UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
mPhase Technologies, Inc.
(Formerly Tecma Laboratories, Inc.)
(Name of Small Business Issuer in its charter)
New Jersey 22-2287503
(State or other jurisdiction of (I.R.S.Employer Identification Number)
incorporation or organization)
587 Connecticut Ave, Norwalk, CT 06854-0566
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (203) 838-2741
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common stock, no par value per share, 50,000,000 shares authorized, 17,194,043
shares issued and outstanding as of March 31, 1999. As of that date, it is
estimated that approximately 4,511,000 shares were in the public float with an
aggregate market value of approximately $16,353,000.
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Part I......................................................................1
Item 1. Description of Business ..........................................1
A1) Business Development, Organization and
Acquisition Activities.................................................1
A2) Communications Industry and Potential
effect on the Company's Plan of Operation .............................4
A3) Management's Plan of Operation. . . . . . . . . . . . . . 10
Item 2. Description of Property . . . . . . . . . . . . . . 13
Item 3. Directors, Executive Officers and Significant Employees14
Item 4. Remuneration of Directors and Executive Officers . . 16
Item 5. Security Ownership of Management and Certain Security holders16
Item 6. Interest of Management and Others in Certain Transactions18
Item 7. Description of Securities. . . . . . . . . . . . . . 19
Part II . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 1 Market Price of and Dividends on the Registrant's Common Equity
and Other Stockholder Matters. . . . . . . . . . . . 20
Item 2 Legal Proceedings . . . . . . . . . . . . . . . . . 21
Item 3 Changes in and Disagreements With Accountants. . . . 21
Item 4 Recent Sales of Unregistered Securities. . . . . . . 22
Item 5 Indemnification of Directors and Officers. . . . . . 23
Part F/S . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 1 Index to Exhibits (Pursuant to Item 601 of Regulation SB)26
Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2 Description of Exhibits. . . . . . . . . . . . . . . .
Signature Page . . . . . . . . . . . . . . . . . . . 27
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Part I
Item 1. Description of Business
A(1) Business Development, Organization, and Acquisition Activities
Lack of Revenue. The Company has had no sales or other revenues as yet and the
Company cannot say for certain when this will occur.
mPhase Technologies, Inc., hereinafter sometimes referred to as "the Company",
was organized as Tecma Laboratory, Inc. by the filing of certificate of
incorporation with the Secretary of State of the State of New Jersey on December
18, 1979. As amended on August 28, 1987, the certificate of incorporation was
amended to change its name to Tecma Laboratories, Inc. and the number of shares
authorized to be issued was increased to 50,000,000 shares no par value common
stock. On April 7, 1997, the Company amended its certificate of incorporation
to change its name to Lightpaths TP Technologies, Inc. On June 2, 1997, the
Company amended the certificate of incorporation and changed its name to mPhase
Technologies, Inc. On March 31, 1997 the Company filed an amendment to its
certificate of incorporation pursuant to which it effected a reverse split of
its issued and outstanding shares of common stock on a one share for ten share
basis.
Until the completion of the reverse acquisition and spinoff, discussed below,
the Company conducted its business under the name of Tecma Laboratories, Inc.
and was primarily engaged in research, development and the exploitation of
certain patented products in the health care field.
On February 17, 1997, the stockholders of the Company approved the acquisition
of Lightpaths, Inc., a Delaware Corporation, with the acquisition deemed to be
effective as of that date.
As part of the transaction whereby the Company acquired Lightpaths, Inc. on
January 29, 1997, the Company concurrently formed another wholly owned
subsidiary called TLI Industries, Inc., hereinafter referred to as "TLI." The
shares of TLI were spun off to the stockholders of the Company, effective March
31 ,1997, after transferring certain assets and liabilities, primarily fixed
assets, patents and shareholder loans related to the prior business of Tecma
Laboratories, Inc. Because liabilities transferred to TLI were in excess of the
book value of the assets transferred there in a gain on the disposal of
discontinued operations on March 31, 1997. This loss was treated as a decrease
of the accumulated deficit by the Company prior to the spin-off.
As a consequence of the above described transactions, most of which required
and obtained approval by the stockholders of the Company on February 17, 1997,
the Company became the holding company of its wholly owned subsidiary,
Lightpaths, Inc.
On June 25, 1998, the Company acquired Microphase Telecommunications, Inc., a
Delaware corporation, hereinafter referred to as "MicroTel," by the issuance of
2,500,000 shares of its common stock in exchange for all the issued and
outstanding shares of MicroTel. The primary assets acquired by way of this
acquisition were patents and patent applications utilized in the Company's
proprietary TRAVERSERTM Digital Video Data Delivery System, hereinafter referred
to either as the TRAVERSERTM DVDDS technology or product.
On August 21, 1998, the Company incorporated a 100% wholly owned subsidiary
called mPhaseTV.net/Inc., a Delaware corporation. The Company intends for this
subsidiary to be the marketing vehicle for its cable business.
The primary business of mPhase Technologies, Inc. is to design, develop,
manufacture and market high-bandwidth telecommunications products incorporating
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direct subscriber line ("DSL") technology. The Company's products allow high
speed broadband transmission over the installed copper telephone wire infra
structure and will enable telecommunications service providers to transmit up to
400 channels of MPEG-2 digital television, high speed Internet and traditional
telephone voice services simultaneously over copper wire.
(1) Principal Products and Principal Markets
A New Twist To Twisted Pair
The Company's TRAVERSERTM product line is designed to provide a cost-effective
solution for high-speed digital data transmission over the installed twisted
pair, copper wire infrastructure, and an alternative to cable access television
("CATV") as well as direct broadcast satellite services ("DBS"). By using the
installed public telephone infrastructure, the TRAVERSERTM product line supports
high-speed,"last mile" communication solutions without requiring costly upgrades
from copper to coaxial cable or fiber optics. The Company intends to target
independent telephone companies ("telcos"), Competitive Local Exchange Carriers
("CLECs"), independent Local Exchange Carriers ("ILECs"), International Local
Exchange Carriers ("IXCs"), Internet Service Providers ("ISPs") and Regional
Bell Operating Companies ("RBOCs") to allow these service providers to offer
customers an integrated package of enhanced services.
Industry sources indicate that investment in copper infrastructure in the United
States is approximately $300 billion and $1 trillion worldwide. The Gartner
Group estimates the number of copper lines worldwide will grow by nearly 50
million per year for the next 5 years. The Company believes that telcos will
seek to protect this significant investment in copper wire by utilizing the
current infrastructure rather than pursuing costly fiber or hybrid fiber coaxial
cable upgrades. In addition, telcos will need to address competition from cable
companies, which are upgrading their networks in order to provide cable modem
service and cable telephony in addition to traditional television services.
There are currently over 30 million Internet accounts in the United States using
28.8 Kbps or 56 Kbps modern speeds. Driven by slow and unreliable service from
their current Internet service providers via remote dial-up, many consumers and
telecommuters are demanding reliable, high-speed Internet access. Digital
Subscriber Line ("DSL") technology allows telephone companies to provide high-
speed Internet access and maximize the potential of installed telephone lines,
thus avoiding installation of new wiring, a process which is time consuming and
extremely expensive.
Using its proprietary hardware, mPhase offers a specific type of DSL called Rate
Adaptive Digital Subscriber Line ("RADSL"), allowing high-speed data
transmission at speeds up to 6 Mbps downstream and up to 1 Mbps upstream,
increasing through-put up to 200 times faster than an existing 28.8 Kbps
Internet connection. mPhase's DSL technology is unique in that it enables
simultaneous delivery of high-speed Internet access, digital television
programming, and telephone communications over an existing telephone line on an
unshared platform. Because the transmission speed is rate adaptive, Mphase's
DSL adjusts to the length and signal quality of the telephone line,
automatically selecting the highest practical operating speed. Furthermore,
the one-to-one connectivity maintains reliable service, which does not degrade
or decrease in speed with increased volume of subscribers.
mPhase believes it is the first affordable alternative to coaxial and fiber
delivery for RBOCs and local telephone exchange carriers. The mPhase DSL
transceiver is the only technology able to transport voice, digital television
video programming, and data over the existing telephone infrastructure without
impacting voice traffic or degrading the quality of service. Other potential
applications made possible by mPhase's products include video teleconferencing,
remote education, tele-medicine, and e-commerce.
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(ii) Status of Products and Services
mPhase is a development stage company in its final stages of on-site beta
testing. To date, the Company has not generated any significant revenues through
product sales or licensing in technology. The Company has installed the
system capable of transmitting digital television, Internet data and voice
service simultaneously at Hart Telephone in Hartwell Georgia, its beta customer.
