.56 2.59 2006 $17,100 $424,946 $918,259
David Klimek 110,000 2.7 1.57 1.68 2006 $11,700 $ 62,650 $124,276
--------------------------------------------------------------------------------------------------------------------------------
The following table sets forth information with respect to the number
and value of outstanding options held by our executive officers named in the
Summary Compensation Table above at June 30, 2001. During the fiscal year ended
June 30, 2001, 320,000 options were exercised. The value of unexercised
in-the-money options is based upon the difference between closing price of our
shares on June 30, 2001 and the exercise price of the options.
FISCAL YEAR-END OPTION VALUES
------------------------------------------------------------------------------------------------------------------------
Shares Value of Unexercised
Acquired Number of at Fiscal In-the-Money Options At Fiscal
On Value Year-End (#) Year-End ($)
Exercise Realized -------------- ----------------- ---------------- -----------------
Name (#) $ Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------
Ronald A. Durando 0 0 2,975,000 3,000,000 $604,900 $1,800,000
Gustave T. Dotoli 140,000 857,500 1,810,000 1,500,000 508,500 900,000
David Klimek 0 0 497,500 150,000 508,500 90,000
Martin Smiley 0 0 599,687 70,313 0 0
35
Employment Agreements
We have an employment agreement with Ronald A. Durando, our President,
Chief Executive Officer and Director. The agreement, executed June 24, 1999, is
for a term of thirty-six months expiring on June 30, 2002. Under the terms of
the agreement, Mr. Durando initially received a base annual salary of $275,000,
a bonus and a salary increase based upon performance review every six months,
beginning six months from the effective date of the agreement, as well as health
benefits, vacation and such other fringe benefits as would be paid to our
similarly situated senior management. In consideration of devoting such time as
would be required of our Chief Executive Officer to our business and
specifically to his duties under the agreement to provide investor relations,
Mr. Durando is entitled to a bonus at the end of each year equal to five percent
(5%) of the increase in the market value of the issued and outstanding shares of
our shares, of which bonus twenty-five percent (25%) shall be payable in cash
and the remaining balance in shares. Mr. Durando has voluntarily agreed to defer
his salary for the period commencing January 1, 2002 through June 30, 2002 as
part of the Company's current cost-reduction effort.
Such agreement is terminable upon Mr. Durando's death, permanent
disability, or for "just cause" (defined below) and is renewable within two
months of the expiration date of the agreement upon the mutual terms agreed to
by Mr. Durando and us. Mr. Durando shall be deemed "permanently disabled" under
the agreement if he shall fail to render and perform the executive services
required under the agreement for a continuous period of three consecutive
months. "Just cause" is defined under the agreement as the commission of acts
constituting theft, embezzlement, the receipt of funds or property under false
pretenses or similar acts of gross misconduct with respect to our property, or
the conviction of a felony involving matters not directly related to our
business if, in the Board's discretion, it adversely affects his ability to
perform his executive duties.
The agreement also contains work-for-hire, confidentiality and
non-disclosure provisions. In the event that Mr. Durando breaches such
provisions, we are is entitled to injunctive relief restraining him from any
further breach, in addition to any other remedies that we may have arising out
of such breach.
Additionally, in the event of a change in control that is not approved
by Mr. Durando as one of our Directors or shareholders, he is entitled to
exercise an option to purchase 3,000,000 shares at a price of $1.00 per share.
We also have an employment agreement with Gustave T. Dotoli, our Chief
Operating Officer and Director. The agreement, executed June 24, 1999, is for a
term of thirty-six months expiring June 30, 2002, and Mr. Dotoli initially
received a base annual salary of $200,000, a bonus and a salary increase based
upon performance review every six months, beginning six months from the
effective date of the agreement, as well as health benefits, vacation and such
other fringe benefits as would be paid to our similarly situated senior
management.
The employment agreement is terminable upon Mr. Dotoli's death,
permanent disability, or for "just cause"(defined below), and is renewable
within two months of the expiration date of the agreement upon the mutual terms
agreed to by Mr. Dotoli and us. Mr. Dotoli shall be deemed "permanently
disabled" under the agreement if he shall fail to render and perform the
executive services required under the agreement for a continuous period of three
consecutive months. "Just cause" is defined under the agreement as the
commission of acts constituting theft, embezzlement, the receipt of funds or
property under false pretenses or similar acts of gross misconduct with respect
to our property, or the conviction of a felony involving matters not directly
related to our business if, in the Board's discretion, it adversely affects his
ability to perform his executive duties. The agreement also contains
work-for-hire, confidentiality and non-disclosure provisions. Mr. Dotoli has
voluntarily agreed to defer his salary for the period commencing January 1, 2002
through June 30, 2002 as part of the Company's current cost-reduction effort.
We also have an employment agreement with Martin Smiley, our Executive
Vice President, Chief Financial Officer and General Counsel. The agreement
executed August 21, 2000, is for a term of twenty-four months expiring on August
20, 2002. Mr. Smiley initially received a base annual salary of $175,000, a
bonus and a salary increase based upon performance review every twelve months,
beginning twelve months from the effective date of the agreement, as well as
health benefits, vacation and such other fringe benefits as would be paid to our
similarly situated senior management. In September of 2001 Mr. Smiley
voluntarily reduced his annual salary to $155,000 as part of the Company's
cost-reduction effort.
36
We also have an employment agreement with David Klimek, our Chief
Technical Officer and a Director. The Agreement dated as of April 1, 2001 is for
a term of twelve months and provides that Mr. Klimek receive an annual salary of
$170,000 per annum and a bonus based upon performance as well as health
benefits, vacation and such other fringe benefits as would be paid to our
similarly situated senior management. In addition, in the event of a change of
control that is not approved by Mr. Klimek as one or our directors or
shareholders, he is entitled to exercise an option to purchase 150,000 shares at
$1.00 per share. In September of 2001, Mr. Klimek voluntarily reduced his annual
salary to $95,000 as part of our cost-reduction effort.
Both Mr. Smiley's and Mr. Klimek's agreements are terminable upon
death, significant disability, or for good cause, and are renewable within one
month of the expiration date of such agreements upon the mutual terms agreed to
by such employees and us. Such employees shall be deemed "significantly
disabled" under their respective agreements for a continuous period of six
months. "Good cause" is defined under each of the agreements as the commission
of acts constituting a felony or crime; fraud or misappropriation of funds;
personal dishonesty, incompetence or, gross negligence; willful misconduct;
repeated use of drugs, alcohol or similar substance; or breach by such employee
of his agreement. Such agreements also contain confidentiality and
non-disclosure provisions.
In January 1999, we entered into a two-year employment agreement with
Susan E. Cifelli. Under this agreement, Ms. Cifelli initially received an
initial base salary of $123,000. In addition, we granted Ms. Cifelli stock
options for 255,000 shares, at exercise prices of $1.50 to $4.00 per share. Ms.
Cifelli left the Company in November 2000.
Long-Term Stock Incentive Plan
We have a Long-Term Stock Incentive Plan, under which we have reserved
for issuance 15,000,000 shares of common stock. Our shareholders approved our
2001 Stock Incentive Plan at our annual meeting of shareholders on May 30, 2001.
The plan provides for grants of incentive stock options and nonqualified stock
options to our key employees and consultants and those key employees and
consultants of our subsidiaries.
With respect to our current plan, the compensation committee of the
Board of Directors administers and interprets our current plan. The exercise
price of common stock underlying an option may be greater, less than or equal to
fair market value. However, the exercise price of an incentive stock option must
be equal to or greater than the fair market value of a share of common stock on
the date such incentive stock option is granted. The maximum term of an option
is five years from the date of grant. In the event of a dissolution, liquidation
or change in control transaction, we may require option holders to either
exercise their options within 30 days or surrender such options (or unexercised
portion thereof).
Upon stockholder approval, the Board of Directors merged our prior
Long-Term Stock Incentive Plan into the 2001 Plan.
The purpose of the 2001 Plan is to promote our long-term growth and
profitability by providing key people with incentives to improve stockholder
value and contribute to our growth and financial success and by enabling us to
attract, retain and reward the best available people.
The maximum number of shares of common stock that we may issue with
respect to awards under the 2001 Plan is 20,000,000 shares, in addition to the
shares previously authorized for issuance under our Company plan, but which are
not issued before our current plan is merged into the 2001 Plan.
37
The maximum number of shares of common stock subject to awards of any
combination that may be granted under the 2001 Plan during any fiscal year to
any one individual is limited to 2,500,000 subject to the exceptions made by the
Board of Directors. These limits will be adjusted to reflect any stock
dividends, split-ups and reverse stock split, unless the Board determines
otherwise. If any award, or portion of an award, under the 2001 Plan expires or
terminates unexercised, becomes unexercisable or is forfeited or otherwise
terminated, surrendered or canceled as to any shares, or if any shares of common
stock are surrendered to us in connection with any award (whether or not such
surrendered shares were acquired pursuant to any award), or if any shares are
withheld by us, the shares subject to such award and the surrendered or withheld
shares will thereafter be available for further awards under the 2001 Plan.
Those shares that are surrendered to or withheld by us, or that are forfeited
after issuance, however, will not be available for incentive stock options.
The 2001 Plan is administered by our Board of Directors or by a
committee or committees as the Board of Directors may appoint from time to time.
The administrator has full power and authority to take all actions necessary to
carry out the purpose and intent of the 2001 Plan, including, but not limited
to, the authority to: (i) determine who is eligible for awards, and the time or
times at which such awards will be granted; (ii) determine the types of awards
to be granted; (iii) determine the number of shares covered by or used for
reference purposes for each award; (iv) impose such terms, limitations,
restrictions and conditions upon any such award as the administrator deems
appropriate; (v) modify, amend, extend or renew outstanding awards, or accept
the surrender of outstanding awards and substitute new awards (provided however,
that, except as noted below, any modification that would materially adversely
affect any outstanding award may not be made without the consent of the holder);
(vi) accelerate or otherwise change the time in which an award may be exercised
or becomes payable and to waive or accelerate the lapse, in whole or in part, of
any restriction or condition with respect to such award, including, but not
limited to, any restriction or condition with respect to the vesting or
exercisability of an award following termination of any grantee's employment or
consulting relationship; and (vii) establish objectives and conditions, if any,
for earning awards and determining whether awards will be paid after the end of
a performance period.
In the event of changes in our common stock by reason of any stock
dividend, split-up, recapitalization, merger, consolidation, business
combination or exchange of shares and the like, the administrator may make
adjustments to the number and kind of shares reserved for issuance or with
respect to which awards may be granted under the 2001 Plan, in the aggregate or
per individual per year, and to the number, kind and price of shares covered by
outstanding award.
Without the consent of holders of awards, the administrator in its
discretion is authorized to make adjustments in the terms and conditions of, and
the criteria included in, awards in recognition of unusual or nonrecurring
events affecting us, or our financial statements or those of any of our
affiliates, or of changes in applicable laws, regulations, or accounting
principles, whenever the administrator determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the 2001 Plan.
Participation in the 2001 Plan will be open to all of our employees,
officers, directors and other individuals providing bona fide services to us or
any of our affiliates, as the administrator may select from time to time. All
three (3) non-employee directors and approximately ten (10) employees will be
eligible to participate in the 2001 Plan.
The 2001 Plan allows for the grant of stock options, stock appreciation
rights, stock awards, phantom stock awards and performance awards. The
administrator may grant these awards separately or in tandem with other awards.
The administrator will also determine the prices, expiration dates and other
material conditions governing the exercise of the awards. We, or any of our
affiliates, may make or guarantee loans to assist grantees in exercising awards
and satisfying any withholding tax obligations arising from awards.
Because participation and the types of awards available for grant under
the 2001 Plan are subject to the discretion of the administrator, the benefits
or amounts that any participant or groups of participants may receive if the
2001 Plan is approved are not currently determinable. For this purpose, the
benefits or amounts that participants may receive if the 2001 Plan is approved
do not include awards granted under the Prior Plan that are amended and restated
to become awards covering the same number of shares under the terms of the 2001
Plan. These amended and restated awards are not contingent on stockholder
approval since the Prior Plan was previously approved by the stockholders.
38
Our Board of Directors may terminate, amend or modify all or any
provision of the 2001 Plan at any time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during fiscal 2001 were
Messrs. Dotoli, Vickers and Guerino. Mr. Dotoli is our Chief Operating Officer.
Neither Messrs. Vickers nor Guerino has been one of our officers or employees.
Mr. Vickers resigned as a member of the Board of Directors and the Compensation
Committee in September 2001 and has been replaced by Mr. Biderman who is neither
an employee or officer of mPhase. None of our directors or executive officers
served as a member of the compensation committee (or other board committee
performing equivalent functions or, in the absence of such committee, the entire
board of directors) of another entity during fiscal 2001 that has a director or
executive officer serving on our Board of Directors except that Mr. Dotoli is
also a member of the Board of Directors of PacketPort.com, Inc., a company in
which Mr. Durando serves as Chief Executive Officer. Mr. Ergul, Mr. Dotoli,
together with Mr. Durando, are controlling shareholders of Janifast Ltd. and are
also directors. Janifast Ltd. has produced components for the Traverser(TM), and
may produce such components for us in the future.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 14, 2002, certain
information regarding the beneficial ownership of our shares:
- by each person who is known by us to be the beneficial owner of
more than five percent (5%) of its outstanding common stock;
- each of our directors;
- by each executive officer named in the Summary Compensation Table;
and,
- by all of our directors and executive officers as a group.
Number of "Shares" of Common
Stock
Name and Address of Beneficial Owner (1) Beneficially Percentage Ownership of Common
---------------------------------------- ------------- ------------------------------
Owned Stock Outstanding (2)
----- ---------------------
Necdet F. Ergul (7) (10) 8,545,368 14.5%
Ronald A. Durando (3) (7) (8) 11,230,814 18.4%
Gustave T. Dotoli (7) (8) 3,751,366 6.4%%
J. Lee Barton (4) (7) 3,539,000 6.3%
David Klimek (7) (8) 1,262,500 2.2%
Lintel, Inc. (6) 3,095,000 5.6%
Abraham Biderman (5) (7) 200,233 --
J. Allen Layman (7) (9) 140,000 --
Anthony Guerino (7) 190,000 --
Martin Smiley 2,202,048 3.9%
All executive officers & Directors as a
group (ten people) (11) 31,222,329 58.3%
-- Less than 1%
1. Unless otherwise indicated, the address of each beneficial owner is 587
Connecticut Avenue, Norwalk, Connecticut 06854-1711.
2. Unless otherwise indicated, mPhase believes that all persons named in the
table have sole voting and investment power with respect to all shares of
the Company shares beneficially owned by them. The percentage for each
beneficial owner listed above is based on 55,576,440 shares outstanding on
February 14, 2002, and, with respect to each such person holding options
or warrants to purchase shares that are exercisable within 60 days after
February 14, 2002, the number of options and warrants are deemed to be
outstanding and beneficially owned by the person for the purpose of
computing such person's percentage ownership, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person. The number of shares of common stock beneficially owned
indicated in the table include the following number of shares issuable
upon the exercise of warrants or options:
Necdet F. Ergul 972,500
Ronald A. Durando 4,350,000
Gustave Dotoli 2,735,000
J. Lee Barton 245,000
David Klimek 870,000
Martin Smiley 1,200,000
J. Allen Layman 140,000
Craig Vickers 159,000
Abraham Biderman 195,000
Anthony Guerino 190,000
39
3. Includes 1,672,863 shares held by Durando Investment LLC, which Mr.
Durando controls and 3,600,000 shares and 1,200,000 warrants held by
Janifast.
4. Includes 100,000 shares owned by Kim Barton, his wife and 100,000 shares
owned by Betty Barton, his daughter. Mr. Barton resigned in March 2002.
5. Includes 5,233 shares of common stock, options and warrants for 195,000
shares of common stock. Does not include 1,103,225 shares held by Lipper &
Co, where Mr. Biderman is a director.
6. The address for Lintel, Inc. and J. Lee Barton, who is Chief Executive
Officer of Lintel, Inc. is 196 North Forest Avenue, P.O. Box 388,
Hartwell, GA 30643.
7. Includes options for 25,000 shares of common stock received as
compensation for participation on the Board of Directors.
8. Does not include contingent options exercisable only upon a change in
control of our Company, not voted for by such person as a stockholder or
director, Ronald Durando--3,000,000; Gustave Dotoli--1,500,000; David
Klimek--150,000.
9. Messrs. Craig Vickers resigned as a Director in September 2001. Messrs. J.
Allen Layman and J. Lee Barton also resigned as Directors in 2002. Mr.
Michael P. McInerney, President of Lintel, Inc. was appointed to the Board
at the Annual Shareholders Meeting.
10. Includes 200,000 shares owned by Berrin Snyder, his daughter and 150,000
owned by Eda Peterson, his daughter. Also includes 3,706,200 shares and
2,200,000 options owned by Microphase Corporation, a company in which Mr.
Ergul is the President and Chief Executive Officer.
11. Includes Mr. Vickers and Mr. Layman, who resigned in September 2001 and
March 2002, respectively.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
mPhase's President and Chairman of the Board of the Company are also
employees of Microphase. On May 1, 1997, the Company entered into an agreement
with Microphase, whereby it will use office space as well as the administrative
services of Microphase, including the use of accounting personnel. This
agreement was for $5,000 per month and was on a month-to-month basis. In July
1998, the office space agreement was revised to $10,000 and in January 2000 to
$11,050 per month. Additionally, in July 1998, mPhase entered into an agreement
with Microphase, whereby mPhase reimburses Microphase $40,000 per month for
technical research and development assistance. Microphase also charges fees for
specific projects on a project-by-project basis. During the years ended June 30,
1999, 2000 and 2001 and for the period from inception (October 2, 1996) to June
30, 2001, $600,000, $2,547,847, $2,128,983 and $5,363,830, and during the nine
months ended March 31, 2001 and 2002, $1,794,817 and $1,010,909 respectively,
have been charged to expense or inventory under these Agreements and is included
in operating expenses in the accompanying consolidated statements of operations.