The Company believes that it will be able to reach commercial production of the
TRAVERSERTM DVDDS version 1.0, an 99-channel end-to-end system solution, by the
end of calendar year 1999. The 99-channel prototype will be completed and
installed by the end of June 1999. Beta tests for the 99-channel product will
commence immediately after installation. The TRAVERSERTM DVDDS version 1.1 will
be the Company's first commercial product. The Company expects to launch a 400-
channel system, version 2.0, by calendar year end 2000.
Generally speaking, mPhase DSL products are being designed to allow high
bandwidth access utilizing the installed twisted pair existing telephone
infrastructure under its proprietary TRAVERSERTM DVDDS technology. mPhase
products in development include video teleconferencing and multi-conferencing
systems, high bit rate Internet and Intranet delivery, distance learning,
tele-medicine, network packet transferring and corporate data networks for
banking and publishing.
In addition to its products utilizing its TRAVERSERTM technology, the Company
also has designed products identified as Transmit/Receive Filters and Plain Old
Telephone Service ("POTS") Splitter Product. The Company's POTS splitter product
will be marketed as well as Drop In transmit and receive filters to XDSL vendors
providing integrated XDSL equipment to their customers. The Company does not
believe its inherent competitive advantage will be impaired by the sale of
Transmit/Receive Filters and POTS splitter products to potential competitors.
(iii) Research and Development Activities
Georgia Tech Research Institute ("GTRI") conducts a significant amount of
research and development for the Company. After the development of the
TRAVERSERTM DVDDS, version 1.1, the Company expects GTRI to continue research
and development of the TRAVERSERTM product to enhance features and
functionality, as well as coordinate the effort to develop the TRAVERSERTM,
version 2.0 and additional products utilizing TRAVERSERTM technology.
The team at GTRI conducts research under the supervision of David Klimek, the
Company's Chief Technology Officer, who works in conjunction with Ronald
Bohlander, a Manager in the Manufacturing Technology Program at GTRI, and the
project supervisors at GTRI.
To date, $3.7 million has been billed to mPhase for research and development
conducted by GTRI, of which $2.2 million remained outstanding at December 31,
1998. GTRI is expected to complete development of the TRAVERSERTM DVDDS pursuant
to a basic ordering agreement comprised of a series of delivery orders, which
outline the timing, necessary actions and form of payment for specific tasks
related to the completion of certain components of the TRAVERSERTM product line.
mPhase is the sole, worldwide licensee of the technology developed by GTRI in
conjunction with the TRAVERSERTM product line. Upon completion of the commercial
product, GTRI will receive a royalty of 3% to 5% of product sales.
The amount of research and development costs expended from October 2, 1996 (date
of Inception) through December 31, 1998 was approximately $4,376,944. The
Company was obligated to pay licensing fees (see Part 1, Item 1, A(2) D.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements,
Labor Contracts) on product licenses for patents held by others through June 25,
1998, and as of that date, the Company eliminated this obligation with the
acquisition the preceding acquisition and the present ordering agreements with
GTRI, the Company of its 100% wholly owned subsidiary, MicroTel.
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Presently, as a result of will be subject to royalty payments of 3% and 4%
respectively, on the sale of its products of the TRAVERSERTM product line. As
of December 31, 1998, the Company had not consummated any sales and has recorded
only nominal revenue from licensing fees. Accordingly, none of the research and
development costs have been borne by any customers.
During the fiscal year ending June 30, 1999, the Company plans to incur research
and development expenses of approximately $5,000,000 as a consequence of the
continued development of its current DSL products.
(iv) Employees
The Company presently has seven employees, two of whom are full-time and five of
whom are part-time, and who are concurrently employed by Microphase Corporation,
a Connecticut corporation, that could be deemed to be affiliated because of some
common officers although the two companies are not identical with respect to
their controlling stockholders.
(v) Impact of Environmental Laws
The Company is not aware of any federal, state or local environmental laws which
would effect its operations.
A(2) Communications Industry and Potential Effect on the Company's Plan of
Operation
A. Copper (The company's technology.)
There has been a total revolution in communications technology since the first
copper cable was installed for telephone connectivity more than a century ago.
Since then a rich copper infrastructure has been installed in the earth and
overhead. This infrastructure constitutes a collective asset with an installment
cost valued at hundreds of billions of dollars which criss-crosses the United
States and every other country in the world. Notwithstanding, only recently has
technology been developed capable of transforming this expansive copper network
originally designed for analog voice delivery into an affordable, high speed,
data-intensive digital communications delivery system capable of meeting the
demands of today's advanced high-tech, high-volume use.
Dataquest, a source of information concerning the telecommunications industry,
estimates that there is 182 million copper wire telephone lines in the United
States and over 827 million lines worldwide. Currently, copper wire and cable
infrastructures must deal with the increasing challenge to support the large
volume of data traffic generated by Internet access from residences and small
offices via remote dial-up. As a result of the exponential growth of the
Internet and the use of the World Wide Web, there is a digital data traffic
dilemma. The volume of data being transmitted over the copper infrastructure has
increased rapidly but the current capacity of the copper infrastructure to
support it remains static.
Utilizing its proprietary TRAVERSERTM technology, mPhase has converted existing
twisted pair copper telephone lines into programmable high speed access paths
for multimedia and data communications. Accordingly, mPhase can now offer
RBOC's, telcos, CLECs, ILECs, ISPs, IXCs, foreign LECs and other
telecommunication companies the first affordable alternative to coaxial and
fiber optic delivery.
B. Various Forms of Competition
The telecommunications equipment market is characterized by swift technological
change. Several competing solutions such as fiber optic, cable, wireless and
satellite technologies will coexist in a competitive environment and compete
with DSL for market share. Service providers may use other technologies to
deploy high-speed transmission such as fiber optic cable, hybrid coaxial cable,
ISDN and
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other alternatives. However, based on industry standards, the Company believes
that DSL will prove to be the most cost-effective and deployment-ready broadband
solution in the near-term.
Within the DSL arena, the Company has numerous competitors including ADTRAN,
Alacatel, Aware, Inc., Broadband Technologies, CISCO Systems, Inc., ESI, General
Data Com, Orckit Communications, PairGain Technologies, TUT Systems, Westell
Technologies, AG Communications Systems, Copper Mountain, Diamond Lane, Paradyne
and SourceNet. However, based on information made public, none of the Company's
competitors offer digital television transmission capability.
b.(1) ISDN
Emerging technologies for high speed data transmission over copper lines include
ISDN (Integrated Services Digital Network), currently delivering 128 Kilo Bytes
Per Second ("KBPS") computer networking connections two times faster than those
available with fastest analog modems.
While ISDN does provide faster access (128 Kbps) than analog modems (56 kbps),
it is expensive, difficult to install, not really fast enough to satisfy
consumer demand and does not allow simultaneous data transmission while
maintaining normal telephone service on the same line. In addition, it is not
capable of delivering digital television.
By contrast, the TRAVERSERTM DVDDS version 1.0 increases data speed throughput
up to 50 times faster than an ISDN connection!
b.(2) Fiber Optic Cable
Fiber Optic cable is another alternative which allows high bandwidth
transmission. But it requires a longer lead time to install and is very
expensive to install. Of the estimated 180 plus million conventional telephone
lines installed in the United States and more than 700 million world wide, fiber
accounts for only a mere three (3%) percent although cable industry pundits have
projected an increase in saturation of fibre optic cable installations to cover
up to ten (10%) percent of the existing telephone infrastructure.
b.(3) Coaxial
Cable modems also promise the potential of wider bandwidth (up to 10 Mbps as
compared to 56 Kbps analog modems). But coaxial cable is relatively expensive
and it cannot deliver data efficiently without interfering with normal
telephone and cable television services. The mPhase TRAVERSERTM DVDDS version
1.0, on the other hand, is fast, affordable and works with POTS.
B. Initial Customer Base and Marketing Plan
To date, numerous domestic, independent telcos have indicated interest in the
TRAVERSERTM DVDDS version 1.1. These domestic telcos are members of the United
States Telephone Association ("USTA") comprising more than 1,100 members, the
National Telephone Cooperative Association ("NTCA"), a non-profit association
representing more than 500 small and rural telephone cooperatives and commercial
companies, or the Organization Promoting the Advancement of Small Telephone
Companies ("OPASTCO"), comprising more than 500 ILEC members in the United
States and Canada. OPASATCO membership includes commercial and cooperative
telephone companies, which range in size from 100 to 50,000 access lines and
collectively serve over 2.5 million customers primarily in rural areas.
mPhase is an associate member of OPASTCO and was a panel participant at a recent
conference regarding the cable telephony threat and the telco response. The
Company believes its relationship with OPASTCO will augment its ability to
directly market its products to ILECs.
In August 1998. mPhase signed an agreement with Hart Telephone Company, valued
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at $1.5 million, to provide 1,000 units of the TRAVERSERTM DVDDS version 1.0.