Management believes that amounts charged to the Company by Microphase are
commensurate to amounts that would be incurred if outside third parties were
used.
Also, during the fiscal year ended June 30, 2000, $2,600,000 was
advanced to Microphase in the form of a note, which was repaid by Microphase
during the year. mPhase recorded $39,000 of interest income on this note for the
year ended June 30, 2000. The Company is obligated to pay a 3% royalty to
Microphase on revenues from its proprietary Traverser(TM) Digital Video and Data
Delivery System and DSL component products. During the year ended June 30, 2001,
and the nine month period ended March 31, 2002 mPhase recorded royalties to
Microphase totaling $297,793 and $59,613, respectively. As of June 30, 2000,
amounts due from Microphase were immaterial. As of June 30, 2001, the Company
converted $639,000 of amounts payable to Microphase into 1,278,000 shares of
mPhase common stock and had $70,799 payable to Microphase, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
At March 31, 2002 the Company had $6,410 payable to Microphase.
During the year ended June 30, 2000, mPhase advanced money to Janifast
Limited, which is a related party of which three directors of mPhase are
significant shareholders, in connection with the manufacturing of POTS Splitter
Shelves and DSL component products. As of June 30, 2000 the amount advanced to
Janifast was approximately $1,106,000, which is included in production
advances-related parties on the accompanying balance sheet. There were no such
advances as of June 30, 2001 and March 31, 2002.
40
For consulting services rendered in connection with the joint venture
(Note 8), the Company agreed to pay two officers of the Company and a related
party $412,400, which was included on the June 30, 2000 consolidated balance
sheet of the Company. This amount was paid by the Company during the year ended
June 30, 2001.
Due to related parties as of June 30, 2000 included $36,120 due to
Nutley Securities, a company owned by mPhase's president and $49,180 due to
affiliates of the Company's joint venture partner, Alphastar International, Inc.
both amounts are for various services performed.
In July 2000, mPhase added a member to the Board of Directors who is
employed by an investment-banking firm that has assisted and is expected to
continue to assist the Company in raising capital through private financing.
During the year ended June 30, 2001, the company issued 140,350 shares of common
stock for investment banking services rendered during the period and recorded an
additional $69,000 of fees which is included in accrued expenses at June 30,
2001. A member of mPhase's Board of Directors is employed by Lintel, Inc, the
parent corporation of Hart Telephone. The Company has installed its prototype
product and commenced beta testing at Hart Telephone. In addition, the Company
has entered into a supply agreement with Hart Telephone upon the completion of
beta testing and the commencement of production of the Traverser(TM). As
consideration for the execution of the agreement with Hart Telephone, in May
2000, mPhase issued Hart Telephone 125,000 options each to purchase one share of
common stock at an exercise price of $1.00 (valued at $1,010,375), which is
included in research and development expenses in the accompanying statement of
operations as of June 30, 2000.
Effective June 30, 2001 the Company converted $2,420,039 of liabilities
due to directors and related parties into 4,840,077 shares of the Company's
common stock pursuant to debt conversion agreements.
During December 2001, the Company converted $1,020,000 of liabilities
due to Microphase and Janifast into 3,400,000 shares of the Company's common
stock and a like amount of warrants to purchase one share each of the Company's
common stock at an exercise price of $.30 pursuant to debt conversion
agreements.
Effective March 31, 2002, the Company converted $420,872 of liabilities
due to Piper Rudnick LLP, outside legal counsel to mPhase into a warrant to
purchase up to a total of 1,683,490 shares of the Company's common stock which
pursuant to EITF 96-18, has an approximate value of $.30 per share and a warrant
to purchase 550,000 shares of the Company's common stock at an exercise price of
$.30 per share pursuant to the terms of payment agreement. In addition, Piper
agreed to accept a Promissory note for $420,872 of current payables at an
interest rate of 8% with payments of $5,000 per month commencing June 1, 2002
and continuing through December 1, 2003, with a final payment of principal plus
accrued interest due at maturity on December 31, 2003.
Our management is affiliated by employment at and/or ownership of a
related group of companies, including Microphase Corporation, Complete
Telecommunications, Inc. (which was dissolved subject to a settlement dated
August 16, 1999), PacketPort, Inc. and PacketPort.com and Janifast Ltd., which
may record material transactions with us. As a result of such affiliations, our
management in the future may have conflicting interests with these affiliated
companies.
Necdet F. Ergul, Ronald A. Durando and Gustave T. Dotoli, our Chairman,
Chief Executive Officer and Chief Operating Officer, respectively, are executive
officers and shareholders of Microphase and Ronald Durando and Gustave T. Dotoli
are president and vice-president of PacketPort.com., respectively.
We reimburse Microphase $51,340 per month for research and development
services and administrative expenses incurred for the use of Microphase's office
space, lab facilities and administrative staff.
Ronald A. Durando is the owner/sole shareholder of Nutley Securities,
Inc., a former registered broker-dealer, which is not a private investment
company under the Investment Advisors Act of 1940.
41
One of our former directors, J. Lee Barton, Chairman of the Board of
Lintel, Inc. Lintel is the parent corporation of Hart Telephone Company, our
beta customer located in Hartwell, Georgia, where we installed our prototype
product and commenced beta testing. In December 1998, we issued 3,115,000 shares
in a private placement to J. Lee Barton, several members of his family, Lintel,
several employees of Lintel and two employees of Microphase for a purchase price
of approximately $1.03 per share, or an aggregate purchase price of $3,197,416.
In fiscal year 1999, we awarded J. Lee Barton 75,000 shares and an option for
100,000 shares. In fiscal year 2000, we awarded J. Lee Barton a $285,000 bonus,
a stock award of 140,000 shares and options for 225,000 shares, which includes
options to Hart Telephone. In fiscal year 2001 we awarded Mr. Barton options for
120,000 shares of common stock. Michael McInerney, one of our directors, is the
president of Lintel, Inc. Mr. McInerney has been awarded 5,000 shares and
options for 53,000 shares.
Janifast Ltd., a Hong Kong corporation manufacturer, which has produced
components for our prototype Traverser(TM) DVDDS product, and may produce such
components for us in the future. Necdet F. Ergul, Ronald A. Durando and Gustave
T. Dotoli are controlling shareholders of Janifast Ltd. with an aggregate
ownership interest of greater than 75% of Janifast Ltd. Mr. Durando is Chairman
of the Board of Directors and Mr. Ergul is a Director of Janifast.
On November 26, 1999, Mr. Durando acquired, via a 100% ownership of
PacketPort, Inc., a controlling interest in Linkon Corporation, now known as
PacketPort.com, Inc. On November 26, 1999, PacketPort, Inc., a company owned
100% by Mr. Durando, acquired controlling interest in Linkon Corp., which
subsequently changed its name to PacketPort.com, Inc. In connection with this
transaction, Mr. Durando transferred 350,000 shares of our common stock to
PacketPort, Inc.
Abraham Biderman became a member of our Board in August 2000. Mr.
Biderman is the Executive Vice President of Lipper & Company, L.P., which
received a total of 265,125 shares of common stock for its services as a
placement agent for our May 2000, September 2000 and January 2001 private
placements. In July, 2001 and November, 2001 Lipper and Company received 138,000
shares and 300,000 shares in additional common stock in mPhase for services
rendered to the Company as placement agent in a Private Placement and for
general investment banking and financial advice services.
42
SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of shares of common stock by the selling stockholders as of the date
of this prospectus, and the number of shares of common stock covered by this
prospectus. Except as otherwise noted below, none of the selling stockholders
has held any position or office, or has had any other material relationship with
us or any of our affiliates within the past three years.
The number of shares of common stock that may be actually purchased by
certain selling stockholders under the warrants and the number of shares of
common stock that may be actually sold by each selling stockholder will be
determined by such selling stockholder. Because certain selling stockholder may
purchase all, some or none of the shares of common stock which can be purchased
under the warrants and each selling stockholder may sell all, some or none of
the shares of common stock which each holds, and because the offering
contemplated by this prospectus is not currently being underwritten, no estimate
can be given as to the number of shares of common stock that will be held by the
selling stockholders upon termination of the offering. The information set forth
in the following table regarding the beneficial ownership after resale of shares
is based on the basis that each selling stockholder will purchase the maximum
number of shares of common stock provided for by the warrants owned by the
selling stockholder and each selling stockholder will sell all of the shares of
common stock owned by that selling stockholder and covered by this prospectus.
NUMBER OF SHARES MAXIMUM NUMBER OF
NAME OF SELLING STOCKHOLDER BENEFICIALLY OWNED SHARES BEING OFFERED
--------------------------- ----------------------------------- --------------------------------
Ace Foundation 750,000(1) 750,000
Advisor Associates 1,000,000(2) 1,000,000
Alexander Hasenfeld, Inc. 133,334(3) 133,334
Alpha Capital Aktiengesellschaft 400,000(4) 400,000
Artman, Gay Lee 50,000(5) 50,000
Ashford, Alexander Woodson, MD 10,000(6) 10,000
Ashford, Clinton B. 30,000(7) 30,000
Assured Mortgage Lenders, Inc. 166,668(8) 166,668
Balmore S.A. 75,000(9) 75,000
Ben Joseph Partners 50,000(10) 50,000
Beth Mayer Associates 664,000(11) 664,000
Biderman, Abraham(*) 225,233(12) 10,000
Bogart, Steven & Francine (JT w/ROS) 25,000(13) 25,000
Camealjon Family LTD Partnership 140,000(14) 140,000
Chaim, Sharei 120,000(15) 120,000
Chaim, Sharei (Babad) 200,000(16) 200,000
Chaim Sholom & Sarah R. Babad 26,000(17) 26,000
Chaya Shafran & Sally Frenkel 40,000(19) 40,000
Chitrik, Joseph 20,000(20) 20,000
Congregation Khal Brezna, Inc. 84,000(21) 84,000
Congregation Sharit Hapleta 150,000(22) 150,000
Congregation Sharei Chaim 136,500(23) 136,500
Cranshire Capital, LP 162,500(24) 162,500
Crescent International Ltd. 300,000(25) 300,000
Davis, Jr., Paul L. 10,000(26) 10,000
EDJ Limited 100,000(27) 100,000
Esquire Trade & Finance 666,668(28) 666,668
Euram Cap Strat "A" Fund, Ltd. 37,500(29) 37,500
F&N Associates 190,000(30) 190,000
Friedman, Morris 300,000(31) 300,000
Gavrity, Camille 40,000(32) 40,000
Gemilas Chesed Ach Tov 300,000(33) 300,000
43
NUMBER OF SHARES MAXIMUM NUMBER OF
NAME OF SELLING STOCKHOLDER BENEFICIALLY OWNED SHARES BEING OFFERED
--------------------------- ----------------------------------- --------------------------------
Generation Capital Associates 175,000(34) 175,000
Golden, Bruce & Maria 50,000(35) 50,000
Golden, Hyman & Mildred 50,000(36) 50,000
Greenberg Family Fund, The 125,000(37) 125,000
Grenville Finance LTD. 1,000,000(38) 1,000,000
HAA, Inc. 666,668(39) 666,668
Hasenfeld Inc., Alexander Profit Sharing &
Retirement Plan 39,125(40) 39,125
Hasenfeld Stein, Inc., Pension Trust 28,000(41) 28,000
Hasenfeld Stein, Inc. 103,125(42) 103,125
Herbert Place LLC 500,000(43) 500,000
HSI Partnership 79,166(44) 79,166
Investec Ernst 150,000(45) 150,000
Inzlicht, Mike 22,000(46) 20,000
Irgun Shiurai Torah 910,000(47) 910,000
Janifast Ltd.*** 4,800,000(48) 4,800,000
Kaufman Brothers 250,000(49) 250,000
Kentucky National Insurance 112,500(50) 112,500
Keshet Fund, L.P., The 15,625(51) 15,625
Keshet, LP 21,875(52) 21,875
Klein, Mervyn 1,266,668(53) 1,266,668
Kovacs, Oliver R. 100,000(54) 100,000
Leval Trading 50,000(55) 50,000
Levitansky, Moshe & Chaya 15,000(56) 15,000
Lipper & Co. 516,775(57) 516,775
M-Com 24,500(58) 24,500
Mary Park Properties 1,334,668(59) 1,334,668
McCarthy, Timothy 400,000(60) 400,000
Microphase Corporation**** 5,878,000(61) 5,878,000
Miller, Phyllis 140,000(62) 140,000
Mitro, Loretta 108,000(63) 108,000
MJN Enterprise, Inc. 83,334(64) 83,334
Moshel, Avroham 966,668(65) 966,668
Nesher Limited 125,000(66) 125,000
Ostrander, Jan 90,002(67) 90,002
Pensack, Harvey 100,000(68) 100,000
Peterson, Louis 150,000 150,000
Piper Rudnick LLP 2,233,490(69) 2,233,490
Porter Partners, L.P. 100,000(70) 100,000
Property Tax Appeals II, LLC 83,334(71) 83,334
Pscherahofer, George 84,000(72) 84,000
Putnam, Walter F. 40,000(73) 40,000
Raab, Samuel 250,000(74) 250,000
RAM Trading Ltd. 125,000(75) 125,000
Reb Ephraim Chaim & Miriam Rachel Klein
Charitable Foundation 50,000(76) 50,000
Romano, Regina 83,334(77) 83,334
Rosenberg, David 360,000(78) 360,000
Rudder, Richard & Cynthia 83,334(79) 83,334
Rutgers Casualty Insurance Company 112,500(80) 112,500
Scari, Steven 400,000(81) 400,000
44
NUMBER OF SHARES MAXIMUM NUMBER OF
NAME OF SELLING STOCKHOLDER BENEFICIALLY OWNED SHARES BEING OFFERED
--------------------------- ----------------------------------- --------------------------------
Scheiner, Chaim & Chummie 10,000(82) 10,000
Schon, Shlomo & Bella 10,000(83) 10,000
Schottenstein, Jay L., Trustee 62,500(84) 62,500
Schuhalter, Coughlin & Suozzo 752,600(85) 441,600
Silcott, Jennifer 13,336(86) 13,336
Silcott, T. George 83,334(87) 83,334
Slomovics, Abraham 92,000(88) 92,000
Smiley, Martin(**) 2,202,048(89) 736,668
Smith, David Revocable Living Trust 93,334(90) 93,334
Smith, David Revocable Living Trust 833,334(91) 833,334
Spitzer, Michael 84,000(92) 84,000
Stefansky, Chaim & Freida Leah 10,000(93) 10,000
Stein, Nachum 153,125(94) 150,125
Stein, Nachum & Feige 60,000(95) 60,000
Sternfeld, Murray 2,340,000(96) 2,340,000
Talbiya B. Investments Ltd. 3,125(97) 3,125
Thorne, Daniel K. 250,000(98) 250,000
Vertical Ventures, Inc. 138,100(99) 138,100
Weinberger, George 325,000(100) 325,000
Weinberger, Mendy & Baila 10,000(101) 10,000
Weiss, Henry 20,000(102) 20,000
Werdiger Family Foundation, The 62,500(103) 62,500
Werdiger, Sol 160,000(104) 160,000
Wesco, Inc. 666,668(105) 666,668
Whitworth, John 83,334(106) 83,334
Willis, Hal 70,000 70,000
Wolf, Hirsch 12,500(107) 12,500
Wolkow, Allen & Sheila 40,000(108) 40,000
YMSF Family Partnership 108,000(109) 108,000
ZLP Master Fund, Ltd. 250,000(110) 250,000
Exhibit Crafts 240,000(111) 240,000
Beth Medrash Govoha 36,000 36,000
Schoemaker, Howard 100,000(112) 100,000
Whitworth, John 100,000(113) 100,000
TOTAL 40,528,932 38,352,319
========== ==========
* Mr. Biderman is a director of our Company.
** Mr. Smiley is Executive Vice President, Chief Financial Officer and
General Counsel of our Company.
*** Mr. Durando, CEO of the Company, and Mr. Dotoli, COO of the Company,
are controlling shareholders of Janifast Ltd. with aggregate ownership
interest of greater than 75% of Janifast Ltd. Mr Ergul, Chairman of the
Board of the Company, is a director of Janifast Ltd.
**** Mr. Ergul, Chairman of the Board of the Company, is a majority
shareholder of Microphase Corporation.
(1)Includes warrants to purchase up to 500,000 shares of common stock.
(2)Includes warrants to purchase up to 1,000,000 shares of common stock.
(3)Includes warrants to purchase up to 66,667 shares of common stock.
(4)Includes warrants to purchase up to 400,000 shares of common stock.
(5)Includes warrants to purchase up to 25,000 shares of common stock.
(6)Includes warrants to purchase up to 5,000 shares of common stock.
(7)Includes warrants to purchase up to 15,000 shares of common stock.
(8)Includes warrants to purchase up to 83,334 shares of common stock.
(9)Includes warrants to purchase up to 75,000 shares of common stock.
(10)Includes warrants to purchase up to 50,000 shares of common stock.
(11)Includes warrants to purchase up to 482,000 shares of common stock.
(12)Includes options and warrants to purchase up to 220,000 shares of
common stock.
(13)Includes warrants to purchase up to 25,000 shares of common stock.
(14)Includes warrants to purchase up to 70,000 shares of common stock.
(15)Includes warrants to purchase up to 60,000 shares of common stock.
(16)Includes warrants to purchase up to 100,000 shares of common stock.
(17)Includes warrants to purchase up to 13,000 shares of common stock.
45
(18)Intentionally left Blank.
(19)Includes warrants to purchase up to 20,000 shares of common stock.
(20)Includes warrants to purchase up to 10,000 shares of common stock.
(21)Includes warrants to purchase up to 42,000 shares of common stock.
(22)Includes warrants to purchase up to 75,000 shares of common stock.
(23)Includes warrants to purchase up to 99,500 shares of common stock.
(24)Includes warrants to purchase up to 162,500 shares of common stock.
(25)Includes warrants to purchase up to 300,000 shares of common stock.
(26)Includes warrants to purchase up to 5,000 shares of common stock.
(27)Includes warrants to purchase up to 100,000 shares of common stock.
(28)Includes warrants to purchase up to 333,334 shares of common stock.
(29)Includes warrants to purchase up to 37,500 shares of common stock.
(30)Includes warrants to purchase up to 95,000 shares of common stock.
(31)Includes warrants to purchase up to 300,000 shares of common stock.
(32)Includes warrants to purchase up to 20,000 shares of common stock.
(33)Includes warrants to purchase up to 150,000 shares of common stock.
(34)Includes warrants to purchase up to 175,000 shares of common stock.
(35)Includes warrants to purchase up to 50,000 shares of common stock.
(36)Includes warrants to purchase up to 50,000 shares of common stock.
(37)Includes warrants to purchase up to 125,000 shares of common stock.
(38)Includes warrants to purchase up to 500,000 shares of common stock.
(39)Includes warrants to purchase up to 333,334 shares of common stock.
(40)Includes warrants to purchase up to 39,125 shares of common stock.
(41)Includes warrants to purchase up to 14,000 shares of common stock.
(42)Includes warrants to purchase up to 52,125 shares of common stock.
(43)Includes warrants to purchase up to 250,000 shares of common stock.
(44)Includes warrants to purchase up to 45,833 shares of common stock.
(45)Includes warrants to purchase up to 150,000 shares of common stock.
(46)Includes warrants to purchase up to 10,000 shares of common stock.
(47)Includes warrants to purchase up to 410,000 shares of common stock.
(48)Includes warrants to purchase up to 1,200,000 shares of common stock.
(49)Includes warrants to purchase up to 250,000 shares of common stock.
(50)Includes warrants to purchase up to 62,500 shares of common stock.
(51)Includes warrants to purchase up to 15,625 shares of common stock.
(52)Includes warrants to purchase up to 21,875 shares of common stock.
(53)Includes warrants to purchase up to 433,334 shares of common stock.
(54)Includes warrants to purchase up to 50,000 shares of common stock.
(55)Includes warrants to purchase up to 50,000 shares of common stock.
(56)Includes warrants to purchase up to 7,500 shares of common stock.
(57)Includes warrants to purchase up to 20,000 shares of common stock.
(58)Includes warrants to purchase up to 24,500 shares of common stock.
(59)Includes warrants to purchase up to 667,334 shares of common stock.
(60)Includes warrants to purchase up to 200,000 shares of common stock.
(61)Includes warrants to purchase up to 2,200,000 shares of common stock.
(62)Includes warrants to purchase up to 70,000 shares of common stock.
(63)Includes warrants to purchase up to 54,000 shares of common stock.
(64)Includes warrants to purchase up to 41,667 shares of common stock.
(65)Includes warrants to purchase up to 133,334 shares of common stock.
(66)Includes warrants to purchase up to 125,000 shares of common stock.
(67)Includes warrants to purchase up to 45,001 shares of common stock.
(68)Includes warrants to purchase up to 50,000 shares of common stock.
(69)Includes warrants to purchase up to 2,233,490 shares of common stock
(Piper Rudnick LLP serves as our outside securities counsel).
(70)Includes warrants to purchase up to 100,000 shares of common stock.
(71)Includes warrants to purchase up to 41,667 shares of common stock.
(72)Includes warrants to purchase up to 42,000 shares of common stock.
(73)Includes warrants to purchase up to 20,000 shares of common stock.
(74)Includes warrants to purchase up to 125,000 shares of common stock.
(75)Includes warrants to purchase up to 125,000 shares of common stock.
(76)Includes warrants to purchase up to 25,000 shares of common stock.
(77)Includes warrants to purchase up to 41,667 shares of common stock.
(78)Includes warrants to purchase up to 180,000 shares of common stock.
(79)Includes warrants to purchase up to 41,667 shares of common stock.
(80)Includes warrants to purchase up to 62,500 shares of common stock.
(81)Includes warrants to purchase up to 200,000 shares of common stock.
(82)Includes warrants to purchase up to 5,000 shares of common stock.
(83)Includes warrants to purchase up to 5,000 shares of common stock.
(84)Includes warrants to purchase up to 62,500 shares of common stock.
(85)Includes warrants to purchase up to 220,800 shares of common stock
(Schuhalter, Coughlin & Suozzo, LLC served as our outside auditor until
January 1999 and currently provides us non-audit consulting services).
(86)Includes warrants to purchase up to 6,668 shares of common stock.
46
(87)Includes warrants to purchase up to 41,667 shares of common stock.
(88)Includes warrants to purchase up to 46,000 shares of common stock.
(89)Includes warrants to purchase up to 1,200,000 shares of common stock.
(90)Includes warrants to purchase up to 46,667 shares of common stock.
(91)Includes warrants to purchase up to 416,667 shares of common stock.
(92)Includes warrants to purchase up to 42,000 shares of common stock.
(93)Includes warrants to purchase up to 5,000 shares of common stock.
(94)Includes warrants to purchase up to 78,125 shares of common stock.
(95)Includes warrants to purchase up to 30,000 shares of common stock.
(96)Includes warrants to purchase up to 1,227,500 shares of common stock.
(97)Includes warrants to purchase up to 3,125 shares of common stock.
(98)Includes warrants to purchase up to 250,000 shares of common stock.
(99)Includes warrants to purchase up to 138,100 shares of common stock.
(100)Includes warrants to purchase up to 225,000 shares of common stock.
(101)Includes warrants to purchase up to 5,000 shares of common stock.
(102)Includes warrants to purchase up to 10,000 shares of common stock.
(103)Includes warrants to purchase up to 62,500 shares of common stock.
(104)Includes warrants to purchase up to 80,000 shares of common stock.
(105)Includes warrants to purchase up to 333,334 shares of common stock.
(106)Includes warrants to purchase up to 41,667 shares of common stock.
(107)Includes warrants to purchase up to 12,500 shares of common stock.
(108)Includes warrants to purchase up to 20,000 shares of common stock.
(109)Includes warrants to purchase up to 54,000 shares of common stock.
(110)Includes warrants to purchase up to 125,000 shares of common stock.
(111)Includes warrants to purchase up to 120,000 shares of common stock.
(112)Includes warrants to purchase up to 50,000 shares of common stock.
(113)Includes warrants to purchase up to 50,000 shares of common stock.
PLAN OF DISTRIBUTION
We are registering for resale by the selling stockholders and certain
transferees a total of shares of common stock, of which shares are issued and
outstanding and up to shares are issuable upon exercise of warrants. We will not
receive any of the proceeds from the sale by the selling stockholders of the
shares of common stock, although we may receive up to approximately $19,247,935
upon exercise of all of the warrants by the selling stockholders. We will bear
all fees and expenses incident to our obligation to register the shares of
common stock. If the shares of common stock are sold through broker-dealers or
agents, the selling stockholder will be responsible for any compensation to such
broker-dealers or agents.
The selling stockholders may pledge or grant a security interest in
some or all of the shares of common stock owned by them and, if they default in
the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time pursuant to this
prospectus. The selling stockholders also may transfer and donate the shares of
common stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling beneficial owners
for purposes of this prospectus.
The selling stockholders will sell their shares of common stock subject
to the following:
(i) all or a portion of the shares of common stock beneficially
owned by the selling stockholders or their respective
pledgees, donees, transferees or successors in interest, may
be sold on the OTC Bulletin Board Market, any national
securities exchange or quotation service on which the shares
of our common stock may be listed or quoted at the time of
sale, in the over-the-counter market, in privately negotiated
transactions, through the writing of options, whether such
options are listed on an options exchange or otherwise, short
sales or in a combination of such transactions;
(ii) each sale may be made at market prices prevailing at the time
of such sale, at negotiated prices, at fixed prices, or at
varying prices determined at the time of sale;
47
(iii) some or all of the shares of common stock may be sold through
one or more broker-dealers or agents and may involve crosses,
block transactions, or hedging transactions. The selling
stockholders may enter into hedging transactions with
broker-dealers or agents, which may in turn engage in short
sales of the common stock in the course of hedging in
positions they assume. The selling stockholders may also sell
shares of common stock short and deliver shares of common
stock to close out short positions, or loan or pledge shares
of common stock to broker-dealers or agent that in turn may
sell such shares; and
(iv) in connection with such sales through one or more
broker-dealers or agents, such broker-dealers or agents may
receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and may receive
commissions from the purchasers of the shares of common stock
for whom they act as broker-dealer or agent or to whom they
sell as principal (which discounts, concessions or commissions
as to particular broker-dealers or agents may be in excess of
those customary in the types of transactions involved). Any
broker-dealer or agent participating in any such sale may be
deemed to be an "underwriter" within the meaning of the
Securities Act and will be required to deliver a copy of this
prospectus to any person who purchases any share of common
stock from or through such broker-dealer or agent. We have
been advised that, as of the date hereof, none of the selling
stockholders have made any arrangements with any broker-dealer
or agent for the sale of their shares of common stock.
The selling stockholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any profits realized by the
selling stockholders and any commissions paid, or any discounts or concessions
allowed to any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. In addition, any shares of common stock
covered by this prospectus which qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this prospectus.
If required at the time a particular offering of the shares of common
stock is made, a prospectus supplement or, if appropriate, a post-effective
amendment to the shelf registration statement of which this prospectus is a
part, will be distributed which will set forth the aggregate amount of shares of
common stock being offered and the terms of the offering, including the name or
names of any broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the selling stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in some states the shares of common stock may not be sold
unless such shares have been registered or qualified for sale in such state or
an exemption from registration or qualification is available and is complied
with. There can be no assurance that any selling stockholder will sell any or
all of the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.
The selling stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M of the Exchange Act, which may limit the timing of purchases and sales of any
of the shares of common stock by the selling stockholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making activities with
respect to the shares of common stock.
48
We will bear all expenses of the registration of the shares of common
stock pursuant to the registration rights agreement, including, without
limitation, Securities and Exchange Commission filing fees and expenses of
compliance with state securities or "blue sky" laws. The selling stockholders
will pay all underwriting discounts and selling commissions and expenses,
brokerage fees and transfer taxes, as well as the fees and disbursements of
counsel to and experts for the selling stockholders, if any. We will indemnify
the selling stockholders against liabilities, including some liabilities under
the Securities Act, in accordance with the registration rights agreement or the
selling stockholders will be entitled to contribution. We will be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act that may arise from any written information furnished to us
by the selling stockholders for use in this prospectus, in accordance with the
related registration rights agreement or will be entitled to contribution. Once
sold under this shelf registration statement, of which this prospectus forms a
part, the shares of common stock will be freely tradable in the hands of persons
other than our affiliates.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 150,000,000 shares of common
stock, without par value. As of June 25, 2002, approximately 57,949,508 shares
of our common stock are issued and outstanding and held by approximately 15,000
stockholders of record. Of the shares of our issued and outstanding common
stock, shares are covered by this prospectus. In addition shares or our common
stock authorized but unissued as of the date of this prospectus will be issued
on exercise of warrants held by certain selling stockholders.
The following description of our capital stock is a summary of the
material terms of such stock. It does not purport to be complete and is subject
in all respects to the provisions of our Certificate of Amendment of Certificate
of Incorporation and our Bylaws, copies of which have been filed as exhibits to
the registration statement of which this prospectus is a part and to applicable
New Jersey law.
Common Stock
Each holder of our common stock is entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Cumulative
voting for the election of Directors is not provided for in our Certificate of
Incorporation, which means that the holders of a majority of the shares of
common stock voted elects the Directors then standing for election. The holders
of outstanding shares of common stock are entitled to receive dividends out of
assets legally available for dividends, at such appropriate times and in such
amounts as our Board of Directors decides. The common stock is not entitled to
preemptive rights or other subscription rights and is not subject to conversion
or redemption. Upon liquidation, dissolution or winding up of our affairs, the
holders of common stock will be entitled to share ratably in all assets
remaining after the payment of liabilities. Shares of common stock shall be
transferred only on our books upon surrender to us or a duly appointed transfer
agent of the certificate or certificates properly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer.
Upon approval by our stockholders of a proposed amendment to our
Certificate of Incorporation, our Board of Directors, without further action by
the holders of our common stock, is authorized to classify any shares of its
authorized by unissued common stock as preferred stock in one or more series,
from time to time. With respect to each series, our Board of Directors
determines the number of shares constituting such series, the dividend rate on
the shares of each series, whether such dividends shall be cumulative and the
relation of such dividends to any dividends payable on any other class of stock,
whether the shares of each series shall be redeemable and the terms thereof,
whether the shares shall be convertible into common stock and the terms thereof,
the amount per share payable on each series or other rights of holders of such
shares on our liquidation or dissolution, the voting rights, if any, of shares
of each series and any other rights and privileges not in conflict with our
Bylaws and any qualifications, limitations or restrictions thereof. Our Board of
Directors has no present intention to issue any series of preferred stock. The
availability of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of discouraging takeover proposals, and the issuance of preferred
stock could have the effect of delaying or preventing a change in control not
approved by our Board of Directors.
49
Common Stock Warrants
This prospectus also covers 20,036,858 shares of common stock
purchasable pursuant to outstanding warrants. The exercise price of these
warrants is $.30 per share. These warrants have expiration terms ranging from
2005 to 2007.
Filling Vacancies on the Board
The Certificate of Incorporation provides that any vacancy on the Board
that results from an increase in the number of Directors during the interim
between annual meetings or special meetings of shareholders may be filled by the
Board. These provisions could temporarily prevent any shareholder from obtaining
majority representation on the Board by enlarging the Board and filling the new
directorships with its own nominees.
New Jersey Shareholders Protection Act
There are provisions of New Jersey law, and our Certificate of
Incorporation and Bylaws, that may have an anti-takeover effect. These
provisions are designed to protect shareholders against coercive, unfair or
inadequate tender offers and other abusive tactics and to encourage any person
contemplating a business combination with us to negotiate with our Board of
Directors for the fair and equitable treatment of all shareholders.
New Jersey has adopted a type of anti-takeover statute known as the New
Jersey Shareholders Protection Act. Subject to numerous qualifications and
exceptions, the statue prohibits an interested shareholder of a corporation from
effecting a business combination with the corporation for a period of five years
unless the corporation's board approved the combination prior to the shareholder
becoming an interested shareholder. In addition, but not in limitation of the
five-year restriction, if applicable, corporations covered by the New Jersey
statute may not engage at any time in a business combination with any interested
shareholder of that corporation unless the combination is approved by the board
prior to the interested shareholder's stock acquisition date, the combination
receives the approval of two-thirds of the voting stock of the corporation not
beneficially owned by the interested shareholder, or the combination meets
minimum financial terms specified by the statute. An "interested shareholder" is
defined to include any beneficial owner of 10% or more of the voting power of
the outstanding voting stock of the corporation and any affiliate or associate
of the corporation who within the prior five year period has at any time owned
10% or more of the voting power. The term "business combination" is defined
broadly to include, among other things:
- the merger or consolidation of the corporation with the interested
shareholder or any corporation that after the merger or
consolidation would be an affiliate or associate of the interested
shareholder,
- the sale, lease, exchange, mortgage, pledge, transfer or other
disposition to an interested shareholder or any affiliate or
associate of the interested shareholder of 10% or more of the
corporation's assets, or
- the issuance or transfer to an interested shareholder or any
affiliate or associate of the interested shareholder of 5% or more
of the aggregate market value of the stock of the corporation.
The effect of the statute is to protect non-tendering, post-acquisition
minority shareholders from mergers in which they will be "squeezed out" after
the merger, by prohibiting transactions in which an acquiror could favor itself
at the expense of minority shareholders. The New Jersey statute generally
applies to corporations that are organized under New Jersey law, have either
their principal executive offices or significant business operations located in
New Jersey, and have a class of stock registered or traded on a national
securities exchange or registered with the Securities and Exchange Commission
pursuant to Section 12(g) of the Securities Exchange Act of 1934.