The Company also signed a distribution agreement with CariPAC Limited, a leading
data communications and networking provider in Hong Kong and China, valued at
$15 million, to distribute its TRAVERSERTM DVDDS products throughout Hong Kong
and the Peoples' Republic of China. The Company is also in negotiations with
several international telcos in Brazil, China, Mexico and Russia regarding the
possibility of deploying the mPhase TRAVERSERTM DVDDS.
Domestic Market
Dataquest estimates that there are approximately 182 million local access lines
in the United States, consisting of 164 million lines owned and operated by
RBOCs and approximately 18 million lines owned by independent telephone
companies other than the RBOCs. There are approximately 1,200 independent
telcos in the continental United States. According to the Gartner Group,
approximately 65% of phone lines in the United States are DSL-ready. The Company
has targeted a group of approximately 300 domestic, independent and regional
telcos for initial marketing efforts and the Company continues to expand this
list as it nears production phase. Potential customers are selected from a
universe including independent telcos with 5,000 access lines or more.
Management believes that there is a significant opportunity to market the
Company's products to larger independent telcos (greater than 20,000 lines), as
well as the smaller telcos (from 5,000 to 20,000 lines). The Company believes
that the ILECs more readily embrace new technology and will typically be the
early adopters of advanced DSL technology.
International LECs and foreign telcos also provide a large market opportunity.
Penetration rates of cable television and DBS in the international markets are
much lower internationally. The TRAVERSERTM would cost a service provider far
less per subscriber than fiber or coax networks and would provide the most cost-
effective method for service providers to increase the value of the existing
copper infrastructure.
Teledensity rates (measured in number of access lines per 100 inhabitants) are
low in developing nations but are expected to enter a period of dramatic growth.
Many governments recognize that an advanced communications system is key to
industrialization and are therefore promoting construction of telephone
infrastructure. The Company believes that because these regions have the lowest
teledensity rates, they will also exhibit the fastest growth over the next
5-year period. Specifically, Dataquest predicts that compounded annual growth of
access lines between 1997 and 2001 in Eastern Europe, Latin America, Africa,
and Asia will be 9.8%, 16.9%, 15.5% and 17.5% respectively.
Marketing Strategy
The Company has focused initial marketing efforts on both domestic and
international telcos, which have responded positively to DSL technology and more
specifically, to DSL service provision via TRAVERSERTM technology. The Company's
initial marketing efforts target small to medium-sized, independent telcos,
which are most threatened by the prospect of cable telephony and need to expand
their service provision rapidly. Furthermore, independent telcos often have a
faster response time in implementing new technology.
The Company also intends to market to larger telcos in the United States who
also need to respond to the threat of competition from cable companies, as well
as new entrants to the telecommunications market such as CLECs, ISPs, and long
distance providers who are continually seeking access to local service. The
Company believes that it will also be successful in penetrating larger telcos,
but expects that it will have a longer sales cycle than with the smaller
independent companies.
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Internationally, many countries also exhibit optimal conditions for telecom,
broadband and video application growth. Most developing nations have low
teledensity rates and few over-air options. Moreover, cable service is rarely
available in most international markets, particularly in areas outside of the
urban centers making them prime candidates for the TRAVERSERTM system. For
example, the majority of Central and South American homes receive only two or
three broadcast channels. According to industry research, the current cable
subscriber base in South America of 8.3 million represents less than ten (10%)
percent of the TV households, with over half concentrated in Argentina.
The Company intends to use a number of marketing strategies to facilitate
product sales. mPhase will develop a direct sales force to market its products
directly to service providers, as well as negotiate with international
resellers. The Company has already signed one non-exclusive agreement with
CariPAC to distribute the product in Hong Kong and the People's Republic of
China. The Company is currently in discussions with other third party
distributors and intends to pursue the resale channel for various parts of the
world.
To date, the Company has made no sales of its technology and has limited
resources to market its products. However, as part of its sales and marketing
initiative, the Company recently hired an executive vice president of marketing
who will oversee all marketing efforts. In addition, a substantial portion of
the proceeds from new offerings of its securities will be used to expand the
Company's marketing and sales force to include direct marketers and sales
representatives responsible for telco accounts.
Product Overview
The Company's patent-protected TRAVERSERTM DVDDS products utilize technology
licensed on an exclusive basis to the Company by Georgia Tech Research Institute
and RADSL technology licensed on a non-exclusive basis by Globespan
Semiconductor, Inc. (formerly AT&T Paradyne, Inc.). GTRI currently conducts a
significant portion of the engineering research and design efforts for the
Company in developing the TRAVERSERTM product line. The Company's proprietary
system also utilizes an advanced filter technology developed by Microphase
Corporation ("Microphase"), a world leader in diplexer and Detector Log Video
Amplifier ("DVLA") technology. The hybrid filters in mPhase circuit boards
enable more efficient impedance matching of the copper loop, longer transmission
distances, and decreased signal bit errer rates.
The TRAVERSERTM is a complete, end-to-end data transmission solution, which
enables service providers to transmit broadcast quality video at up to 5 Mbps,
simultaneous Internet access at up to 1 Mbps (in four segments via Ethernet) and
traditional voice. The TRAVERSERTM product is installed in the telco central
office with a set-top box configuration, trademarked the Intelligent Network
Interface ("INI"), at the customer premise. The Company's network product is
utilized in conjunction with popular telecommunications transport protocols such
as: Digital Signal Level 3.0 ("DS3"), Synchronous Optical NETwork ("SONET"),
Synchronous Digital Hierarchy ("SDH"), Asynchronous Transfer Mode ("ATM") or
frame relay and is highly adaptable. The Company is also in the process of
evaluating the ease with which its network products can be used in conjunction
with other transport protocols. The TRAVERSERTM is transparent to the switch and
DLC manufacturer, supports emergency service operation and relieves dial-up
Internet switch congestion.
With the TRAVERSERTM, the content provider receives and distributes digital data
(television signals and Internet) to a typical telephone company central office
via satellite or a SONET telecommunications network. A programming and control
center located at the central office will combine the video and Internet data as
well as local off-air broadcasts for transmission over the TRAVERSERTM DVDDS.
The central office then delivers traditional analog voice signal, digital
television, and Internet data via the TRAVERSERTM DVDDS over the existing copper
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twisted-pair infrastructure to the customer premises. At the customer
premises, the TRAVERSERTM Intelligent Network Interface ("INI") passes through
the phone lines and connects to the television set and the computer. The video
signal is sent as both an S-video signal and a channel 3 or 4 RF modulated
signal. Internet is accessed via a 10baseT Ethernet connection over category-5
wiring.
The TRAVERSERTM product line is able to partition bandwidth, using mPhase's
proprietary framer chip, enabling all 6 Mbps of upstream and 1 Mbps of
downstream bandwidth to be used to transmit data exclusive of the digital
television application. The ability to segment and scale the bandwidth
according to individual needs ideally targets the small office/home office
("SOHO") market. The Company's DSL-based, high-speed data delivery solutions
are useful for vertical data communications applications such as
videoconferencing, tele-medicine and all types of corporate data network
markets. Furthermore, the Company's products provide a non-shared data
transmission line, while most other DSL products use a multiplexed modem at
the central office.
Production Strategy
mPhase plans to use contract manufacturing companies to provide manufacturing
services and to support responsive customer service. The Company is targeting
leading contract manufacturing companies with which it believes long-term
relationships can be established and which have strategically located facilities
in North America, Mexico and Asia. In doing so, the Company is following a trend
already well established among original equipment manufacturers ("OEMs").
The production scale, infrastructure, purchasing volume and expertise of leading
contract manufacturers can enable OEMs to reduce production cycle time and
accelerate time to market. As electronic products have become technologically
advanced, internal manufacturing has required significantly increased working
capital, equipment, labor and infrastructure. Contract manufacturers enable OEMs
to manufacture without making the substantial capital investments required for
internal production.
Because OEMs are faced with increasing challenges in planning procuring and
managing their inventories efficiently due to frequent design changes, short
product life cycles, large investments in electronic components, component price
fluctuations and the need to achieve economies of scale in materials
procurement. Contract manufacturers' inventory management expertise and volume
procurement can reduce OEM production and inventory costs.
Contract manufacturers with worldwide capabilities also are able to offer OEMs
a variety of options on manufacturing locations to better address their
objectives regarding costs, shipment location, frequency of interaction with
manufacturing specialists and local content requirements of end-market
countries.
D. Patents and Licenses
The Company has filed and intends to file United States patents and/or copyright
applications relating to certain of its proposed products and technologies
either with its collaborators/strategic partners or on its own behalf. There can
be no assurance, however, that any of the patents obtained will result in the
Company protecting a commercially significant protection of its technologies
or that the Company will have adequate resources to enforce its patents.