50
LEGAL MATTERS
The validity of the common stock we are offering pursuant to this
prospectus will be passed upon by the law firm of Piper Rudnick LLP, New York,
New York, outside counsel to the Company. Piper Rudnick LLP owns warrants to
purchase an aggregate of 2,233,490 shares of common stock and all such shares
are being registered as part of this prospectus.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement, to the extent and for the periods
indicated in their reports, have been reviewed by Rosenberg Rich Baker Berman &
Company and audited by Arthur Andersen, LLP and Schuhalter, Coughlin & Suozzo,
LLC, independent public accountants, and are included in reliance upon the
authority of said firms as experts in giving said reports. Prior to the date of
this prospectus, Arthur Andersen was indicted in connection with its rendering
of services to another company. Therefore, Arthur Andersen withdrew from
practice before the SEC effective prior to the date hereof and many of the
accountants at Arthur Andersen have left their current jobs or have been
searching for a new place of employment. Based on these factors, after
reasonable efforts, including numerous phone calls, we were unable to contact
our former audit partner at Arthur Andersen and therefore were unable to obtain
Arthur Andersen's consent to the inclusion of their report dated October 12,
2001. Accordingly, we have dispensed with the requirement to file their consent
in reliance upon Rule 437a of the securities act. Because Arthur Andersen has
not consented to the inclusion of their report in this prospectus, you will not
be able to recover against Arthur Andersen under Section 11 of the securities
act for any untrue statements of a material fact contained in the financial
statements audited by Arthur Andersen or any omissions to state a material fact
required to be stated therein. As of June 30, 2002, Schuhalter, Coughlin &
Suozzo, LLC, owns 221,800 shares of common stock, options to purchase 310,000
shares of common stock and warrants to purchase 220,800 additional shares of
common stock, of which 441,600 of such shares are being registered pursuant to
this prospectus. All of such securities owned by Schuhalter, Coughlin & Suozzo,
LLC, other than 1,000 shares of common stock which it bought on the open market
in April 2001, were issued to Schuhalter, Coughlin & Suozzo, LLC in
consideration for non-audit consulting services and/or extinguishment of
payables related to non-audit consulting services and were issued after
Schuhalter, Coughlin & Suozzo, LLC was no longer our independent public
accountants.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, we file reports, proxy statements and other information with the
Securities and Exchange Commission. Our reports, proxy statements and other
information filed with the SEC may be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of such material also may be obtained at
prescribed rates from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. The SEC maintains a web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
You may request a copy of these filings, at no cost by writing or
telephoning us at the following address:
mPhase Technologies, Inc.
587 Connecticut Avenue
Norwalk, Connecticut 06854-0566
Attention: General Counsel
(203) 831-2242
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. The selling security
holders will not make an offer of the shares of our common stock in any state
where the offer is not permitted. You should not assume that the information in
this prospectus or any prospectus supplement is accurate as of any date other
than the date on the front of those documents.
51
mPHASE TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Arthur Andersen LLP F-1
Report of Schuhalter, Coughlin & Suozzo, LLC F-2
Consolidated Balance Sheets as of June 30, 2000, June 30, 2001
and March 31, 2002 (unaudited) F-3
Consolidated Statements of Operations for the years ended June 30, 1999, 2000
and 2001, and for the period from inception
(October 2, 1996) through June 30, 2001 F-4
Consolidated Statements of Operations for the nine months ended March 31, 2001
and 2002 and for the period from inception (October 2, 1996) through March 31,
2002 (unaudited) F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
period from inception (October 2, 1996) through June 30, 1997 and for each of
the three years in the period ended June 30, 2001 and the nine months ended
March 31, 2002 (unaudited) F-6-9
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 2000
and 2001, and for the period from inception
(October 2, 1996) through June 30, 2001 F-10
Consolidated Statements of Cash Flows for the nine months ended March 31, 2001
and 2002 (unaudited) and for the period from inception
(October 2, 1996) through March 31, 2002 F-11
Notes to Consolidated Financial Statements F-12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of mPhase Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of mPhase
Technologies, Inc. (a New Jersey corporation in the development stage) and
subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended June 30, 2001 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the period from inception (October 2, 1996) to June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of mPhase Technologies,
Inc. for the period from inception to June 30, 1998. Such statements are
included in the cumulative from inception to June 30, 2001 totals of the
statements of operations, changes in stockholders' equity and cash flows and
reflect total net loss of 1 percent of the related cumulative totals. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts for the period from inception
to June 30, 1998, included in the cumulative totals, is based solely upon the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of mPhase Technologies, Inc. and subsidiaries
as of June 30, 2001 and 2000, and the results of their operations and their cash
flows for each of the two years in the period ended June 30, 2000 and for the
period from inception to June 30, 2001, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is in a working capital deficit position that raises
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen LLP
Stamford, Connecticut
October 12, 2001
PURSUANT TO SEC RELEASE NO. 33-8070 AND RULE 437A UNDER THE SECURITIES ACT OF
1933, AS AMENDED, mPHASE TECHNOLOGIES, INC. HAS NOT RECEIVED WRITTEN CONSENT
AFTER REASONABLE EFFORT TO USE THIS REPORT. BECAUSE ARTHUR ANDERSEN LLP HAS NOT
CONSENTED TO THE INCLUSION OF THEIR REPORT IN THIS PROSPECTUS, YOU WILL NOT BE
ABLE TO RECOVER AGAINST ARTHUR ANDERSEN LLP UNDER SECTION 11 OF THE SECURITIES
ACT FOR ANY UNTRUE STATEMENTS OF A MATERIAL FACT CONTAINED IN THE FINANCIAL
STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP OR ANY OMISSIONS TO STATE A MATERIAL
FACT REQUIRED TO BE STATED THEREIN.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of mPhase Technologies, Inc.:
We have audited the statements of operations, changes in stockholders'
equity, and cash flows for the period October 2, 1996 (date of inception)
through June 30, 1998 of mPhase Technologies, Inc. (a development stage
company). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the results of its operations and its cash flows for the
period of October 2, 1996 (date of inception) through June 30, 1998 in
conformity with generally accepted accounting principles.
Schuhalter, Coughlin & Suozzo, LLC
Raritan, New Jersey
January 28, 1999
F-2
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
------------------------------ 2002
2000 2001 (Unaudited)
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,432,417 $ 31,005 $ 310,643
Accounts receivable, net
of bad debt reserve of $0, $29,218 and $0, respectively 151,186 292,434 516,984
Inventory -- 4,303,895 4,037,404
Due From Officer -- 100,000 --
Prepaid expenses and other current assets 823,726 856,979 293,220
------------ ------------ ------------
Total current assets 7,412,329 5,584,313 5,158,251
------------ ------------ ------------
Production advances-related parties 1,109,641 -- --
Property and equipment, net 1,323,756 2,198,845 2,034,266
Patents and licenses, net 1,338,520 1,026,524 746,768
Other Assets -- 187,500 123,045
------------ ------------ ------------
Total assets $ 11,184,246 $ 8,997,182 $ 8,062,330
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,520,505 $ 5,116,029 $ 3,970,984
Accrued expenses 1,837,532 1,742,138 1,445,390
Due to related parties 497,705 184,373 550,879
Due to Officers -- -- 156,252
Note Payable Current -- -- 398,116
Derferred Revenue -- -- 214,180
------------ ------------ ------------
Total current liabilities 3,885,742 7,042,540 6,735,801
------------ ------------ ------------
Commitments and Contingencies (Note 13)
Other Liabilities -- 90,000 460,396
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, stated value $.01, 150,000,000 shares
authorized; 31,404,540, 41,344,467 and 55,844,508
shares issued and outstanding, respectively 314,045 413,445 558,444
Additional paid-in capital 74,370,291 92,293,370 99,487,780
Deferred compensation (1,225,668) (713,275) (91,746)
Deficit accumulated during development stage (66,122,191) (90,120,925) (99,080,372)
Less-treasury stock, 13,750 shares, at cost (7,973) (7,973) (7,973)
------------ ------------ ------------
Total stockholders' equity 7,328,504 1,864,642 866,133
------------ ------------ ------------
Total liabilities and stockholders' equity $ 11,184,246 $ 8,997,182 $ 8,062,330
============ ============ ============
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, From Inception
------------------------------------------------ (October 2, 1996) to
1999 2000 2001 June 30, 2001
------------ ------------ ------------ ------------
TOTAL REVENUES $ -- $ 279,476 $ 10,524,134 10,803,610
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of Sales -- 131,756 5,804,673 5,936,429
Research and development
(including non-cash stock related
charges of $0, $382,461, $1,010,375
and $1,392,836, respectively) 3,562,901 10,150,386 10,779,570 26,989,191
General and administrative
(including non-cash stock related
charges of $2,364,910, $9,078,311
$16,227,552 and $17,840,773,
respectively) 4,683,109 17,516,216 16,150,711 40,638,057
Depreciation and amortization 410,303 471,101 660,372 1,581,429
Non-cash charges for stock-based
employee compensation 13,002,605 10,343,114 1,170,903 24,516,622
------------ ------------ ------------ ------------
Total costs and expenses 21,658,918 38,619,123 34,566,229 99,661,728
------------ ------------ ------------ ------------
Loss from operations (21,658,918) (38,339,647) (24,042,095) (88,858,118)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain on extinguishments -- -- -- --
Minority interest loss in consolidated
subsidiary -- 20,000 -- 20,000
Loss from unconsolidated subsidiary (1,161,622) -- (1,466,467)
Interest (expense) income, net (17,804) 158,105 43,361 183,660
------------ ------------ ------------ ------------
Total other income (expense) (1,179,426) 178,105 43,361 (1,262,807)
------------ ------------ ------------ ------------
Net loss $(22,838,344) $(38,161,542) $(23,998,734) $(90,120,925)
============ ============ ============ ============
LOSS PER COMMON SHARE,
basic and diluted $ (1.42) $ (1.41) $ (.072)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 16,038,009 26,974,997 33,436,641
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
From Inception
For The Nine Months Ended (October 2, 1996) to
March 31, March 31
2001 2002 2002
------------- ------------- -------------
TOTAL REVENUES $ 10,055,006 $ 1,948,351 $ 12,751,961
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 5,339,634 1,711,811 7,648,240
Research and development
(including non-cash stock related
charges if $0, $202,175 and
$1,780,106, respectively) 8,699,948 2,907,256 29,896,447
General and administrative
(including non-cash stock related
charges of $2,319,638, $2,441,659 and
$20,277,625), respectively 8,966,355 5,376,709 46,014,766
Depreciation and amortization 459,464 538,255 2,119,684
Non-cash charges for stock-based
employee compensation 950,070 480,727 24,997,349
------------- ------------- -------------
Total costs and expenses $ 24,415,471 $ 11,014,758 $ 110,676,486
------------- ------------- -------------
Loss from operations (14,360,465) (9,066,407) (97,924,525)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Gain on extinguishments -- 123,858 123,858
Minority interest loss in consolidated subsidiary -- -- 20,000
Loss from unconsolidated subsidiary -- -- (1,466,467)
Interest income (expense), net 40,812 (16,898) 166,762
------------- ------------- -------------
Total other income (expense) 40,812 106,960 (1,115,847)
------------- ------------- -------------
Net loss $ (14,319,653) $ (8,959,447) $ (99,080,372)
============= ============= =============
LOSS PER COMMON SHARE
basic and diluted;
Loss from continuing operations before
extraordinary gains $ (.44) $ (.19)
Extraordinary gains on debt Extinguishments $ -- $ --
------------- -------------
Net loss per common share $ (.44) $ (.19)
------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
Basic and diluted 32,684,012 47,346,671
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from Inception (October 2,
1996) to June 30, 1998 and for Each of the
Four Years in the Period Ended June 30, 2001
Common Stock
----------------------------------------------
$.01 Additional
Stated Treasury Paid-in
Shares Value Stock Capital
------------ ------------ ------------ ------------
BALANCE, OCTOBER 2, 1996 (date
of inception) 1,140,427 $ 11,404 $ -- $ 459,753
Issuance of common stock of
Tecma Laboratories, Inc.,
for 100% of the Company 6,600,000 66,000 -- (537,157)
Issuance of common stock, in
private placement, net of
offering costs of $138,931 594,270 5,943 752,531 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 31, 1997 8,334,697 83,347 -- 675,127
Issuance of common stock with
warrants in private
placement, net of offering
costs of $84,065 999,502 9,995 -- 791,874
Issuance of common stock for
services 300,000 3,000 -- 147,000
Issuance of common stock in
connection with investment in
unconsolidated subsidiary 250,000 2,500 -- 122,500
Repurchase of 13,750 shares of
common stock -- -- (7,973) --
Issuance of common stock with
warrants in private
placement, net of offering
costs of $121,138 1,095,512 10,955 -- 659,191
Issuance of common stock for
financing services 100,000 1,000 -- (1,000)
Issuance of common stock in
consideration for 100% of
the common stock of
Microphase
Telecommunications, Inc 2,500,000 25,000 -- 1,685,000
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998 13,579,711 $ 135,797 $ (7,973) $ 4,079,692
Issuance of common stock with
warrants in private
placements, net of offering
costs of $107,000 3,120,000 31,200 -- 2,981,800
Issuance of common stock for
services 1,599,332 15,993 -- 8,744,873
Issuance of common stock with
warrants in private
placement, net offering costs
of $45,353 642,000 6,420 -- 1,553,227
Issuance of common stock in
private placement, net of
offering costs of $679,311 4,426,698 44,267 -- 10,343,167
Issuance of stock options for
services -- -- -- 7,129,890
Issuance of warrants for services -- -- -- 16,302
Deferred employee stock option
compensation -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 23,367,741 $ 233,677 $ (7,973) $ 34,848,951
Total
Stockholders'
Deferred Accumulated (Deficit)
Compensation Deficit Equity
------------ ------------ ------------
BALANCE, OCTOBER 2, 1996 (date
of inception) $ -- $ (537,707) $ (66,550)
Issuance of common stock of
Tecma Laboratories, Inc.,
for 100% of the Company -- 537,707 66,550
Issuance of common stock, in
private placement, net of
offering costs of $138,931 -- -- 758,474
Net loss -- (781,246) (781,246)
------------ ------------ ------------
BALANCE, JUNE 31, 1997 -- (781,246) (22,772)
Issuance of common stock with
warrants in private
placement, net of offering
costs of $84,065 -- -- 801,869
Issuance of common stock for
services -- -- 150,000
Issuance of common stock in
connection with investment in
unconsolidated subsidiary -- -- 125,000
Repurchase of 13,750 shares of
common stock -- -- (7,973)
Issuance of common stock with
warrants in private
placement, net of offering
costs of $121,138 -- -- 670,146
Issuance of common stock for
financing services -- -- --
Issuance of common stock in
consideration for 100% of
the common stock of
Microphase
Telecommunications, Inc -- -- 1,710,000
Net loss -- (4,341,059) (4,341,059)
------------ ------------ ------------
BALANCE, JUNE 30, 1998 -- $ (5,122,305) $ (914,789)
Issuance of common stock with
warrants in private
placements, net of offering
costs of $107,000 -- -- 3,013,000
Issuance of common stock for
services -- -- 8,760,866
Issuance of common stock with
warrants in private
placement, net offering costs
of $45,353 -- -- 1,559,647
Issuance of common stock in
private placement, net of
offering costs of $679,311 -- -- 10,387,434
Issuance of stock options for
services -- -- 7,129,890
Issuance of warrants for services -- -- 16,302
Deferred employee stock option
compensation (140,000) -- (140,000)
Net loss -- (22,838,344) (22,838,344)
------------ ------------ ------------
BALANCE, JUNE 30, 1999 $ (140,000) $(27,960,649) $ 6,974,006
F-6
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY (DEFICIT)
For the Period from Inception (October 2,
1996) to June 30, 1997 and for Each of the
Three Years in the Period Ended June 30, 2001
Common Stock
------------------------------------ Total
$.01 Additional Stockholders'
Stated Treasury Paid-in Deferred Accumulated (Deficit)
Shares Value Stock Capital Compensation Deficit Equity
----------- --------- ---------- ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 23,367,741 $ 233,677 $ (7,973) $ 34,848,951 $ (140,000) $(27,960,649) $ 6,974,006
Issuance of common stock and
options in settlement 75,000 750 -- 971,711 -- -- 972,461
Issuance of common stock upon
exercise of warrants and
options 4,632,084 46,321 -- 5,406,938 -- -- 5,453,259
Issuance of common stock in
private placement, net of
cash offering costs of
$200,000 1,000,000 10,000 -- 3,790,000 -- -- 3,800,000
Issuance of common stock in
private placement, net of
cash offering costs of
$466,480 1,165,500 11,655 -- 9,654,951 -- -- 9,666,606
Issuance of common stock for
Services 1,164,215 11,642 -- 8,612,265 -- -- 8,623,907
Issuance of options for
services -- -- -- 9,448,100 -- -- 9,448,100
Deferred employee stock
Option compensation -- -- -- 1,637,375 (1,637,375) -- --
Amortization of deferred
Employee compensation -- -- -- -- 551,707 -- 551,707
Net Loss -- -- -- -- -- (38,161,542) (38,161,542)
----------- --------- ---------- ------------ ------------ ------------ ------------
Balance, June 30, 2000 31,404,540 $ 314,095 $ (7,793) $ 74,370,291 $ (1,225,668) $(66,122,191) $ (7,328,504)
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996) TO JUNE 30, 1997
AND FOR EACH OF THE FOUR YEARS IN THE PERIOD ENDED JUNE 30, 2001
Common Stock
Total
$.01 Additional Stockholders'
Stated Treasury Paid-in Deferred Accumulated (Deficit)
Shares Value Stock Capital Compensation Deficit Equity
------ ----- --------- ---------- ------------ ------------ --------
Balance June 30, 2000 31,404,540 $314,045 $(7,973) $74,370,291 $(1,225,668) $(66,122,191) $7,328,504
Issuance of common stock 320,000 3,200 -- 324,300 -- -- 327,500
upon exercise of options
Issuance of common stock 4,329,850 43,298 -- 7,766,547 -- -- 7,809,845
with warrants in private
placements, net of cash
offering costs of $512,195
Issuance of common stock 450,000 4,500 -- 1,003,125 -- -- 1,007,625
for services
Issuance of options and -- -- -- 5,849,585 -- -- 5,849,585
warrants for services
Deferred employee stock 607,885 (607,885) -- --
option compensation
Amortization or deferred 4,840,077 48,402 -- 2,371,637 1,120,278 -- 1,120,278
employee stock option
compensation
Issuance of common stock -- -- -- -- -- -- 2,420,039
in settlement or debt to
directors and related
parties
Net Loss -- -- -- -- (23,998,734) -- (23,998,734)
---------- -------- ------- ----------- ----------- ------------ -------------
BALANCE June 30, 2001 41,344,467 $ 413,445 $ (7,973) $ 92,293,370 (713,275) $(90,120,925) 1,864,642
========== ======== ======= =========== =========== ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY For the nine
months ended March 31, 2002
(unaudited)
Common Stock
Total
$.01 Additional Stockholders'
Stated Treasury Paid-in Deferred Accumulated (Deficit)
Shares Value Stock Capital Compensation Deficit Equity