Because the Company may license its technology and products in foreign markets,
it may also elect to 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 the Company's 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 the Company's
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ability to make and sell its products. There can also be no assurance that
competitors will not infringe on the Company's 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 the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease its operations.
The intellectual property owned and licensed by mPhase falls into two essential
categories, analog and digital intellectual property. The Company owns all of
the intellectual property related to the analog component of its DSL-based
products, previously held by Microphase Corporation. The provisional patents and
subsequent United States patent applications will be under the name of mPhase.
mPhase acquired the intellectual property rights for the analog components
related to the TRAVERSERTM from MicroTel.
The following are titles of United States provisional patent applications for
the analog portion of the technology used in relation to the TRAVERSERTM DVDDS:
(a) Video Voice Isolation Filter for Telephone User Installation; (b) Video
Voice Isolation Filter for Rack Mount Telephone Equipment; and (c) Voice
Channel Noise Filter for Telephony.
The DSL filter technology developed by Microphase Corporation which is now
patent pending under application by mPhase, enables increased video clarity over
copper wire, longer transmission distances and decreased signal error rate.
The intellectual property related to the Microphase DSL filters falls into two
categories: the POTS filter, which separates the TRAVERSERTM DSL spectrum from
the traditional voice service and the upstream/downstream filtering, which
separates the two distinct portions of the TRAVERSERTM DSL spectrum from each
other. Both of these components are key to providing a DSL signal at sufficient
quality and service distances for combined video and data delivery.
Digital intellectual property licensing is comprised of: (a) a non-exclusive
license from GlobeSpan Semiconductor, Inc. for the rights to use the GlobeSpan
RADSL chipset; and (b) an exclusive, worldwide license to manufacture and market
products using the technology developed under contract by GTRI. The exclusive
license with GTRI is applicable for the duration of their patent protecting the
system design and other technology related to the TRAVERSERTM product line.
Currently, GTRI has both regular and provisional United States patents pending
for transport and system design and proprietary framing and has filed all
necessary paperwork for permanent copyrights. United States patents for the
digital intellectual property have an effective filing date of November 4, 1997
and are pending. The Company believes that in the future it will have the
opportunity to acquire intellectual property rights from GTRI.
The licensed technology developed at GTRI centers around the capabilities of the
TRAVERSERTM DVDDS. The four (4) United States patents under application are:
(1) System and Method for Maintaining Timing Syncronization in a Digital Video
Network; (2) System and Method for the Delivery of Digital Video and Data over
a Communications Channel; (3) Computer System and Method for Providing Digital
Video and Data over a Communications Channel; and (4) Apparatus and Method for
Transporting Infrared and Radio Frequency Signals.
The exclusively licensed digital intellectual property allows several unique
aspects of the DVDDS. Among these is the backplane design, which allows the
ability to have every subscriber 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
("DSLAM") architecture, makes the DVDDS a true broadcast system rather than a
mere video delivery system.
Intellectual property rights also cover the development of the Framer and the
Framer chip. The Framer is an Application Specific Integrated Circuit (ASIC)
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which gives the TRAVERSERTM DVDDS the capability of allocating both the
downstream and upstream bandwidth into virtually any application required. This
feature allows the TRAVERSERTM to deliver both MPEG-2 Digital Video and Internet
data simultaneously and also allows for future applications of the DVDDS. This
proprietary capability will not be able to be duplicated without a serious
endeavor to avoid patent infringement.
Patents pending also protect the software management and control of the
individual TRAVERSERTM links, the DVDDS, all firmware, C++ and Java code written
for the project and the channel changing methodology and interface to EPG
(electronic program guide) at the customer site through the Intelligent Network
Interface.
The Company also relies on unpatented proprietary technology, and there can be
no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. If
the Company is unable to maintain the proprietary nature of its
TRAVERSERTMtechnology, the Company's future operations could be adversely
affected.
E. Regulation
The Federal Communication Commission ("FCC") and various state public utility
and service commissions, regulate most of the Company's potential domestic
customers. Changes to FCC regulatory policies affect the accessibility of
services, and other terms on which telecommunications providers conduct their
business, may adversely impact the Company's potential penetration into certain
markets. While the statutory and regulatory framework for telephone providers
providing video products has become more favorable, it is uncertain at this time
how this will affect the demand for products based upon DSL technology. In
addition, the Company's business and results of operations may also be adversely
affected by the imposition of certain tariffs, duties and other import
restrictions on components which the Company obtains from non-domestic
suppliers. Changes in current or future laws or regulations, in the U.S. or
elsewhere, could materially adversely affect the Company's business.
A(3) Management's Plan of Operation
To date, the Company has had no operating revenue. There can be no assurance
whatsoever that the TRAVERSERTM technology and products, when developed and
manufactured, will be able to compete successfully in the marketplace and/or
generate revenue. Moreover, the Company forecasts ongoing significant losses
into the foreseeable future, including, but not limited to, costs such as
general and administrative, marketing and sales, advertising, engineering,
drafting, manufacturing, assembly, quality control, cost of materials and
research and development expenses. Consequently, the Company will continue to
have high levels of operating expense before developing significant revenues
and will be required to make substantial capital expenditures in connection with
its ongoing research and development activities.
As a result of forecasted operating losses and the significant outlays for
research and development, the Company will be required to raise additional
capital through the issuance of its common stock, estimated at $15,000,000 at a
price per share to be determined, to sophisticated investors in a transaction
which is expected to be exempt from registration pursuant to Rule 506 of
Regulation D promulgated by the Securities and Exchange Commission ("the SEC")
under the Securities Act of 1933, as amended. Upon completion of this private
offering, the Company will have sufficient working capital for at least one year
and does not anticipate other offerings of its common stock during that time.
The TRAVERSERTM technology and products currently being developed by the Company
utilize new concepts and designs in transporting signals over traditional
twisted copper pair telephone wires. The prospects for success by mPhase
therefore will
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depend on its ability to successfully sell its products to potential customers
who may be inhibited from doing business with the Company because of their
commitment to their own technologies and products. As a result, demand and
market acceptance for the TRAVERSERTM technology and products now under
development by the Company is subject to a high level of risk in relation to
their acceptance in the marketplace.
Reliance Upon Technology and Product Development by GTRI
If GTRI is unable to complete its development activities pursuant to contract
arrangements, the Company would have to complete development itself or through
third parties. Although management at mPhase believes it has sufficient
information to allow the completion of development of these products, there is
no assurance that the Company will have sufficient economic or human resources
to complete such development in a timely manner, or that it could enter into
economically reasonable arrangements for the completion of such products by
third parties. In addition, the Company's success will depend upon its
technologies and proposed products meeting acceptable performance criteria and
upon their timely introduction into the marketplace.
First to Market with a Video Solution
The Company intends to benefit from being first to market with a product that
allows the delivery of digital quality television over copper wire. The Company
estimates that it would take a competitor several years to develop comparable
technology without patent infringement. The Company believes that competitors
are focusing their product development on high-speed Internet data transmission
only and have overlooked the vast opportunity in digital television transmission
over copper wire.
Flexibility of Service Offerings
With the TRAVERSERTM, telcos can partition the bandwidth allocated to a given
line in nearly countless configurations. This flexibility will enable telcos to
provide Internet data only service using the entire bandwidth at 6 Mbps speeds
up to 18,000 feet or video data without Internet up to 15,000 feet. This feature
of the TRAVERSERTM system enables the telcos to remotely configure a customer's
bandwidth according to the needs of that specific subscriber.
Maximizing Breadth of Customer Base
The Company believes that the historical barriers in the communications industry
are being deconstructed. Companies that have traditionally offered only type of
service are expanding into different products. Cable companies are now offering
Internet and telephony services in addition to cable television. Long distance
companies are now entering the local, cellular and Internet Service Provider
("ISP") markets and, in some cases, the video distribution market. mPhase
intends to target all carriers and believes that most carriers would be
interested in offering a variety of services.
Leveraging the Success Based Economics of DSL
Because the TRAVERSERTM incorporates DSL technology, a significant portion of
the service provider's capital expenditures is success-based. The Company's
TRAVERSERTM system is modular and scalable so service providers can buy
equipment where they have presold lines, thereby eliminating stranded plant or
unused equipment. The Company estimates that eighty (80%) percent of
expenditures are variable and are incurred when a subscriber is added, compared
to twenty (20%) percent which is fixed common equipment in the central office
that is necessary regardless of the number of subscribers on the system.