------ ----- --------- ---------- ------------ ------------ ---------
------------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2001 41,344,467 $413,445 $(7,973) $92,293,370 $(713,275) $(90,120,925) $1,864,642
Sale of common stock with 6,872,643 68,727 -- 1,875,027 -- -- 1,943,754
warrants in private
placement
Issuance of common stock 871,068 8,710 -- 119,507 -- -- 457,247
for services
Issuance of options and -- -- -- 1,776,552 -- -- 1,776,552
warrants for services
Cancellation of unearned -- -- -- (140,802) 140,802 -- --
options to former
employees
Amortization or deferred -- -- -- -- 480,727 -- 480,727
employee stock option
compensation
Issuance of common stock 1,342,996 13,429 -- 1,266,229 -- -- (1,278,658)
in settlement or debt
Sale of common stock to 2,000,000 20,000 -- 980,000 -- -- 1,000,000
certain Officers and
Directors in private
placement
Issuance of Common stock 3,400,000 34,000 -- 986,000 -- -- 1,020,000
w/warrants in settlement
or debt to related parties
Issuance of common stock 13,334 133 -- 3,067 -- -- 4,000
upon exercise of options
Net Loss (8,959,447) (8,959,447)
------------- ------------- ------------- --------------- -------------- ----------- -----------
Balance March 31, 2002 $55,844,508 $558,444 $(7,973) $99,487,780 $(91,746) $(99,080,372) $866,133
=========== ======== ======== =========== ========= ============= ========
F-9
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Inception
(October 2,
1996
For the Years Ended June 30, to June 30,
------------------------------------------------------------
1999 2000 2001 2001
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,838,344) $(38,161,542) $(23,998,734) $(90,120,925)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 454,494 756,055 1,235,213 2,514,842
Book value of fixed assets disposed 7,062 5,796 61,414 74,272
Loss on unconsolidated subsidiary 1,161,622 - - 1,466,467
Provision for doubtful accounts - - 29,218 29,218
Impariment of note receivable - - 212,500 212,500
Non-cash common stock, common stock
option and warrant expense 15,768,058 20,431,800 7,398,455 43,748,313
Changes in operating assets and liabilities:
Accounts receivable - (151,186) (170,466) (321,652)
Increase in inventory - - (4,303,895) (4,303,895)
Prepaid expenses and other
current assets (82,100) (730,626) 88,280 (740,446)
Production advances-related parties - (1,109,641) 1,109,641 -
Increase in other assets - - (150,000) (150,000)
Cash overdraft (8,432) - - -
Receivables from subsidiary - - - (150,000)
Due from officer - - (100,000) (100,000)
Accounts payable (1,272,815) 1,086,736 2,802,008 4,322,513
Accrued expenses 1,400,779 (391,997) (5,394) 1,682,766
Due to related parties (511,394) 483,365 2,106,707 2,168,737
------------ ------------ ------------ ------------
Net cash used in operating
activities (5,921,070) (17,781,240) (13,685,053) (39,667,290)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in patents and licensing rights (59,907) (38,272) (148,127) (301,071)
Purchase of property and equipment (280,744) (1,348,210) (705,577) (2,432,355)
------------ ------------ ------------ ------------
Net cash used in investing
activities (340,651) (1,386,482) (853,704) (2,733,426)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan payable (210,000) - - -
Net proceeds from private placement
of common stock and exercise of
options and warrants 14,449,581 17,622,279 8,137,345 42,439,694
Repurchase of treasury stock
at cost - - - (7,973)
------------ ------------ ------------ ------------
Net cash provided by financing
activities 14,239,581 17,622,279 8,137,345 42,431,721
------------ ------------ ------------ ------------
Net increase (decrease) in cash 7,977,860 (1,545,443) (6,401,412) 31,005
CASH AND CASH EQUIVALENTS,
beginning of period - 7,977,860 6,432,417 -
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 7,977,860 $ 6,432,417 $ 31,005 $ 31,005
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-10
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(October 2,
1996 (Date of
For the Nine Months Ended Inception) to
March 31, March 31,
----------------------------------------------
2001 2002 2002
------------ ------------ ------------
Cash Flow From Operating Activities:
Net Loss $(14,319,653) $ (8,959,447) $(99,080,372)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 866,076 1,224,362 3,759,204
Book value of fixed assets disposed 31,147 -- 74,272
Provision for doubtful accounts -- -- 29,218
Gain on debt extinguishment -- (123,858) (123,858)
Loss on unconsolidated subsidiary -- -- 1,466,467
Impairment of note receivable -- -- 212,500
Non-cash charges relating to issuance of common stock,
common stock options and warrants 3,269,708 3,124,561 46,872,874
Changes in assets and liabilities:
Accounts receivable (1,423,931) (224,550) (546,202)
Inventory (2,984,124) 266,491 (4,037,404)
Prepaid expenses and other current assets (517,528) (65,276) (805,722)
Other non-current assets -- 64,455 (85,545)
Accounts payable 1,621,704 (799,341) 3,523,172
Accrued expenses (484,074) 915,540 2,598,306
Due to/from related parties 1,792,646 1,677,366 3,846,103
Receivables from subsidiary -- -- (150,000)
Due from officer -- 100,000 (0)
Deferred revenue -- 214,180 214,180
------------ ------------ ------------
Net cash used in operating activities (12,148,029) (2,565,517) (42,232,807)
------------ ------------ ------------
Cash Flow From Investing Activities:
Payments related to patents and licensing rights (120,275) (71,150) (372,221)
Purchases of fixed assets (1,028,218) (31,445) (2,463,800)
------------ ------------ ------------
Net cash used in investing activities (1,148,493) (102,595) (2,836,021)
------------ ------------ ------------
Cash Flow From Financing Activities:
Proceeds from issuance of common stock and exercises
of options and warrants 7,119,345 2,947,750 45,387,444
Repurchase of treasury stock at cost -- -- (7,973)
------------ ------------ ------------
Net cash provided by financing activities 7,119,345 2,947,750 45,379,471
------------ ------------ ------------
Net increase (decrease) in cash (6,177,177) 279,638 310,643
CASH AND CASH EQUIVALENTS, beginning of period 6,432,417 31,005 0
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 255,240 $ 310,643 $ 310,643
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-11
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
1. ORGANIZATION AND NATURE OF BUSINESS
mPhase Technologies, Inc. ("mPhase" or the "Company") was organized on
October 2, 1996. The primary business of mPhase is to design, develop,
manufacture and market high-bandwidth telecommunications products incorporating
digital subscriber line ("DSL") technology. The present activities of the
Company are focused on the deployment of its proprietary Traverser(TM) System,
which delivers MPEG2 native non-Internet Protocol based video utilizing existing
twisted pair copper wire infrastructure in "plain old telephone systems"
("POTS") and other related component products and services.
On February 17, 1997, mPhase acquired Tecma Laboratories, Inc.,
("Tecma") in a transaction accounted for as a reverse merger.
On June 25, 1998, the Company acquired Microphase Telecommunications,
Inc. ("MicroTel") a Delaware corporation, through the issuance of 2,500,000
shares of its common stock in exchange for all the issued and outstanding shares
of MicroTel (Note 4). The assets acquired in this acquisition were patents and
patent applications utilized in the Company's proprietary Traverser(TM) Digital
Video and Data Delivery System ("Traverser(TM)").
On August 21, 1998, the Company incorporated a 100% wholly-owned
subsidiary called mPhaseTelevision.Net, Inc., ("mPhaseTV.Net"), a Delaware
corporation. The Company intends for this subsidiary to be the marketing vehicle
for its video services over the Internet.
On March 2, 2000 the Company acquired a 50% interest in mPhaseTV, an
incorporated joint venture with Alphastar International, Inc. (Note 8). The
Company acquired an additional interest in the joint venture of 6.5% in April of
2000 for $1.5 million. Based on its controlling interest in mPhaseTV, the
operating results of mPhaseTV are included in the consolidated results of the
Company since March 2, 2000.
The Company is in the development stage and its present activities are
focused on the commercial deployment of its proprietary Traverser(TM) and
associated DSL component products. Since mPhase is in the development stage, the
accompanying consolidated financial statements should not be regarded as typical
for normal operating periods.
2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS
At June 30, 2001, the Company's ability to continue as a going concern
and its future success is dependent upon its ability to raise capital in the
near term to: (1) satisfy its current obligations, (2) continue its research and
development efforts, and (3) the successful wide scale development, deployment
and marketing of its products.
Through March 31, 2002, the Company had incurred development stage
losses totaling approximately $99,080,370, and at March 31, 2002 was in a
working capital deficit position of $1,577,550. At March 31, 2002, the Company
had approximately $310,640 of cash, cash equivalents and approximately $517,000
of trade receivables to fund short-term working capital requirements. 30,
The Company believes that it will be able to complete the necessary
steps in order to meet its cash flow requirements throughout fiscal 2002 and
continue its development and commercialization efforts. Management's plans in
this regard include, but are not limited to, the following:
In September 2001, certain Board members subscribed to purchase up to
2,000,000 restricted shares of the Company's common stock for $1,000,000. The
balance was collected in full by December 31, 2001.
The Company presently has ongoing discussions and negotiations with a
number of additional financing alternatives, one or more of which it believes
will be able to successfully close to provide necessary working capital, while
maintaining sensitivity to shareholder dilution issues.
In addition to the above financing activities, the following business
initiatives are also ongoing and are expected to provide additional working
capital to the Company.
The Company is in negotiation with certain strategic vendors to convert
outstanding current liabilities into equity. The Company is currently
negotiating with several organizations for the commencement of commercial sales
of its Traverser(TM) products, including deployment at existing test sites. The
Company has had discussions with certain companies for increasing sales of its
POTS Splitter and component products.
Management believes that actions presently being taken to complete the
Company's development stage through the introductory roll-out of its
Traverser(TM) Digital Video and Data Delivery System will be successful.
However, there can be no assurance that mPhase will generate sufficient revenues
to provide positive cash flows from operations or that sufficient capital will
be available, when required, to permit the Company to realize its plans. The
accompanying financial statements does not include any adjustments that might
result from the outcome of this uncertainty.
F-12
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of mPhase,
its wholly-owned and majority owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported 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
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period
consolidated financial statements to conform to the current period presentation.
CASH AND CASH EQUIVALENTS
mPhase considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of three to five years.
REVENUE RECOGNITION
All revenue included in the accompanying consolidated statements of
operations for all periods presented relates to sales of mPhase's POTS Splitter
Shelves and DSL component products.
F-13
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
As required, mPhase has adopted the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", which provides guidelines on applying generally accepted
accounting principles to revenue recognition based on the interpretations and
practices of the SEC. The Company recognizes revenue for its POTS Splitter Shelf
and other DSL component products at the time of shipment, at which time, no
other significant obligations of the Company exist, other than normal warranty
support. In addition, the Company includes costs of shipping and handling billed
to customers in revenue with the related expense included in cost of sales.
During fiscal 1999, mPhase received a prepayment of $40,000 relating to
the future completion and sale of its Traverser(TM). As the Company's
obligations have not yet been met, this amount is recorded as deferred revenue
and is included in accrued expenses in each consolidated balance sheet presented
herein.
BUSINESS CONCENTRATIONS AND CREDIT RISK
To date the Company's products have been sold to a limited number of
customers, primarily in the telecommunications industry. The Company had
revenues from two customers representing 64% and 19% of total revenues during
the year ended June 30, 2001 and four customers representing 31%, 18%, 15% and
15% of total revenues during the nine months ended March 31, 2002.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred in
accordance with Statement of Financial Accounting Standards ("SFAS"), No. 2,
"Accounting for Research and Development Costs."
INCOME TAXES
mPhase accounts for income taxes using the asset and liability method
in accordance with SFAS No. 109 "Accounting for Income Taxes." Under this
method, 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 and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that includes the enactment date. Because of
the uncertainty as to their future realizability, net deferred tax assets,
consisting primarily of net operating loss carry forwards, have been fully
reserved for. Accordingly, no income tax benefit for the net operating loss has
been recorded in the accompanying consolidated financial statements.
Utilization of net operating losses generated through June 30, 2001 and
March 31, 2002 may be limited due to changes in ownership that occurred.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes rules for the Reporting of Comprehensive Income and
its components. For each of the years ended June 30, 2001, 2000, 1999, and for
the nine months ended March 31, 2001 and 2002, and for the nine months ended
March 31m 2001 and 2002, there was no difference between the Company's net
income and comprehensive income.
PATENTS AND LICENSES
Patents and licenses are capitalized when mPhase determines there will
be a future benefit derived from such assets, and are stated at cost.
Amortization is computed using the straight-line method over the estimated
useful life of the asset, generally five years.
Amortization expense was $400,299, $442,444 and $460,121 for the years
ended June 30, 1999, 2000 and 2001, respectively. Amoritzation expense was
$342,035 and $354,725 for the nine months ended March 31, 2001 and 2002
respectively.
F-14
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
INVENTORIES
Inventory is stated at the lower of cost, determined on a first-in,
first-out basis, or market. Inventory consists mainly of the Company's POTS
Splitter Shelf and Filters. As of June 30, 2000, these amounts were immaterial.
At June 30, 2001, and March 31, 2002 inventory is comprised of the following:
March 31, 2002
June 30,2001 (unaudited)
------------ -----------
Raw materials $639,524 $750,494
Work In Progress -0- 1,121,734
Finished Goods 3,978,923 3,127,206
--------- ---------
Total 4,618,447 4,999,434
Less: Reserve for Obsolesence (314,552) (962,030)
--------- ---------
$4,303,895 $4,037,404
========== ==========
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
reviews its long-lived assets for impairment when changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Such
changes in circumstances may include, among other factors, a significant change
in technology that may render an asset or an asset group obsolete or
noncompetitive, a significant change in the extent or manner in which an asset
is used, evidence of a physical defect in an asset or asset group or an
operating loss. If changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, then the Company estimates the fair value based
on the undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition, and would record an impairment loss (equal
to the amount by which the carrying amount of the asset exceeds the fair value
of the asset) if such estimated cash flows are less than the carrying amount of
the asset. Fair value would be determined, if necessary, based on an outside
appraisal.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for
mPhase's cash, accounts receivable, accounts payable, and accrued expenses
approximate their fair values due to the short maturities of these financial
instruments.
LOSS PER COMMON SHARE, BASIC AND DILUTED
mPhase accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 requires
the disclosure of the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Common equivalent shares have been excluded from the computation of
diluted EPS since their effect is antidilutive.
F-15
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
STOCK-BASED COMPENSATION
The Company follows the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-based Compensation". SFAS No. 123 encourages, but does not
require companies to record compensation expense for stock-based employee
compensation plans at fair value. As permitted, the Company has elected to
continue to account for stock-based compensation to employees using the
intrinsic value method presented in Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Issued to Employees" and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants as if the fair value-based method, as defined, had been applied.
Compensation expense is generally measured on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
The Company accounts for no employee stock-based awards in which goods
or services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more readily determinable.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 required all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt SFAS 142
effective January 1, 2002. The Company is currently evaluating the effect that
the adoption of the provisions of SFAS 142 will have on its results of
operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and provides
guidance on classification and accounting for such assets when held for sale or
abandonment. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. Management does not expect that adoption of SFAS No. 144 will have a
material effect on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technnical
Corrections", which recinds SFAS No. 4 and No. SFAS 44 and SFAS No. 64 which
relates to circumstances whereby the Company would determine when the settlement
of debt or other liabilities would be considered extraordinary or recurring.
Management does not expect that adoption of SFAS No. 145 will have a material
effect on the Company's results of operations or financial position.
4. ACQUISITION OF MICROTEL
In June 1998, mPhase issued 2,500,000 shares of common stock in
exchange for all of the issued and outstanding shares of MicroTel, a
wholly-owned subsidiary of Microphase, Inc. ("Microphase") The transaction was
accounted for as a purchase pursuant to APB Opinion No. 16 "Accounting for
Business Combinations". The total purchase price of approximately $1,870,000,
which was based on the fair market value of the shares issued, was allocated to
the patents acquired and is being amortized over an estimated useful life of
five years. Pursuant to the agreement of merger, MicroTel has become a
wholly-owned subsidiary of mPhase.
5. NOTE RECEIVABLE
As consideration for a letter of settlement with a former consultant of
mPhase, the Company had loaned the former consultant $250,000 in the form of a
Note (the "Note") secured by 75,000 shares of the former consultants common
stock of mPhase. The Note was due April 7, 2001. The Company decreased the Note
to $37,500, representing the estimated value of the underlying stock at June 30,
2001. The Company charged $212,500 to administrative expense as a result of this
impairment. The Company has included the $37,500, in long-term assets in the
accompanying consolidated balance sheet at June 30, 2001 and March 31, 2002.