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Providing a Turnkey-Solution for Content - mPhase TV.net
The Company has organized a subsidiary corporation, mPhaseTV.net, which is an
integrator and aggregator of both digital television programming and Internet
content. mPhase TV.net will provide content for the telcos and other service
providers who install the TRAVERSERTM DVDDS hardware. mPhaseTV.net's content
package for both the Internet and the digital television applications of the
TRAVERSERTM is expected to rollout simultaneously and is contingent upon the
deployment rate of the TRAVERSERTM DVDDS version 1.1. The programming available
from mPhaseTV.net will be a suggested package of channels but can be customized
by each customer for local programming, existing and future ethnic channels,
special interest programming or preferred movie packages.
mPhaseTV.net has signed an agreement with InfoSpace.com Inc. ("InfoSpace")
(NASDAQ:INSP), a leading provider of Internet content, who will co-brand
Internet content for mPhase. Features included will be InfoSpace.com Yellow &
White Pages, Classifieds, Finance, Shopping, Net Community, and City Guide.
InfoSpace will act as the Internet portal for mPhase TV.net.
mPhaseTV.net will provide a gateway to the Internet through a proprietary mPhase
website, which consumers access through an mPhaseTV.net service provider. When
accessing the Internet, the telco subscriber will automatically enter the mPhase
homepage, similar to any on-line access provider. The mPhase Internet portal
will be powered by InfoSpace. The Company has signed an agreement with InfoSpace
to aggregate content and coordinate regional banner advertising with
mPhaseTV.net. Revenues from service provision will be shared between InfoSpace
and mPhaseTV.net. Any revenues derived from e-commerce will be shared between
InfoSpace, mPhaseTV.net and the telco or service provider, based on pre-
negotiated contracts.
Enable Service Providers to Benefit from E-Commerce and Internet Advertising
Telcos and service providers using the TRAVERSERTM product will benefit from
additional revenue streams derived through E-Commerce and advertising profit
sharing. The Company anticipates negotiating individual agreements with service
providers who purchase the TRAVERSERTM product related to revenue generated from
e-commerce and online advertising profit sharing. These agreements would be
dependent upon the terms of the agreements between the Company and e-commerce
participants, who generally reward Internet content providers featuring online
shopping on their website with a percentage of revenues generated through that
site. The Company would then pass along a portion of revenues to the telcos or
service providers.
Continued Product Enhancements
The Company anticipates developing a number of future products, which can be
incorporated into the TRAVERSERTM product line using mPhase's proprietary framer
chip to allocate both the downstream and upstream bandwidth dynamically for a
myriad of applications. In addition to digital television and Internet usage,
applications such as video conferencing and digital telephony (virtual copper)
become a technical and economic possibility. Remote security system monitoring,
utility meter reading, and any Ethernet data application can be performed with
the proper connectivity. When MPEG-2 video is not being transmitted over a
particular link, the entire bandwidth is automatically allocated to Ethernet.
Future Product Offerings
The Company also has several additional products under development to enhance
and expand its target market. These products include the DVDDS version 2.0, a
Digital Loop Carrier TRAVERSERTM solution, and a DSL repeater. The TRAVERSERTM
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DVDDS version 2.0 will address connectivity to ATM networks, targeting the
larger CLECs, certain foreign telephone companies, as well as the RBOCs.
Version 2.0 will offer a capacity of 400 digital video channels.
Strategic Partnerships
The Company intends to seek additional strategic partners for the aggregation
and development of television and Internet content, manufacturing, sales and
distribution and technological advancements. mPhase relies on the additional
expertise that other companies have in various specific fields, which relate to
the successful commercialization of the TRAVERSERTM, and intends to leverage
that expertise to enhance its product appeal. The Company is actively looking in
international markets for resellers and distributors who have established
relationships with pre-existing carriers. mPhase is also exploring the
possibility of seeking a partner to provide a turnkey video package, which it
can then resell to telcos who purchase the Company's hardware products.
"Plain English" Guidelines
At the time the Company prepared this document it was not required to follow the
plain English Guidelines recently promulgated by the SEC; on a going forward
basis the Company intends to utilize these guidelines on all its future filings.
B. Segment Data
As of December 31, 1998, no sales revenue has been generated by the Company.
Accordingly, no table showing percentage breakdown of revenue by business
segment or product line is included.
C. Forward Looking Statements
Forward-looking statements above and elsewhere in this report that suggest that
the Company will increase revenues, become profitable and achieve significant
growth are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations and cash flows. Words such as "believes," "expects," "anticipates,"
or similar expressions identify these statements. Such forward-looking
statements are based on the beliefs of the Company and its Board of Directors in
which they attempt to analyze the Company's competitive position in its industry
and the facts affecting its business. Investors should understand that each of
the foregoing risk factors, in addition to those discussed elsewhere in this
document could affect the future results of the Company, and could cause those
results to differ materially from those expressed in the forward-looking
statements contained or incorporated by reference herein. In addition, there can
be no assurance that the Company and its Board have correctly identified and
assessed all of the factors affecting the Company's business.
Item 2. Description of Property
The Company's corporate headquarters are located at 587 Connecticut Avenue,
Norwalk, CT 06856-0960. The Company also leases office space as well as
administrative services of Microphase Corporation including the use of
accounting personnel on a month to month basis for $5,000 per month. The
Company also maintains an office at the facilities of Georgia Tech Research
Corporation in Atlanta Georgia where the GTRI also has research facilities as
part of its contractual relations relating to a basic ordering agreement between
mPhase and Georgia Tech Research Corporation.
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Item 3. Directors, Executive Officers and Significant Employees
(a) Directors and Executive Officers and Significant Employees
The names, ages and positions of the Company's present directors and executive
officers are as follows:
Name Age Position
Necdet F. Ergul 75 Director, Chairman of the Board
Ronald A. Durando 42 Director, President and Chief
Executive Officer
Gustave T. Dotoli 62 Director and Chief Operating
Officer
David Klimek 44 Director, Chief Technology
Officer
J. Lee Barton 45 Director
Hal L. Willis 45 Executive Vice President -
Corporate Development
Susan E. Cifelli 41 Executive Vice President -
Sales and Marketing
(b) Other relationships
Necdet F. Ergul, Director and Chairman of the Board of the Company is also the
Chairman of the Board of Microphase Corporation. Ronald A. Durando, president
of the Company is also Chief Operating Officer of Microphase Corporation.
Gustave T. Dotoli is also Vice President of Corporate Development at Microphase
Corporation.
(c) Work Experience
Necdet F. Ergul: Chairman of the Board of Directors. Mr. Ergul has been
Chairman of the Board at mPhase since October 1996 with the exception of a three
month period when he temporarily resigned from that position due to the press of
personal business. He is also the President and Chief Executive Officer of
Microphase Corporation which he founded in 1955. 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.
Ronald A. Durando: Mr. Durando has been President and Chief Executive Officer
of mPhase since the Company's inception in October of 1996. In addition, he has
been the Chief Operating Officer of Microphase Corporation since 1994. From 1987
to 1994, he was the President and Chief Executive Officer of Nutley Securities,
Inc., a registered broker-dealer. From 1982 to 1987 Mr. Durando worked as a
Registered Representative for several Security Brokerage firms. From 1973 to
1982, Mr. Durando held various positions at Nova Electric Manufacturing Company,
including Head of Electromechanical Design.
Gustave T. Dotoli: Mr. Dotoli has been Chief Operating Officer of mPhase since
October of 1996. In addition, Mr. Dotoli has been the Vice President of
Corporate Development at Microphase Corporation since December of 1996. He is
formerly 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
earned a B.S. degree in Industrial Engineering from Fairleigh Dickenson
University in 1959.
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David Klimek: Mr. Klimek has been Chief Technology Officer of mPhase since
June, 1998 and Director of Engineering since the Company's inception in October
1996.He has more than 18 years of technical engineering and design expertise
and presently holds 13 individual or co-authored U.S. Patents. From 1982 to
1990, Mr. Klimek was the Research and Development Manager at Digital Controls,
Inc. In 1982, he received his Bachelor of Science degree in Electrical
Engineering from Milwaukee School of Engineering, Milwaukee, WI. In addition,
he graduated from the U.S. Navy Basic Electronics School at Great Lakes Naval
Training Center in 1972.
Hal L. Willis: Mr. Willis has been Executive Vice President - Corporate
Development of mPhase since October 1998. Prior to joining mPhase, Mr. Willis
had 17 years of cable television industry experience with Gaylord Entertainment
Company. Mr. Willis was formerly Vice President and General Manager-Worldwide
for the Country Music Television Cable Network ("CMT") and longtime General
Counsel of the Nashville Network (TNN). Mr. Willis worked with Gaylord
Entertainment Company, overseeing its launch of TNN and its acquisition of CMT.
Susan E. Cifelli: Ms. Cifelli joined mPhase in the capacity of Executive Vice
President - Marketing during February 1999. Ms. Cifelli has 18 years of
experience in the telecommunications industry with Bell Atlantic, NYNEX and New
England Telephone Company. Most recently, she was Project Manager for the
"Infospeed" DSL Services Marketing Project at Bell Atlantic. Prior to this, she
was the Project and Product Manager for marketing InfoFone Services in the State
of New York. Ms. Cifelli holds an Masters of Science degree in
Telecommunications & Computing Management from Polytechnic University and a
Bachelors of Art from the State University of New York at Buffalo.
J. Lee Barton: Mr. Barton became a member of the board of mPhase in February
1999. Mr. Barton is presently Chief Executive Officer of Lintel, Inc. a holding
company that includes Hart Telephone Company, a 10,000 line Local Exchange
Carrier in Northeast Georgia; Hart Communications, an interconnect carriers'
carrier and long distance company; Hart Cellular, a partnership in two RSA's in
North Georgia; Hart Cable, a recently formed cable television company; and Hart
GlobalNet.
(d) Involvement in certain material legal proceedings during the last five
years
A. No director, executive officer, significant employee or consultant has
been convicted in a criminal proceeding, exclusive of traffic violations.
B. No bankruptcy petitions have been filed by or against any business or
property of any director, executive officer, significant employee or
consultant of the Company nor has any bankruptcy petition been filed
against a partnership or business association where these persons were a
general partner or executive officer.
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Item 4. Renumeration of Existing Directors, Executive Officers and
Consultants
A. Remuneration During Period ended June 30, 1998
(i) Compensation of Officers
Options,
Warrants
Capacities Or Other
In Which Remuneration Aggregate Stock
Name of Individual Was Recorded Remuneration Rights
Necdet F. Ergul Chairman of the Board -0- - 0 - (1)
Ronald A. Durando President and Chief
Executive Officer 150,000 - 0 - (1)
Gustave Dotoli Chief Operating Officer 120,000 - 0 - (1)
David Klimek Manager of Engineering 68,500 - 0 - (1)
(ii) Compensation of Directors
There were no arrangements pursuant to which any director of the Company was
compensated for the period ended June 30, 1998 for any service provided as a
director.
(1) Does not include options issued with an exercise price of one dollar
($1.00) per share, and therefore no compensatory element.
B. Remuneration Subsequent to year-end for the six month period ending
December 31, 1998
Options,
Warrants
Capacities Or Other
Name of Individual In Which Remuneration Aggregate Stock
or Identity of Group Was Recorded Remuneration Rights
Necdet F. Ergul Chairman of the Board -0- $ 256,250(1,2)
Ronald A. Durando President and Chief
Executive Officer 75,000 $ 256,250(1,2)
Gustave Dotoli Chief Operating Officer 60,000 $ 85,417 (1,2)
David Klimek Manager of Engineering 37,985 - 0 - (1)
There were no arrangements pursuant to which any director of the Company was
compensated for the period ended June 30, 1998 for any service provided as a
director.
(1) Does not include options issued with an exercise price of one dollar
($1.00) per share, and therefore no compensatory element.
(2) Includes grant of shares valued at $1.7083 per share, issued in January of
1999 for services performed through December 31, 1998. 150,000 shares
were issued to Necdet F. Ergul; 150,000 shares were issued to Ronald A.
Durando; and 50,000 shares were issued to Gustave T. Dotoli.
Item 5. Security Ownership of Management and Certain Security holders
A. The following table sets forth information concerning stock ownership of
(i) each director, (ii) each executive officer (iii) the directors and
officers of the Company as a group, (iv) and each person known by the
Company to own beneficially more than 10% of the Common Stock as of June
25, 1998.
16
Amount
Title Name and Address of Shares Percent
of of Held By of
Class Owner of Shares Owner Class
Common Necdet F. Ergul (1) 1,306,148 7.6
" Ronald A. Durando (1)(2) 1,966,148 11.4
" Gustave Dotoli (1) 775,000 4.5
" J. Lee Barton (1) 2,545,000 14.8
" David Klimek (1) 300,000 1.8
" Hal L. Willis (1) 150,000 0.9
" All Directors and
Officers as a group
(6 persons) Total 7,042,296 41.0%
(1) c/o mPhase Technologies, Inc.,
(2) Includes 320,000 shares held by Nutley Securities, Inc. which is owned
100% by Mr. Durando.
B. Persons Sharing Ownership of Control Shares
No persons other than J. Lee Barton, Ronald A. Durando and Necdet F. Ergul
own or shares the power to vote 5% or more of the Company's securities.
C. Non-voting Securities and Principal Holders Thereof.
The Company has not issued any non-voting securities.
D. Options, Warrants and Rights
The Company has issued 1,621,845 five year warrants to purchase mPhase
common stock in connection with Rule 505 offerings of its securities to
investors. It also issued 75,000 five year warrants to a company called
VMW, Inc., the first 25,000 warrants exercisable at $1.06 per share and
the balance of 50,000 exercisable at $2.375 per share. In addition, the
Company issued 400,000 five year warrants to Kaufman Brothers, a New York
City investment banker, exercisable at $1.00 per share. The warrants
granted the Kaufman Brothers also contain provisions which would allow for
a conversion to common stock without any proceeds being received by the
Company under a formula which would reduce the number of shares issued
when the warrants are exercised based in part on the marketplace of the
Company's common stock when the warrants are exercised.
The Company has also granted stock options to its directors, officers,
legal counsel and certain consultants, in August 1997 and again in
January/March 1999. The total number of stock options granted and
outstanding as of March 31, 1999 was 5,703,750. Of this number, 5,573,750
were exercisable at $1.00 per share, 80,000 were exercisable at $1.50 per
share, and 50,000 were exercisable at $2.00 per share.
In August 1997, the Company granted Thomas A. Murphy, a former director
and officer of the Company, 750,000 options to purchase mPhase common
stock at a price of $1.00 per share. As a consequence of negotiations
between the Company and Mr. Murphy, this former director and officer
agreed to waive any claim he may have had to the 750,000 stock options
that had been granted to him.
E. Parents of the Issuer
Under the definition of parent, as including any person or business entity
who controls substantially all (more than 80%) of the issuers of common
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stock, the Company has no parents. No person other than Messrs. J. Lee
Barton, and Ronald A. Durando own or share the power to vote 10% or more of the
Company's securities.
Item 6. Interest of Management and Others in Certain Transactions
The management of the Company are also employees of an affiliated group of
companies which have recorded material transactions with the Company. The
Company's management is in a position to, and in the future may, influence
future operations of the Company for the benefit of other companies that are
under their control.
During the period ended June 30, 1997, the Company advanced $164,000 and
$250,090 to companies then under common control. Additionally, the Company
agreed to reimburse another affiliate $383,266 for research and development
expenses as well as certain marketing expenses and $42,500 for other costs.
On May 1, 1997 the Company entered into an agreement with Microphase
Corporation, an affiliated company with certain directors and officers in
common, whereby the Company will utilize office space as well as the
administrative services of Microphase Corporation such as its accounting
personnel. This agreement calls for payments of $10,000 a month and is on a
month to month basis.
On October 27, 1997, the Company, in connection with a planned joint venture
licensing agreement with Global Music & Media, Inc., a Tennessee corporation,
became the 41.724% owner in an unconsolidated subsidiary known as Complete
Telecommunications, Inc. Pursuant to the original concept for the joint
venture, the Company made an investment of $300,000 and issued to Global Music
& Media, Inc. 250,000 shares of its common stock then valued at $125,000. The
Company also advanced $150,000 to the joint venture which was to bear interest
at twelve (12%) percent per annum. No payments have been received by the Company
from the joint venture with Global Music & Media, Inc. During the fiscal year
1998, Global Music & Media, Inc. commenced an action against the Company
alleging it was the holder of an exclusive license to market the Company's
TRAVERSERTMtechnology and related projects.
Prior to its merger with Lightpaths, Inc., when known as Tecma Laboratories,
Inc., the corporation had abandoned its Bridgewater, New Jersey facility and
had taken the position it had no obligation for rent under a lease with U.S.
Land Resources, L.P. which has since expired. Notwithstanding, the Company
recorded $54,250 on its books for unpaid rent which is included in accounts
payable as of June 30, 1998. As a consequence of a lawsuit brought by U.S. Land
Resources which named the former legal counsel for the Company as a defendant,
in March 1999, the Company negotiated a settlement of this obligation which was
funded in substantial part by the aforesaid former legal counsel of the Company
and, accordingly, had no further impact on its books.
Prior to recapitalization due to the reverse acquisition discussed in A(1)
Business Development, Organization and Acquisition Activities, the Company
issued 1,500,000 and 27,465 shares of stock in cancellation of $75,000 of loans
and $6,866 of accounts payable respectively, bringing the aggregate shares to
11,404,270 prior the recapitalization and the reverse split noted below.
The Company effected a one-for-ten reverse split for the shares above,
effective March 31, 1997.