F-16
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
June 30 March 31,
2000 2001 2002 (Unaudited)
-------------------------------- ----------------
Equipment $1,468,881 $2,879,738 $3,593,418
Office & marketing
equipment 245,437 471,086 482,460
------- ------- -------
$1,714,318 $3,350,824 $4,075,878
Less-Accumulated
depreciation (390,562) (1,151,979) (2,041,612)
--------- ----------- -----------
$1,323,756 $ 2,198,845 $ 2,034,266
========== =========== ===========
Depreciation expense for the years ended June 30, 1999, 2000 and 2001, was
$54,195, $313,611, and $775,092 respectively of which $44,191, $284,954, and
$501,676, respectively is included in research and development expense.
Depreciation expense for the nine months ended March 31, 2002 and 2001 was
$869,637 and $524,041, respectively, of which $686,107 and $355,069,
respectively, was included in research and development expense.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, March 31,
2000 2001 2002 (Unaudited)
---- ---- ----------------
Accrued Bonuses $1,056,511 $ - $ -
Georgia Tech
Research Corporation (Note 12) 445,594 400,000 800,000
Other 335,427 1,342,138 645,390
----------------------- ----------
$1,837,532 $1,742,138 $ 1,445,390
======================= ===========
F-17
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
8. JOINT VENTURE
In March 2000, the Company acquired a 50% interest in
mPhaseTelevision.Net, Inc. for $20,000 pursuant to a Joint Venture Agreement
(the 'Agreement'). In addition, the Company loaned the joint venture $1,000,000
at 8% interest per annum in March 2000. The loan is repayable to the Company
from equity infusions to the subsidiary, but in no event later than such time
that mPhaseTelevision.Net qualifies for a NASDAQ Small Cap Market Listing.
During April 2000, the Company acquired an additional 6.5% in interest in
mPhaseTelevision.Net, Inc. for $1,500,000. The Agreement stipulates for mPhase's
joint venture partner, Alphastar International, Inc., to provide
mPhaseTelevision.Net, Inc. right of first transmission for its transmissions,
including MPEG-2 digital satellite television.
During the nine months ending March 31, 2001 and 2002,
mPhaseTelevision.Net,Inc. was charged $806,544 and $64,039, respectively, for
fees and costs by Alphastar International, Inc. and its affiliates.
9. STOCKHOLDERS' EQUITY
mPhase initially authorized capital of 50,000,000 shares of common
stock with no par value. On February 23, 2000, the Board of Directors proposed
and on May 22, 2000 the shareholders approved an increase in the authorized
capital to 150,000,000 shares of common stock.
On January 26, 2000 the Board of Directors of mPhase resolved that the
stated value of the common stock was $.01 for accounting purposes and, as such,
the financial statements have been retroactively restated to reflect this
change.
Tecma issued 6,600,000 shares of common stock for all of the issued and
outstanding shares of the Company in the reverse acquisition (Note 1).
In October 1997, mPhase issued 250,000 shares of its common stock in
connection with its investment in Complete Telecommunications Inc.
During the year ended June 30, 1998, mPhase sold, pursuant to private
placements, 2,095,014 shares of its common stock together with 1,745,179
warrants for proceeds to the Company of $1,472,015, net of offering costs of
$205,203. The warrants were issued to purchase one share each of common stock at
an exercise price of $0.75, and exercised during the year ended June 30, 2000
generating proceeds to the Company of $1,308,884. Included in offering costs are
100,000 shares of common stock issued for services provided by a third party
valued at $0.50 per share, the fair market value on the date of grant.
During the year ended June 30, 1998, mPhase issued 300,000 shares of
common stock to consultants for services at $0.50 per share, its fair market
value. The Company recorded a charge to operations of $150,000 included in
cumulative from inception in the accompanying consolidated statement of
operations.
On June 25, 1998, mPhase issued 2,500,000 shares of its common stock
for all of the outstanding stock of MicroTel (Note 4) for approximately
$1,870,000, the fair market value.
In November 1998, mPhase sold, 3,120,000 shares of its common stock at
$1.00 per share, together with 1,000,000 warrants, with an exercise price of
$1.00 per share, for $3,013,000 net of offering costs of approximately $107,000
in private transactions pursuant to Rule 506 of Regulation D of the Securities
Act of 1933, as amended, with accredited investors. On June 2, 2000 these
warrants were exercised, generating proceeds to the Company of $1,000,000.
During the year ended June 30, 1999, mPhase issued 1,599,332 shares of
common stock to employees and consultants for services performed. The Company
recognized a charge to operations of $8,760,866, based upon the fair market
value of the shares.
F-18
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
9. STOCKHOLDERS' EQUITY (continued)
In April, May and June of 1999, mPhase sold a total of 642,000 shares
of common stock at $2.50 per share, together with 642,000 warrants for
$1,559,647, net of offering costs of $45,353 in private transactions pursuant to
Rule 506 of Regulation D of the Securities Act of 1933, as amended, with
accredited investors. The warrants expire in June 2004. By June 30, 2000,
148,000 of these warrants were exercised, generating proceeds to the Company of
$370,000.
In June 1999, mPhase sold 4,426,698 shares of its common stock at a
price of $2.50 per share for $10,387,434, net of offering costs of $679,311, in
private transactions pursuant to Rule 506 of Regulation D of the Securities Act
of 1933, as amended, with accredited investors.
In December 1999 and January 2000, mPhase sold, pursuant to private
placements, 1,000,000 shares of common stock at a price of $4.00 per share, net
of cash offering costs of $200,000, generating net proceeds to the Company of
$3,800,000 in private transactions pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended, with accredited investors. In connection
with the private placements, the Company issued 200,000 and 50,000 warrants to
purchase common stock to the respective investors. The warrants had an exercise
price of $4.00 and $5.00, respectively. During February 2000, these warrants
were exercised, generating $1,050,000 of proceeds to the Company.
In March 2000, mPhase sold 832,500 shares of common stock at a price of
$10.00 per share, net of cash offering costs of $466,480, and issued 124,875
shares to a transaction advisor for services, generating net proceeds to the
Company of $7,858,520 in private transactions pursuant to Rule 506 of Regulation
D of the Securities Act of 1933, as amended, with accredited investors. On May
5, 2000 the Company issued an additional 208,125 shares to these investors due
to a market value adjustment. These shares were valued at $1,808,086, which is
included in general and administrative expenses in the accompanying statement of
operations for the year ended June 30, 2000.
During the year ended June 30, 2000, mPhase issued 1,164,215 shares of
common stock to employees and consultants for services performed. The Company
recognized a charge to operations of $8,623,907, based upon the fair market
value of the common stock on the dates of grant.
In September 2000, mPhase issued 510,000 shares of its common stock,
generating net proceeds of $2,532,120, net of cash offering costs of $17,880 in
private transactions pursuant to Rule 506 of Regulation D of the Securities Act
of 1933, as amended, with accredited investors. In connection with the private
placement, the Company issued 105,750 shares of its common stock to transaction
advisors.
In February 2001, mPhase sold 2,342,500 shares of its common stock and
a like amount of warrants to purchase one share each of the Company's common
stock generating gross proceeds of $4,685,000 in private transactions pursuant
to Rule 506 of Regulation D of the Securities Act of 1933, as amended with
accredited investors. The attached warrants permit the investor to purchase one
share each of common stock at an exercise price of $3.00 per share. The Company
incurred cash offering costs of $425,315 and also issued 284,600 shares of its
common stock and 162,600 warrants to purchase one share each at an exercise
price of $3.00 to transaction advisors.
In May and June 2001, mPhase sold 1,087,000 shares of its common stock
and a like amount of warrants to purchase one share each of the Company's common
stock generating gross proceeds of $1,087,000 in private transactions pursuant
to Rule 506 of Regulation D of the Securities Act of 1933, as amended with
accredited investors. The attached warrants permit the investor to purchase one
share each of common stock at an exercise price of $3.00. The Company incurred
offering costs of $69,000.
F-19
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
9. STOCKHOLDERS' EQUITY (continued)
During the year ended June 30, 2001, the Company issued 450,000 shares
of common stock to consultants for services performed and to be performed. The
Company recognized a charge to operations of $886,534 and deferred $121,091 for
services to be performed in the fiscal year ending June 30, 2002. Total expense
of $1,007,625, based upon the fair market value of the common stock on the date
of the grant.
In July 2001, the Company sold 75,000 shares of its common stock and a
like amount of warrants to purchase one share each of the Company's common stock
at an exercise price of $3.00 generating proceeds of $75,000 in a private
transaction with accredited investors.
In September 2001, certain Board members subscribed to purchase
2,000,000 restricted shares of the Company's common stock for $1,000,000.
In December 2001, the Company issued 3,474,671 shares of its common
stock and a like amount of warrants to purchase one share each of the Company's
common stock at an exercise price of $.30 generating gross proceeds of
$1,042,000 in a private transaction pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended with accredited investors, which included a
subscription receivable of $440,200, which was collected in January 2002.
In January 2002, the Company issued 2,754,503 shares of its common
stock and a like amount of warrants to purchase one share each at an exercise
price of $.30 generating gross proceeds of $826,351 in a private placement
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended,
with accredited investors.
In connection with the December 2001 and January 2002 private
placement, the Company issued 568,469 shares of its common stock and a like
amount of warrants to purchase one share each at an exercise price of $.30 to
finders and consultants whom assisted in the transaction.
The Company granted 1,115,000 options, 48,068 shares of its common
stock and 48,068 warrants to employees and 4,453,000 options to consultants for
services performed during the nine months ending March 31, 2002. Compensation
expense for the options granted to consultants was records based on the fair
value of the options at the date of grant. Also, during the nine months ending
March 31, 2002, the Company granted 823,000 shares of its common stock and
1,675,000 warrants to consultants for services performed.
STOCK INCENTIVE PLANS
On August 15, 1997, mPhase established its Long Term Stock Incentive
Plan. Included as part of the Long Term Stock Incentive Plan, is the Stock
Option Plan (the "Plan"), in which incentive stock options and nonqualified
stock options may be granted to officers, employees and consultants of the
Company. On February 23, 2000 the board of directors proposed and on May 22,
2000 the stockholders approved an increase in the total shares eligible under
this plan to 15,000,000 shares. Vesting terms of the options range from
immediately to two years and generally expire in five years.
On May 30, 2001, mPhase established the 2001 Stock Incentive Plan (the
"2001 Plan"), in which incentive stock options and non-qualified stock options
may be granted to officers, employees and consultants of the Company. The total
shares eligible under the 2001 Plan is 20,000,000 shares, in addition to the
shares previously authorized for issuance under the prior plan. Vesting terms of
the options range from immediately to two years and options generally expire in
five years. The maximum number of shares that may be granted during any one
fiscal year to any one individual under the 2001 Plan is limited to 2,500,000
shares.
F-20
A summary of the stock option activity for the years ended June 30,
1999, 2000 and 2001, and for the nine months ended March 31, 2002, pursuant to
the terms of both plans, which include incentive stock options and non-qualified
stock options, is set forth on the below:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Outstanding at July 1, 1998 3,700,000 1.00
Granted 2,457,500 1.78
Exercised -- --
Canceled (750,000) 1.00
------------ ----
Outstanding at June 30, 1999 5,407,500 1.35
Granted 2,710,000 3.49
Exercised (655,000) 2.93
Canceled -- --
------------ ----
Outstanding at June 30, 2000 7,462,500 $2.09
Granted 5,618,000 1.56
Exercised (320,000) 1.02
Canceled (180,000) 2.39
------------ -----
Outstanding at June 30, 2001 12,580,500 $1.94
============
Exercisable at June 30, 2001 12,169,629 $1.79
============
Outstanding at June 30, 2001 12,580,500 $1.94
Granted (unaudited) 5,715,000 .47
Exercised (unaudited) -- --
Cancelled (unaudited) (43,500) (4.26)
------------ -----
Outstanding at March 31, 2002
(unaudited) $ 18,252,000 $1.33
============ =====
Exercisable at March 31, 2002
(unaudited) 18,226,135 $1.33
============ =====
The fair value of options granted in 1999, 2000 and 2001 was estimated
as of the date of grant using the Black-Scholes stock option pricing model,
based on the following weighted average assumptions: annual expected return of
0%, annual volatility of 90% in 1999; 115% in 2000 and 113% in 2001, risk-free
interest rate ranging from 4.85% to 6.18% and expected option life of three
years.
The per share weighted average fair value of stock options granted
during 1999, 2000 and 2001 was $5.01, $6.99 and $1.16 respectively. The per
share weighted average remaining life of the options outstanding at June 30,
1999, 2000 and 2001 is 3.91, 3.86 and 3.66 years, respectively.
mPhase has elected to continue to account for stock-based
compensation under APB Opinion No. 25, under which no compensation expense has
been recognized for stock options granted to employees at fair market value. Had
compensation expense for stock options granted under the Plan been determined
based on fair value at the grant dates, mPhase's net loss for 1999, 2000 and
2001 would have been increased to the pro forma amounts shown below.
F-21
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
Nine Months Ended
Years Ended June 30, March 31,
1999 2000 2001 2001 2002
(Unaudited) (Unaudited)
-------------- -------------- -------------- -------------- --------------
Net Loss:
As reported $ 22,838,344 $ 38,161,542 $ 23,998,734 14,319,653 $ 8,959,447
Pro forma $ 24,576,165 $ 40,097,570 $ 25,243,270 15,019,759 $ 9,272,977
Net Loss Per Share
As reported $ (1.42) $ (1.41) $ (.72) $ (.44) $ (.19)
============== ============== ============== ============== ==============
Pro forma $ (1.53) $ (1.49) $ (.75) $ (.46) $ (.20)
============== ============== ============== ============== ==============
For the year ended June 30, 1999, mPhase recorded non-cash charges and
deferred compensation totaling $7,129,890 and $140,000, respectively, in
connection with the grant of 1,607,500 options to employees and 850,000 options
to consultants for services rendered.
For the year ended June 30, 2000, mPhase recorded non-cash charges and
deferred compensation totaling $9,448,100 and $1,637,375, respectively, in
connection with the grant of 2,710,000 options to employees and options to
consultants for services rendered or to be rendered.
For the year ended June 30, 2001, the Company recorded non-cash charges
and deferred compensation totaling $2,955,964 and $607,885, respectively, in
connection with the grant of 5,618,000 options to employees and options to
consultants for services rendered or to be rendered. Such charges are the result
of the differences between the quoted market value of the Company's common stock
on the date of grant and the exercise price for options issued to employees and
Black-Scholes stock option pricing calculations for options issued to
consultants.
WARRANTS
In January and April 1998, mPhase issued 25,000 and 50,000 warrants,
respectively, each to purchase one share of common stock at an exercise price of
$1.06 and $2.44, respectively, for consulting services. The warrants expire five
years from the date of issuance. At any time after the date of issuance, the
Company may, at its option, elect to redeem all of these warrants at $0.01,
subject to adjustment, as defined, per warrant, provided that the average
closing price of the common stock for 20 business days within any period of 30
consecutive business days exceeds $5.00 per share. As of June 30, 2001, none of
these warrants remain outstanding.
In July 1998, in connection with the private placements, mPhase issued
400,000 warrants, each to purchase one share of common stock at an exercise
price of $1.00 per share. The Company allocated the net proceeds from the sale
of the common stock to the common stock and the warrants. On July 26, 1999,
pursuant to the warrant agreement these 400,000 warrants were converted into
352,239 shares of common stock. In accordance with the warrant agreement, the
warrant holder had the right to initiate a cashless exercise to convert the
warrants into shares of common stock in lieu of exchanging cash. The number of
shares received was determined by dividing the aggregate fair market value of
the shares minus the aggregate exercise price of the warrants by the fair market
value of one share.
F-22
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
9. STOCKHOLDERS' EQUITY (Continued)
In September 1998, mPhase issued 6,666 warrants for services, each to
purchase one share of common stock at an exercise price of $0.75 per share. The
warrants expire five years from the date of grant. The Company determined the
fair market value of the warrants issued under the Black-Scholes Option Pricing
Model to be $16,302. This amount is included in the Company's general and
administrative expenses in the accompanying consolidated statement of operations
as of June 30, 1999. These warrants were exercised during the year ended June
30, 2000 generating proceeds to the Company of $5,000.
In June 1999, in connection with the private placements, mPhase also
issued 400,000 warrants each to purchase one share of common stock at an
exercise price of $1.00 per share. The warrants expire five years from the date
of grant. These warrants were exercised during the year ended June 30, 2000
generating proceeds to the Company of $400,000.
In January 2000, in connection with private placements, mPhase issued
200,000 and 50,000 warrants, each to purchase one share of common stock, at an
exercise price of $4.00 and $5.00, respectively. The net proceeds of the private
placement were allocated to the warrants and the common stock based on their
respective fair values. The warrants expire five years from the date of
issuance. These warrants were exercised in February 2000.
During the year ended June 30, 2001, mPhase issued 4,980,125 warrants
to investors including 1,550,625 warrants to existing investors as compensation
which resulted in a charge of $1,249,804 to operations based upon the fair value
of the warrants issued as determined under the Black-Scholes option pricing
model, and 162,600 to finders, consultants and investment banking firms, each of
these warrants to purchase one share each of the Company's common stock at
$3.00, for five years, in connection with private placements.
During the year ended June 30, 2001, mPhase granted 1,180,000 warrants
to consultants for services performed and for services to be performed at prices
ranging from $1.25 to $5.00, which resulted in a charge of $1,185,874 to
operations and deferred $457,942 for services to be performed in the fiscal year
to end June 30, 2002, totaling $1,643,816 based upon the fair value of the
warrants issued as determined under the Black-Scholes option pricing model.