The Company issued 6,600,000 post reverse split shares in connection with the
reverse acquisition discussed above.
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On June 25, 1998, the Company issued 2,500,000 shares in consideration for all
the issued and outstanding shares of MicroTel, which was then an affiliate of
Microphase Corporation which holds certain provisional patents and copyrights
relating to the Company's TRAVERSERTM technology. As a consequence of this
acquisition, the Company eliminated a Technology, Patent and Trademark License
Agreement it had entered into with MicroTel.
Item 7. Description of Securities
(a) Common or Preferred Stock
(1) Description of Rights and Liabilities of Common Stockholders
(i) Dividend Rights-The holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefore at such
times and in such amounts as the board of directors of the Company may from time
to time determine.
(ii) Voting Rights-Each holder of the Company's common stock are entitled to one
vote for each share held of record on all matters submitted to the vote of
stockholders, including the election of directors. All voting is noncumulative,
which means that the holders of 50% of the shares voting for the election of the
directors can elect all the directors. The board of directors may issue shares
for consideration of previously authorized but unissued common stock without
further stockholder action.
(iii) Liquidation Rights- Upon liquidation, the holders of common stock are
entitled to receive pro rata all of the assets of the Company available for
distribution to such holders.
(iv) Preemptive Rights-Holders of common stock are not entitled to preemptive
rights.
(v) Conversion Rights-No shares of common stock are currently subject to
outstanding options, warrants, or other convertible securities.
(vi) Redemption Rights-No redemption rights exist for shares of common stock
(vii) Sinking Fund Provisions- No sinking fund provisions exist for shares of
common stock.
(viii) Further Liability For Calls- No shares of common stock are subject to
further call or assessment by the issuer.
(2) Potential Liabilities of Common Stockholders to State or Local Authorities
No material potential liabilities are anticipated to be imposed on stockholders
under state statues.
(b) Debt Securities
The Company is not registering any debt securities, nor are any debt securities
presently outstanding.
(c) Other Securities To Be Registered
The Company is not registering any securities other than its common stock.
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Part II
Item 1 Market Price of and Dividends on the Registrant's Common Equity and
Other Stockholder Matters
(a) Market Information
(1)The common stock of the Company is presently traded on the NASDAQ OTC
Bulletin Board, under the symbol "XDSL".
The following represents the high and low, bid and ask prices of the Company's
common stock the last two fiscal years 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.
THESE FIGURES HAVE BEEN ADJUSTED TO REFLECT A 1 FOR 10 REVERSE SPLIT ON MARCH 1,
1997 AND A REVERSE SPLIT OF 1 FOR 2 EFFECTIVE ON SEPTEMBER 21, 1995
Bid Prices Ask Prices
High Low High Low
1996
October 1 through December 31 $.03125 $ .03125 $ .28125 $ .28125
1997
Jan. 1 through Mar. 31 $ .625 $ .03125 $ .78125 $ .28125
Apr. 1 through June 30 $ 3.75 $ 1.75 $ 5.00 $ 2.125
July 1 through Sept. 30 $ 2.125 $ 1.375 $ 2.3475 $ 1.875
Oct. 1 through Dec. 31 $ 1.406 $ .625 $ 1.875 $ .8125
1998
Jan. 1 through Mar. 31 $ 1.75 $ .875 $ 2.00 $ 1.0
April 1 through June 30 $ 2.375 $ 1.125 $ 2.5625 $ 1.28125
July 1 through Sept. 30 $ 5.125 $ .71875 $5.25 $.875
Oct. 1 through Dec. 31 $ 7.813 $ 1.3125 $ 3.9375 $ 1.500
1999
Jan. 1 through Mar. 31 $7.375 $ 1.875 $ 7.375 $ 1.9688
(2)(i) The common stock of mPhase is subject to outstanding options issued to
directors, officers, consultants and legal counsel of the Company as follows:
5,488,750 options to purchase 5,488,750 shares of the Company's common stock at
$1.00 per share, 80,000 options to purchase 80,000 shares of the Company's
common stock of $1.50 per share and 50,000 options to purchase 50,000 shares of
the Company's common stock at a price of $2.00 per share. In addition, the
Company has issued 1,621,845 warrants to purchase 1,621,845 shares of the
Company's common stock at $0.75 per share, 25,000 warrants to purchase 25,000
shares of the Company's common stock at $1.06 per share, 50,000 warrants to
purchase 50,000 shares of the Company's common stock at $2.4375 per share and
400,000 warrants to purchase 400,000 shares of the Company's common stock at a
price of $1.00 per share but with provisions which would allow the holder of the
warrants to reduce the number of shares exercised proportionately to the market
price of the Company's stock in lieu of payment for these options.
(ii) All of the issued and outstanding shares of the Company's common stock is
subject to being sold under Rule 144 promulgated by the United States Securities
and Exchange Commission under the Securities Act of 1933, as amended. Except for
a limited number of shares sold under Rule 504 of Regulation D, sales of
unregistered shares of mPhase common stock made by the Company to investors have
been made with the understanding that it would file to become a reporting
company which would then allow the investors to sell the shares purchased
pursuant to Rule 144 after a one year holding period. As of March 31, 1999, the
public float consisted of approximately 4,511,000 shares and the remaining
12,683,000 issued and outstanding shares were subject to Rule 144 restrictions.
20
(iii) No common stock is currently being publicly offered by the Company.
However, management continues to seek additional capital to fund its research
and development projects through the private placement of its securities with
institutions and other sophisticated investors. The Company presently plans a
to implement a private placement of its securities that would raise $15,000,000
pursuant to Rule 506 of Regulation D promulgated by the SEC.
(b) Shareholders
As of March 31, 1999, the Company had issued 17,194,043 shares, all of which
were still outstanding and held by individual shareholders and brokerage firms
and/or clearing houses in "street name" for their clients. The Company believes
that there are approximately 750 beneficial owners of its common stock,
including shares held in street name.
(c) Dividends
The Company has not paid any dividends, other than a dividend having a value of
$11,404, distributed to shareholders of record on February 16, 1997. In
addition, certain assets and liabilities from the health care business were
transferred to TLI, which was then spun off to shareholders of record prior to
the date of the acquisition by the Company of Lightpaths, Inc., the subsidiary
which then held the rights to the mPhase technology and products which are now
identified as the TRAVERSERTM technology and products. The Company does not
anticipate paying dividends in the immediate foreseeable future. The board of
directors of the Company will review its dividend policy from time to time to
determine the desirability and feasibility of paying dividends after giving
consideration to the Company's earnings, financial condition, capital
requirements and such other factors as the board may deem relevant.
Item 2. Legal Proceedings
The Company is not currently involved in any legal proceeding nor does it have
knowledge of any threatened litigation, except for a lawsuit instituted by
Global Music and Media Inc, a Tennessee Corporation, over an alleged breach of
an April 30, 1997 agreement whereby Global alleges it was given the exclusive
right to market mPhase technology as well as television programming and related
services. The Company has asserted the April 30, 1997 agreement relied upon by
Global was superseded by an October 27, 1997 agreement with respect to which
Global and a related company has defaulted under its obligations. Accordingly,
the Company does not believe there is any merit to the contentions of Global
and intends to vigorously defend the lawsuit.
The Company was previously involved in an action arising out of a lease entered
into by its predecessor in name with U.S. Land Resources, L.P. which has since
been resolved and settled at a minimal cost. Another matter which did not result
in litigation but was settled by the Company involved claims by Thomas A.
Murphy, a former director and executive of the Company who agreed to waive all
claims against the Company in return for allowing him to retain the benefit of
525,000 shares of mPhase common stock he had acquired as a founding shareholder
of Lightpaths, Inc. and as a director of the Company.
Item 3. Changes in and Disagreements With Accountants
Effective for the fiscal year ended June 30, 1997, the Company changed its
accountants from Mauriello, Franklin & LaBrace, CPAs to Schuhalter, Coughlin &
Suozzo, LLC. Mauriello, Franklin & Labrace, CPAs declined to stand for
re-election in March of 1997. In the Auditor's report for the fiscal year ended
June 30, 1996, Mauriello, Franklin & Labrace, CPAs expressed an opinion which
was qualified as to the Company's ability to continue as a going concern. There
were no disagreements with the former accountant on any matter of accounting
principals or practices, financial statement disclosure, or auditing scope or
procedure.
21
<PAGE>
Item 4. Recent Sales of Unregistered Securities
(a) In June 1997, the Company issued 594,270 post reverse split shares for
aggregate consideration of $897,405, pursuant to Rule 504 of Regulation D of the
United States Securities and Exchange Commission. In July 1997, the Company
issued 49,300 post reverse split shares for aggregate consideration of $98,600,
pursuant to Rule 504 of Regulation D of the United States Securities and
Exchange Commission.