As of June 30, 2001, 6,816,725 warrants remain outstanding with a
weighted average exercise price of $2.93.
During the nine months ended March 31, 2002, the Company issued 75,000
and 6,797,643 warrants to investors and to finders, consultants and investment
banking firms, each of these warrants to purchase one share each of the
Company's common stock at $3.00 and $.30, for five years, in connection with
private placements. The Company also issued 13,334 shares of its common stock
following the exercise of warrants resulting in gross proceeds $4,000. Also,
during the nine months ended March 31, 2002, the Company granted 1,675,000
warrants to consultants for services performed and 6,246,824 warrants to
creditors, included realted parties, in connection with the conversion of
outstanding liabilities.
As of March 31, 2002, 21,809,192 warrants remain outstanding with a
weighted average exercise price of $1.13.
F-23
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
10. RELATED PARTY TRANSACTIONS
mPhase's President, Executive Vice President and Chairman of the Board
of the Company are also employees of Microphase (Note 4). On May 1, 1997, the
Company entered into an agreement with Microphase, whereby it will use office
space as well as the administrative services of Microphase, including the use of
accounting personnel. This agreement was for $5,000 per month and was on a
month-to-month basis. In July 1998, the office space agreement was revised to
$10,000 and in January 2000 to $11,050 per month. Additionally, in July 1998,
mPhase entered into an agreement with Microphase, whereby mPhase reimburses
Microphase $40,000 per month for technical research and development assistance.
Microphase also charges fees for specific projects on a project-by-project
basis. During the years ended June 30, 1999, 2000 and 2001 and for the period
from inception (October 2, 1996) to June 30, 2001, $600,000, $2,547,847,
$2,128,983 and $5,363,830, and during the nine months ended March 31, 2001 and
2002, $1,794,817 and $1,010,909 respectively, have been charged to expense or
inventory under these Agreements and is included in operating expenses in the
accompanying consolidated statements of operations. Management believes that
amounts charged to the Company by Microphase are commensurate to amounts that
would be incurred if outside third parties were used.
Also, during the fiscal year ended June 30, 2000, $2,600,000 was
advanced to Microphase in the form of a note, which was repaid by Microphase
during the year. mPhase recorded $39,000 of interest income on this note for the
year ended June 30, 2000. The Company is obligated to pay a 3% royalty to
Microphase on revenues from its proprietary Traverser(TM) Digital Video and Data
Delivery System and DSL component products. During the year ended June 30, 2001,
and the nine month period ended March 31, 2002 mPhase recorded royalties to
Microphase totaling $297,793 and $59,613, respectively. As of June 30, 2000,
amounts due from Microphase were immaterial. As of June 30, 2001, the Company
converted $639,000 of amounts payable to Microphase into 1,278,000 shares of
mPhase common stock and had $70,799 payable to Microphase, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
At March 31, 2002 the Company had $6,410 payable to Microphase.
On February 15, 1997, mPhase entered into a Technology, Patent and
Trademark License Agreement (the "Agreement") with MicroTel (Note 4). The
Agreement permits the Company to utilize the patent and trademark technology of
MicroTel under a licensing arrangement. The Company made payments of $37,500 per
month, commencing June 1, 1997 for technology development. During the period
ended June 30, 1997 and 1998, $37,500 and $450,000 has been charged to expense
under this Agreement and is included in licensing fees in the accompanying
consolidated statement of operations. As of June 25, 1998, the Company acquired
MicroTel and as of that date this Agreement is no longer in effect.
During the year ended June 30, 2000, mPhase advanced money to Janifast
Limited, which is a related party of which three directors of mPhase are
significant shareholders, in connection with the manufacturing of POTS Splitter
Shelves and DSL component products. As of June 30, 2000 the amount advanced to
Janifast was approximately $1,106,000, which is included in production
advances-related parties on the accompanying balance sheet. There were no such
advances as of June 30, 2001 and March 31, 2002.
For consulting services rendered in connection with the joint venture
(Note 8), the Company agreed to pay two officers of the Company and a related
party $412,400, which was included on the June 30, 2000 consolidated balance
sheet of the Company. This amount was paid by the Company during the year ended
June 30, 2001.
Due to related parties as of June 30, 2000 included $36,120 due to
Nutley Securities, a company owned by mPhase's president and $49,180 due to
affiliates of the Company's joint venture partner, Alphastar International, Inc.
both amounts are for various services performed.
On November 26, 1999, PacketPort, Inc., a company owned by Mr. Durando,
the President and CEO of mPhase, acquired a controlling interest in Linkon
Corp., which subsequently changed its name to PacketPort.com, Inc. In connection
with this transaction, Mr. Durando transferred 350,000 of his own shares of
mPhase's common stock to PacketPort, Inc. Included in other current assets as of
June 30, 2000 is $11,694 due from PacketPort.com for certain expenses paid by
the Company on behalf of PacketPort.com, Inc.
F-24
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
10. RELATED PARTY TRANSACTIONS (Continued)
In July 2000, mPhase added a member to the Board of Directors who is
employed by an investment-banking firm that has assisted and is expected to
continue to assist the Company in raising capital through private financing.
During the year ended June 30, 2001, the company issued 140,350 shares of common
stock for investment banking services rendered during the period and recorded an
additional $69,000 of fees which is included in accrued expenses at June 30,
2001. A member of mPhase's Board of Directors is employed by Lintel, Inc, the
parent corporation of Hart Telephone. The Company has installed its prototype
product and commenced beta testing at Hart Telephone. In addition, the Company
has entered into a supply agreement with Hart Telephone upon the completion of
beta testing and the commencement of production of the Traverser(TM). As
consideration for the execution of the agreement with Hart Telephone, in May
2000, mPhase issued Hart Telephone 125,000 options each to purchase one share of
common stock at an exercise price of $1.00 (valued at $1,010,375), which is
included in research and development expenses in the accompanying statement of
operations as of June 30, 2000.
Effective June 30, 2001 the Company converted $2,420,039 of liabilities
due to directors and related parties into 4,840,077 shares of the Company's
common stock pursuant to debt conversion agreements.
During December 2001, the Company converted $1,020,000 of liabilities
due to Microphase and Janifast into 3,400,000 shares of the Company's common
stock and a like amount of warrants to purchase one share each of the Company's
common stock at an exercise price of $.30 pursuant to debt conversion
agreements.
Effective March 31, 2002, the Company converted $420,872 of liabilities
due to Piper Rudnick LLP, outside legal counsel to mPhase into a warrant to
purchase up to a total of 1,683,490 shares of the Company's common stock which
pursuant to EITF 96-18, has an approximate value of $.30 per share and a warrant
to purchase 550,000 shares of the Company's common stock at an exercise price of
$.30 per share pursuant to the terms of payment agreement. In addition, Piper
agreed to accept a Promissory note for $420,872 of current payables at an
interest rate of 8% with payments of $5,000 per month commencing June 1, 2002
and continuing through December 1, 2003, with a final payment of principal plus
accrued interest due at maturity on December 31, 2003.
11. INCOME TAXES
No provision has been made for corporate income taxes due to cumulative
losses incurred. At June 30, 2001, mPhase has operating loss carry forwards of
approximately $55.8 million and $55.5 million to offset future federal and state
income taxes respectively, which expire through 2021. Certain changes in stock
ownership can result in a limitation in the amount of net operating loss and tax
credit carryovers that can be utilized each year.
At June 30, 2001 the Company has net deferred income tax assets of
approximately $20.9 comprised principally of the future tax benefit of net
operating loss carry forwards. A full valuation reserve has been recorded
against such assets due to the uncertainty as to their future realizability.
F-25
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited for the periods ended March 31, 2001 and 2002)
12. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
mPhase has entered into various agreements with Georgia Tech Research
Corporation ("GTRC"), pursuant to which the Company receives technical
assistance in developing the commercialization of its Digital Video and Data
Delivery System. The amount incurred by the Company for GTRC technical
assistance with respect to its research and development activities during the
years ended June 30, 1999, 2000 and 2001 totaled $2,450,253, $4,563,560, and
$3,814,300, and for the nine months ended March 31, 2001 and 2002 totaled
$3,175,850 and $400,000, and $13,374,300 from the period from inception through
March 31, 2002, respectively.
If and when sales commence utilizing this particular technology, the
Company will be obligated to pay to GTRC a royalty equal to 5% of product sales,
as defined.
mPhase is a party to employee agreements with certain key executives
providing for cash commitments of $675,000 through June 30, 2002. In addition,
one of the executives is entitled to an annual bonus equal to 5% of the
appreciation in market value of mPhase's stock from year-to-year based on the
change in the Company's issued and outstanding common stock at each fiscal year
end through June 30, 2002, 25% of which is to be paid in cash and the remainder
in common stock of the Company.
CONTINGENCIES
During the year ended June 30, 2000, mPhase settled a litigation with
Global Music and Media Inc. ("Global"), which had asserted that it had the
exclusive right to market the Company's technology. This litigation was resolved
in August 1999 in a settlement agreement wherein Global Music surrendered its
claim to mPhase's technology in exchange for the Company to settle claims of Hal
Willis against Global for a cash payment of $100,000, the issuance of 75,000
shares of mPhase's common stock and options to purchase another 75,000 shares at
$5.63 per share and the payment of $90,000 to Global to settle employee claims,
the cost of which had been recorded in the consolidated financial statements as
of June 30, 1999. As such, $1,161,622 is included in accrued expenses on the
consolidated balance sheet at June 30, 1999 and $1,161,622 is included in loss
from unconsolidated subsidiary on the consolidated statement of operations for
the year ended June 30, 1999 related to this settlement. The agreement also
called for the repurchase of 75,000 shares of the Company's common stock from
the owners of Global by the Company or its co-defendant, Microphase. Microphase
repurchased these shares in August 1999.
From time to time, mPhase may be involved in various legal proceedings
and other matters arising in the normal course of business. The Company
currently has no material outstanding legal proceedings.
13. SUBSEQUENT EVENTS (Unaudited)
Subsequent to March 31, 2002 through June 17, 2002, the company issued
2,000,000 shares of its common stock in connection with a consulting agreement
and 105,000 shares of its common stock in connection with the settlement
obligations for prior services.
F-26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses payable in connection
with the preparation and filing of this Registration Statement:
--------------------------------------------------------------------------------
Securities and Exchange Commission Registration Fee $ 1,050
--------------------------------------------------------------------------------
NASD Filing Fee --
--------------------------------------------------------------------------------
Nasdaq Listing Fee --
--------------------------------------------------------------------------------
Printing Expenses $ 2,000
--------------------------------------------------------------------------------
Accounting Fees and Expenses $12,500
--------------------------------------------------------------------------------
Legal Fees and Expenses $25,000
--------------------------------------------------------------------------------
Transfer Agent's and Registrar's Fees and Expenses --
--------------------------------------------------------------------------------
Miscellaneous Expenses --
--------------------------------------------------------------------------------
Total $40,550
--------------------------------------------------------------------------------
II-1
Item 14. Indemnification of Directors and Officers.
Our Certificate of Incorporation, as amended, and Bylaws provide that
we shall indemnify any Director, officer, employee or agent of ours to the full
extent permitted by the New Jersey Business Corporations Act.
Under Section 14A:3-5 of the New Jersey Business Corporation Act, we
have the power to indemnify any person, against his expenses and liabilities in
connection with any proceeding, whether civil or criminal, who is or was a
Director, officer, employee or agent, provided that such person acted in good
faith and with reasonable business prudence. Should the proceeding involve
criminal liability, the Director, officer, employee or agent shall be
indemnified if he reasonably believed that his conduct was not unlawful. Should
the Director, officer, employee or agent be liable to us, indemnification shall
not be provided unless the court in such proceeding determines that, in light of
all surrounding circumstances of the case, such Director, officer, employee or
agent is reasonably entitled to expenses as the court deems proper.
Additionally, we shall indemnify any Director, officer, employee or agent
against expenses should such Director, officer, employee or agent be successful
on the merits in any proceeding referred to in this paragraph.
Our determination as to whether the Director, officer, employee or
agent should be indemnified shall be made:
(i) by way of a majority vote of a quorum of the Board of Directors who
were not parties to or otherwise involved in the proceeding;
(ii) or if such quorum is not obtainable, or, even if obtainable and
directed by such quorum or by a majority vote of the disinterested Directors, by
independent legal counsel in a written opinion; or
(iii) by our stockholders if directed by a resolution of the Board of
Directors or of the stockholders.
We shall not indemnify any Director, officer, employee or agent if a
judgment or other final adjudication establishes that his acts or omissions (a)
were in breach of his duty of loyalty to us or our shareholders, (b) were not in
good faith or involved a knowing violation of law, or (c) resulted in receipt by
the Director, officer, employee or agent of an improper personal benefit.
We may purchase and maintain insurance on behalf of any person who is
or was a Director, officer, employee or agent of ours, whether or not we would
have the power to indemnify such corporate agent against expenses and
liabilities under the provisions of Section 14A:3-5 of the New Jersey Business
Corporation Act.
Item 15. Recent Sales of Unregistered Securities.
The following securities were issued by us within the past three years and were
not registered under the Securities Act of 1933, as amended (the "Act"). Each of
the transactions is claimed to be exempt from registration under the Act.
During the year ended June 30, 1999, we issued 1,599,332 shares of
common stock to employees and consultants for services performed. We recognized
a charge to operations of $8,760,866, based upon the fair market value of the
shares.
In April 1999, we issued 642,000 shares of our common stock and
warrants to purchase up to 642,000 shares of our common stock at a combined
price of $2.50 per share and warrant pursuant to Rule 506 of Regulation D of the
Act for an aggregate of $1,605,000 in cash.
In June and July 1999, we issued 4,426,698 shares of our common stock
at $2.50 per share pursuant to Rule 506 of Regulation D of the Act for an
aggregate of $11,066,745 in cash.
On July 26, 1999, 400,000 warrants were converted into 352,239 shares
of common stock in a cashless exercise.
II-2
In June 1999, we also issued 400,000 warrants each to purchase one
share of common stock at an exercise price of $1.00 per share which expire in
June 2004.
During the year ended June 30, 2000 warrants to purchase 400,000 shares
of common stock were exercised generating proceeds of $400,000.
In December 1999 and January 2000, we sold, pursuant to Rule 506 of
Regulation D of the Act, 1,000,000 shares of common stock at a price of $4.00
per share, for an aggregate of $4,000,000. In connection with the private
placement, we issued 200,000 and 50,000 warrants to purchase common stock for
services rendered pursuant to Section 4(2) of the Act. The warrants had an
exercise price of $4.00 and $5.00, respectively.
During February 2000, warrants to purchase 200,000 and 50,000 shares of
common stock were exercised, at an exercise price of $4.00 and $5.00
respectively, generating additional proceeds of $1,050,000.
In May 2000, we issued 1,040,625 shares of our common stock at $8.00
per share pursuant to Rule 506 of Regulation D of the Act for an aggregate of
$8,325,000 in cash.
In September 2000, we issued 510,000 shares of our common stock at
$5.00 per share pursuant to Rule 506 of Regulation D of the Act for an aggregate
of $2,550,000 in cash and in connection therewith 38,250 shares of common stock
for services rendered pursuant to Section 4(2) of the Act.
During the year ended June 30, 2000, we issued 1,164,215 shares of
common stock to employees and consultants for services performed.
On November 30, 2000, we granted 150,000 shares of common stock for
services rendered pursuant to Section 4(2) of the Act.
During the quarter ended December 31, 2000, we granted 30,000 warrants
to a consultant for services performed pursuant to Section 4(2) of the Act.
During the nine month period ended December 31, 2000, we issued 320,000
shares of our common stock following the exercise of options and warrants
resulting in gross proceeds of $327,500 and granted 1,035,000 options to
employees and 1,572,000 options to consultants for services performed pursuant
to Section 4(2) of the Act.
In January 2001, we granted 102,000 shares of common stock for services
rendered pursuant to Section 4(2) of the Act.
In January 2001, we granted 250,000 shares of common stock for services
rendered pursuant to Section 4(2) of the Act.
On January 26, 2001 and February 9, 2001 we raised approximately
$4,685,000 in cash through the issuance of 2,342,500 shares of our common stock
and a like amount of warrants to purchase one share each of our common stock at
an exercise price of $3.00 and a term of four years pursuant to Rule 506 of
Regulation D of the Act. The Company issued 162,600 warrants to purchase one
share each of our common stock at an exercise price of $3.00 and a term of four
years to consultants in connection with these private placements.
On April 3, 2001, we issued warrants to purchase 1,550,625 shares of
common stock at an exercise price of $3.00 per share expiring on April 3, 2005
as consideration for consent to certain additional issuances.
On April 16, 2001, we issued warrants to purchase 250,000, 250,000 and
500,000 shares of common stock at respective exercise prices of $5.00, $2.50 and
$1.25 per share in connection with consulting services rendered pursuant to
Section 4(2) of the Act.
On May 7, 2001, we issued 300,000 shares of common stock and warrants
to purchase 150,000 shares of common stock at an exercise price of $5.00 per
share expiring on May 7, 2006 in connection with consulting services rendered
pursuant to Section 4(2) of the Act.
On May 25, 2001, we issued 587,000 shares of our common stock and a
like amount of warrants at an exercise price of $3.00 per share and a term of
five years pursuant to Rule 506 of Regulation D of the Act for approximately
$587,000 in cash.
II-3
On July 18, 2001, we issued 575,000 shares of our common stock and a
like amount of warrants at an exercise price of $3.00 per share and a term of
five years pursuant to Rule 506 of Regulation D of the Act for approximately
$575,000 in cash.
Effective June 30, 2001 the Company converted $2,420,039 of liabilities
due to directors and related parties into 4,840,077 shares of the Company's
common stock pursuant to debt conversion agreements.
In September 2001, certain of our officers and directors purchased an
aggregate of 2,000,000 shares of common stock for an aggregate investment of
$1,000,000. This issuance was exempt pursuant to Section 4(2) and/or Rule 506 of
Regulation D of the Act.
During December 2001, the Company converted $1,020,000 of liabilities
due to Microphase and Janifast into 3,400,000 shares of the Company's common
stock and a like amount of warrants to purchase one share each of the Company's
common stock at an exercise price of $.30 pursuant to debt conversion
agreements.
In December 2001 and January 2002, we issued 6,797,643 shares of common
stock and a like amount of warrants at an exercise price of $.30 per share for a
term of five (5) years pursuant to Rule 506 of Regulation D of the Act for
approximately $2,000,000 in cash. This issuance was exempt pursuant to Section
4(2) and/or Rule 506 of Regulation D of the Act.
Effective March 31, 2002, the Company converted $420,872 of liabilities
due to Piper Rudnick LLP, outside legal counsel to mPhase into a warrant to
purchase up to a total of 1,683,490 shares of the Company's common stock which
pursuant to EITF 96-18, has an approximate value of $.30 per share and a warrant
to purchase 550,000 shares of the Company's common stock at an exercise price of
$.30 per share pursuant to the terms of payment agreement. In addition, Piper
agreed to accept a Promissory note for $420,872 of current payables at an
interest rate of 8% with payments of $5,000 per month commencing June 1, 2002
and continuing through December 1, 2003, with a final payment of principal plus
accrued interest due at maturity on December 31, 2003.
From August 2001 to June 2002, we issued an aggregate of 2,976,068
shares of common stock to consultants for an aggregate of $1,202,997. We also
issued an aggregate of 2,675,000 warrants to consultants for an aggregate of
$1,040,000.
From August 2001 to June 2002, holders of an aggregate of $1,462,082
in debt converted such debt into 4,625,584 shares of common stock.
II-4
Item 16. Exhibits and Financial Statements.
Exhibit Number Description
-------------- -----------
2.1* Exchange of Stock Agreement and Plan of
Reorganization dated January 15, 1997
(incorporated by reference to Exhibit 2(a) to our
registration statement on Form 10SB-12G filed on
October 16, 1998 (file no. 000-24969)).
2.2* Exchange of Stock Agreement and Plan of
Reorganization dated June 25, 1998 (incorporated
by reference to Exhibit 2(b) to our registration
statement on Form 10SB-12G filed on May 6, 1999
(file no. 000-24969).
3.1* Certificate of Incorporation of Tecma Laboratory,
Inc. filed December 20, 1979 (incorporated by
reference to Exhibit 3(a) to our registration
statement on Form 10SB-12G filed on October 16,
1998 (file no. 000-24969)).
3.2* Certificate of Correction to Certificate of
Incorporation of Tecma Laboratory, Inc. dated June
19, 1987 (incorporated by reference to Exhibit
3(b) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no.
000-24969)).
3.3* Certificate of Amendment of Certificate of
Incorporation of Tecma Laboratory, Inc. filed
August 28, 1987 (incorporated by reference to
Exhibit 3(c) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no.
000-24969)).
3.4* Certificate of Amendment of Certificate of
Incorporation of Tecma Laboratories, Inc. filed
April 7, 1997 (incorporated by reference to
Exhibit 3(d) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no.
000-24969)).
3.5* Certificate of Amendment of Certificate of
Incorporation of Lightpaths TP Technologies, Inc.
filed June 2, 1997 (incorporated by reference to
Exhibit 3(e) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no.
000-24969)).
3.6* Certificate of Amendment of Certificate of
Incorporation of mPhase Technologies, Inc. filed
September 15, 2000 (incorporated by reference to
Exhibit 3i to our quarterly report on Form 10Q
filed on November 13, 2000 (file no. 000-24969)).
3.7* Bylaws of the Company (incorporated by reference
to Exhibit 3(g) to our registration statement on
Form 10SB-12G filed on October 16, 1998 (file no.
000-24969)).
4.1* Form of Registration Rights Agreement, dated
January 26, 2001, by and among the Company and the
purchasers listed on Schedule A attached thereto
(incorporated by reference to Exhibit 4.1 to our
registration statement on Form S-1 filed on June
18, 2001 (file no. 33-63262)).
4.2* Form of Registration Rights Agreement, dated
February 9, 2001, by and among the Company and the
purchasers listed on Schedule A attached thereto
(incorporated by reference to Exhibit 4.2 to our
registration statement on Form S-1 filed on June
18, 2001 (file no. 33-63262)).
4.3** Form of Warrant
4.4** Warrant issued to Piper Rudnick LLP
4.5** Warrant issued to Piper Rudnick LLP
4.6** Form of Subscription Agreement, dated December 15,
2001
5.1 Opinion of Piper Rudnick LLP
10.1* License Agreement, dated March 26, 1998, between
the Company and Georgia Tech Research Corporation
(incorporated by reference to Exhibit 10(e) to our
registration statement on Form 10SB-12G filed on
October 16, 1998 (file no. 000-24969)).
10.2* First Amendment to the License Agreement, dated
January 8, 2001, between the Company and Georgia
Tech Research Corporation (incorporated by
reference to Exhibit 10.2 to our registration
statement on Form S-1 filed on June 18, 2001 (file
no. 33-63262)).
II-5
Exhibit Number Description
-------------- -----------
10.3* Employment Agreement between Ronald A. Durando and
the Company (incorporated by reference to Exhibit
10.8 to our registration statement on Form SB-2
filed on August 13, 1999 (file no. 333-85147)).
10.4* Employment Agreement between Gustave T. Dotoli and
the Company (incorporated by reference to Exhibit
10.9 to our registration statement on Form SB-2
filed on August 13, 1999 (file no. 333-85147)).
10.5* Employment Agreement between Martin S. Smiley and
the Company, dated as of August 15, 2000
(incorporated by reference to Exhibit 10.5 to our
registration statement on Form S-1 filed on June
18, 2001 (file no. 33-63262)).
10.6* Employment Agreement between David C. Klimek and
the Company, dated as of April 1, 2001
(incorporated by reference to Exhibit 10.6 to our
registration statement on Form S-1 filed on June
18, 2001 (file no. 33-63262)).
10.7* Manufacturing Services Agreement, dated March 14,
2001, by and between the Company and Flextronics
International USA, Inc. (incorporated by reference
to Exhibit 10.7 to our registration statement on
Form S-1 filed on June 18, 2001 (file no.
33-63262)).
10.8* Supply Agreement by and between the Company and
Hart Telephone Company, Inc., dated as of August
19, 1998 (incorporated by reference to Exhibit
10.8 to our registration statement on Form S-1
filed on June 18, 2001 (file no. 33-63262)).
10.9* Facilities/Services Agreement between the Company
and Microphase Corporation, dated as of July 1,
1998 (incorporated by reference to Exhibit 10.9 to
our registration statement on Form S-1 filed on
June 18, 2001 (file no. 33-63262)).
10.10* Company's 2001 Stock Incentive (incorporated by
reference to Exhibit C to our preliminary proxy
statement on Form Pre 14A filed on March 21, 2001
(file no. 000-30202)).
10.11* License Agreement, dated July 31, 1996, by and
between AT&T Paradyne Corporation and Microphase
Corporation (incorporated by reference to Exhibit
10.11 to our registration statement on Form S-1
filed on June 18, 2001 (file no. 33-63262)).
10.12* Assignment Agreement, dated February 17, 1997, by
and between the Company and Microphase Corporation
(incorporated by reference to Exhibit 10.12 to our
registration statement on Form S-1 filed on June
18, 2001 (file no. 33-63262)).
21* List of Subsidiaries (incorporated by reference to
Exhibit 21 to our registration statement on Form
S-1 filed on June 18, 2001 (file no. 33-63262)).
23.1* Consents of Schuhalter, Coughlin & Suozzo, LLC
dated August 31, 1998 and Mauriello, Franklin &
LoBrace, P.C. dated August 31, 1998 (incorporated
by reference to Exhibit 23 to our registration
statement on Form 10SB-12G filed on October 16,
1998 (file no. 000-24969)).
23.2* Consents of Schuhalter, Coughlin & Suozzo, LLC
dated April 23, 1999 and Mauriello, Franklin &
LoBrace, P.C. dated April 23, 1999 (incorporated
by reference to Exhibit 23 to our registration
statement on Form 10SB-12G filed on May 6, 1999
(file no. 000-24969)).
23.3* Consent of Schuhalter, Coughlin & Suozzo, LLC
dated August 13, 1999 (incorporated by reference
to Exhibit 23.1 to our registration statement on
Form SB-2 filed on August 13, 1999 (file no.
333-85147)).
23.4 Consent of Schuhalter, Coughlin & Suozzo, LLC.
23.5 Consent of Piper Rudnick LLP (included in Exhibit
5.1).
24.1** Power of Attorney (included as a part of the
signature page of the initial filing of this
Registration Statement)
* Incorporated by reference.
** Previously filed.
II-6
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this 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 this Registration Statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) promulgated under the Securities Act of 1933
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum
aggregate offering price set forth in the Calculation
of Registration Fee" table in this Registration
Statement;
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in this registration statement or any
material change to such information in this
Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) shall not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, 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.
(4) Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers,
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director,
officer, or controlling person of the 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 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 Securities Act and will be governed by the final
adjudication of each issue.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Norwalk,
State of Connecticut, on the 26th day of July 2002.
mPHASE TECHNOLOGIES, INC.
By: /s/ Ronald A. Durando
-----------------------------------
Ronald A. Durando
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board of Directors July 24, 2002
-----------------------------
Necdet F. Ergul
*
-----------------------------
Ronald A. Durando President, Chief Executive Officer July 24, 2002
and Director (Principal Executive Officer)
/s/ Martin S. Smiley
-----------------------------
Martin S. Smiley Executive Vice President of Finance, July 24, 2002
Chief Financial Officer, and General Counsel
(Principal Financial and Accounting Officer)
*
-----------------------------
Michael P. McInerney Director July 24, 2002
-----------------------------
Anthony H. Guerino Director July 24, 2002
*
-----------------------------
Gustave T. Dotoli Chief Operating Officer and Director July 24, 2002
*
-----------------------------
David L. Klimek Chief Technology Officer and Director July 24, 2002
*
-----------------------------
Abraham Biderman Director July 24, 2002
* By: /s/ Martin S. Smiley
-----------------------------
Martin S. Smiley
Attorney-in-fact
II-8
mPhase Technologies, Inc.
Form S-1
Registration Statement
Exhibit Index
Exhibit Number Description
-------------- -----------
2.1* Exchange of Stock Agreement and Plan of Reorganization dated
January 15, 1997 (incorporated by reference to Exhibit 2(a) to
our registration statement on Form 10SB-12G filed on October
16, 1998 (file no. 000-24969)).
2.2* Exchange of Stock Agreement and Plan of Reorganization dated
June 25, 1998 (incorporated by reference to Exhibit 2(b) to
our registration statement on Form 10SB-12G filed on May 6,
1999 (file no. 000-24969)).
3.1* Certificate of Incorporation of Tecma Laboratory, Inc. filed
December 20, 1979 (incorporated by reference to Exhibit 3(a)
to our registration statement on Form 10SB-12G filed on
October 16, 1998 (file no. 000-24969)).
3.2* Certificate of Correction to Certificate of Incorporation of
Tecma Laboratory, Inc. dated June 19, 1987 (incorporated by
reference to Exhibit 3(b) to our registration statement on
Form 10SB-12G filed on October 16, 1998 (file no. 000-24969)).
3.3* Certificate of Amendment of Certificate of Incorporation of
Tecma Laboratory, Inc. filed August 28, 1987 (incorporated by
reference to Exhibit 3(c) to our registration statement on
Form 10SB-12G filed on October 16, 1998 (file no. 000-24969)).
3.4* Certificate of Amendment of Certificate of Incorporation of
Tecma Laboratories, Inc. filed April 7, 1997 (incorporated by
reference to Exhibit 3(d) to our registration statement on
Form 10SB-12G filed on October 16, 1998 (file no. 000-24969)).
3.5* Certificate of Amendment of Certificate of Incorporation of
Lightpaths TP Technologies, Inc. filed June 2, 1997
(incorporated by reference to Exhibit 3(e) to our registration
statement on Form 10SB-12G filed on October 16, 1998 (file no.
000-24969)).
3.6* Certificate of Amendment of Certificate of Incorporation of
mPhase Technologies, Inc. filed September 15, 2000
(incorporated by reference to Exhibit 3i to our quarterly
report on Form 10Q filed on November 13, 2000 (file no.
000-24969)).
3.7* Bylaws of the Company (incorporated by reference to Exhibit
3(g) to our registration statement on Form 10SB-12G filed on
October 16, 1998 (file no. 000-24969)).
4.1* Form of Registration Rights Agreement, dated January 26, 2001,
by and among the Company and the purchasers listed on Schedule
A attached thereto (incorporated by reference to Exhibit 4.1
to our registration statement on Form S-1 filed on June 18,
2001 (file no. 33-63262)).
4.2* Form of Registration Rights Agreement, dated February 9, 2001,
by and among the Company and the purchasers listed on Schedule
A attached thereto (incorporated by reference to Exhibit 4.2
to our registration statement on Form S-1 filed on June 18,
2001 (file no. 33-63262)).
4.3** Form of Warrant.
4.4** Warrant issued to Piper Rudnick LLP.
4.5** Warrant issued to Piper Rudnick LLP.
4.6** Form of Subscription Agreement, dated December 15, 2001.
5.1 Opinion of Piper Rudnick LLP.
10.1* License Agreement, dated March 26, 1998, between the Company
and Georgia Tech Research Corporation (incorporated by
reference to Exhibit 10(e) to our registration statement on
Form 10SB-12G filed on October 16, 1998 (file no. 000-24969)).
II-9
Exhibit Number Description
-------------- -----------
10.2* First Amendment to the License Agreement, dated January 8,
2001, between the Company and Georgia Tech Research
Corporation (incorporated by reference to Exhibit 10.2 to our
registration statement on Form S-1 filed on June 18, 2001
(file no. 33-63262)).
10.3* Employment Agreement between Ronald A. Durando and the Company
(incorporated by reference to Exhibit 10.8 to our registration
statement on Form SB-2 filed on August 13, 1999 (file no.
333-85147)).
10.4* Employment Agreement between Gustave T. Dotoli and the Company
(incorporated by reference to Exhibit 10.9 to our registration
statement on Form SB-2 filed on August 13, 1999 (file no.
333-85147))
10.5* Employment Agreement between Martin S. Smiley and the Company,
dated as of August 15, 2000, as amended, (incorporated by
reference to Exhibit 10.5 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262)).
10.6* Employment Agreement between David C. Klimek and the Company,
dated as of April 1, 2001, as amemded, (incorporated by
reference to Exhibit 10.6 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262)).
10.7* Manufacturing Services Agreement, dated March 14, 2001, by and
between the Company and Flextronics International USA, Inc.
(incorporated by reference to Exhibit 10.7 to our registration
statement on Form S-1 filed on June 18, 2001 (file no.
33-63262))
10.8* Supply Agreement by and between the Company and Hart Telephone
Company, Inc., dated as of August 19, 1998 (incorporated by
reference to Exhibit 10.8 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262)).
10.9* Facilities/Services Agreement between the Company and
Microphase Corporation, dated as of July 1, 1998 (incorporated
by reference to Exhibit 10.9 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262).
10.10* Company's 2001 Stock Incentive (incorporated by reference to
Exhibit C to our preliminary proxy statement on Form Pre 14A
filed on March 21, 2001 (file no. 000-30202)).
10.11* License Agreement, dated July 31, 1996, by and between AT&T
Paradyne Corporation and Microphase Corporation (incorporated
by reference to Exhibit 10.11 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262)).
10.12* Assignment Agreement, dated February 17, 1997, by and between
the Company and Microphase Corporation (incorporated by
reference to Exhibit 10.12 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262)).
21* List of Subsidiaries (incorporated by reference to Exhibit 21
to our registration statement on Form S-1 filed on June 18,
2001 (file no. 33-63262)).
23.1* Consents of Schuhalter, Coughlin & Suozzo, LLC dated August
31, 1998 and Mauriello, Franklin & LoBrace, P.C. dated August
31, 1998 (incorporated by reference to Exhibit 23 to our
registration statement on Form 10SB-12G filed on October 16,
1998 (file no. 000-24969)).
23.2* Consents of Schuhalter, Coughlin & Suozzo, LLC dated April 23,
1999 and Mauriello, Franklin & LoBrace, P.C. dated April 23,
1999 (incorporated by reference to Exhibit 23 to our
registration statement on Form 10SB-12G filed on May 6, 1999
(file no. 000-24969)).
II-10
Exhibit Number Description
-------------- -----------
23.3* Consent of Schuhalter, Coughlin & Suozzo, LLC dated August 13,
1999 (incorporated by reference to Exhibit 23.1 to our
registration statement on Form SB-2 filed on August 13, 1999
(file no. 333-85147)).
23.4 Consent of Schuhalter, Coughlin & Suozzo, LLC.
23.5 Consent of Piper Rudnick LLP (included in Exhibit 5.1).
24.1** Power of Attorney (included as a part of the signature page of
the initial filing of this Registration Statement).
*Incorporated by reference.
**Previously filed.
II-11