In November 1997, 300,000 post reverse split shares were issued for services
rendered to the Company valued at twenty-five ($0.25) cents per share in
connection with efforts to obtain markets for the Company's technology.
In November 1997, the Company also issued 300,000 post reverse split shares to
shareholders of Complete Telecommunications, inc. for aggregate consideration of
$300,000 and issued 250,000 post reverse split shares as part of its investment
in Complete Telecommunications, Inc.
During the fiscal year ended June 1998, the Company issued 2,195,014 post
reverse split shares for aggregate consideration of $1,677,218, which net of
offering costs of $205,203, generated net proceeds of 1,472,015 to the Company.
In addition, during the same time period, warrants to purchase 1,621,845 shares
of mPhase common stock at a price of $.75 per share were issued pursuant to an
offering made under Rule 505 of Regulation D promulgated by the United States
Securities and Exchange Commission under authority granted that federal agency
by provisions of the Securities Act of 1933, as amended.
On June 25, 1998, the Company issued 2,500,000 shares in consideration for all
the shares outstanding of Microphase Telecommunications, Inc., a Connecticut
corporation, which is also an affiliate that holds substantially all the patents
and copyrights to the Company's technology.
During the six month period ended December 31, 1998, the Company issued 360,000
shares valued at $615,000, considering the Rule 144 restrictions to which they
were subject, and charged the same to stock based compensation in the statement
of operations.
During the six month period ended December 31, 1998, the Company issued 54,332
shares valued at $40,750 for services.
Also during the six period ended December 31, 1998, the Company issued 3,115,000
shares for $3,197,416, which net of offering costs aggregating $132,666,
generated net proceeds of $3,064,750 to the Company.
Subsequent to December 31, 1998, the Company issued 85,000 shares for services
rendered valued at $0.50 per share resulting in net proceeds to the Company of
$42,500 for bookkeeping purposes.
(b) The Company has not publicly offered any unregistered securities. It has no
agreement with any person who may be deemed an underwriter. However, it has sold
shares of its common stock in private transactions, including the Rule 504 and
Rule 505 offerings discussed below.
(d) The issuer has not sold any securities for other than cash, except for
1,000,000 shares of its common stock issued to the following persons:
(1) 600,000 shares of stock issued to Nutley Securities, Inc. a company in which
Ronald A. Durando is President, valued at $0.01 per share in connection with his
services as a "finder fee" at the time of the acquisition of Lightpaths, Inc.
22
<PAGE>
(2) 100,000 shares of common stock, valued at $0.25 per share, issued to Robert
H. Jaffe & Associates, P.A. in consideration of services to be rendered by that
law firm in connection with drafting the Company's initial registration
statement on SEC Form 10-SB, and 300,000 shares to six investors who performed
services for the Company in connection with efforts to obtain markets for the
Company's technology.
(e) The unregistered shares of common stock sold by the Company pursuant to
Rule 504 in June/July 1997 were offered in accordance with provisions of
Regulation D of the United States Securities and Exchange Commission and similar
exemption provisions in the states where these offerings were made. These
offerings were made to accredited investors, who represented in subscription
agreements that they had sufficient assets such that they could afford to lose
their entire investment without significantly affecting their personal financial
condition.
(f) The unregistered shares of common stock sold by the Company pursuant to Rule
505 in 1998 were offered in accordance with provisions of Regulation D of the
United States Securities and Exchange Commission and similar exemption
provisions in the states where these offerings were made. These offerings were
made to accredited investors, who represented in subscription agreements that
they had sufficient assets such that they could afford to lose their entire
investment without significantly affecting their personal financial condition.
Item 5. Indemnification of Directors and Officers
THE BYLAWS OF THE COMPANY PROVIDE FOR INDEMNIFICATION OF EMPLOYEES AND AGENTS IN
CERTAIN CASES. INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS
BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS
THEREFORE UNENFORCEABLE.
23
<PAGE>
TABLE OF CONTENTS
The following documents are filed as part of this report:
a) mPhase Technologies, Inc. and Subsidiary Page
Report of Schuhalter, Coughlin & Suozzo, LLC F-1
Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1998 (Unaudited) F-2, F-3
Consolidated Statement of Operations From the Company's
Inception, October 2, 1996 through June 30, 1997 and
December 31,1998 (Unaudited) and for the year ended
June 30, 1998 and the six months ended
December 31, 1998 (Unaudited) F-4 - F-5
Consolidated Statement of Changes in Stockholder's
Deficit From Inception, October 2, 1996 through
June 30, 1997 and for the year ended June 30, 1998
and the six months ended December 31, 1998 (Unaudited)F-6, F-7, F-8
Consolidated Statement of Cash Flows From the Company's
Inception, October 2, 1996, through June 30, 1997 and
December 31, 1998 (Unaudited) and for the year ended
June 30, 1998 and the six months ended
December 31, 1998 (Unaudited) F-9
Notes to Consolidated Financial Statements F-10
b) Interim Financial Statements are not provided in this
section as they are included above
c) Financial Statements of Businesses Acquired or to be Acquired
1) Tecma Laboratories, Inc.
Report of Mauriello, Franklin & Labrace, CPA's F-21
Balance Sheets as of June 30, 1996 F-22
Statements of Income for the years ended June 30, 1996
and 1995 F-23
Statements of Stockholder's Equity for the years ended
June 30, 1996 and 1995 F-24
Statements of Cash Flows for the years ended June 30,
1996 and 1995 F-25
Notes to the Financial Statements F-26
2) Microphase Telecommunications, Inc.
Report of Schuhalter, Coughlin & Suozzo, LLC F-34
Balance Sheet as of June 30, 1998 F-35
Statement of Operations for the periods ended June 30,1997 and 1998F-36
Statement of Changes in Stockholder's Equity through June 30, 1998 F-37
Statement of Cash Flows for the periods ended June 30,1997 and 1998F-38
Notes to Financial Statements F-39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
mPhase Technologies, Inc.
We have audited the accompanying balance sheets of mPhase Technologies, Inc. as
of June 30, 1998 and the related statements of operations, changes in
stockholders' equity, and cash flows for the period October 2, 1996 (date of
inception) through June 30, 1998. 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 financial position of the Company at June 30, 1998 and 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.
The Company is in the development stage as of June 30, 1998. Recovery of the
Company's assets is dependent upon future events, the outcome of which is
indeterminable. In addition, successful completion of the Company's development
program and its transition, ultimately, to attaining profitable operations is
dependent upon obtaining adequate financing to fulfill its development
activities and achieving a level of sales adequate to support the Company's cost
structure.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, conditions
exist which raise substantial doubt about the Company's ability to continue as
a going concern unless it is able to generate sufficient cash flows to meet its
present and future obligations and sustain its operations. Management's plan in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Schuhalter, Coughlin & Suozzo, LLC
Schuhalter, Coughlin & Suozzo, LLC
Raritan, New Jersey
January 28, 1999
F-1
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
June 30, December 31,
1998 1998
(Unaudited)
ASSETS
Cash and equivalents $ - $ 969,680
Prepaid expenses 16,000 4,400
Deposits - 7,415
Equipment used in research and development, less
accumulated depreciation of $29,427 and $47,661 59,115 82,603
Marketing equipment, less accumulated depreciation
of $5,268 and $8,951 16,350 15,826
Patents and licensing rights, at cost, less
accumulated amortization of $46,534 and $142,366 1,084,492 972,624
Organization costs, less accumulated amortization
of $187 and $253 468 1,122
Note receivable - unconsolidated subsidiary, net
of $150,000 bad debt reserve - -
Goodwill, less accumulated amortization of
$0 and $49,929 998,085 948,181
TOTAL 2,174,510 3,001,851
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Cash overdraft 8,432 -
Accounts payable 1,706,584 2,290,288
Accrued expenses 638,554 601,079
Due to affiliates 525,729 442,490
Deferred revenue - 40,000
Loan payable 210,000 222,600
TOTAL LIABILITIES 3,089,299 3,596,457
STOCKHOLDERS DEFICIT
Common stock, no par value, 50,000,000 shares
authorized; 13,579,711 shares issued and
outstanding at June 30, 1998 and 17,109,043
shares issued and outstanding at
December 31, 1998 (unaudited) 4,215,489 7,976,739
Deficit accumulated during development stage,
subsequent to recapitalization effective
October 2, 1996 (5,122,305)(8,563,372)
Treasury Stock, 13,750 shares at cost (7,973) (7,973)
TOTAL STOCKHOLDERS' DEFICIT (914,789) (594,606)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,174,510 $3,001,851
The accompanying notes are an integral part of these financial statements.
F-2
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Operations
From
October 2,
1996
(Date of For the
Inception) Year
to Ended
June 30, June 30,
1997 1998
TOTAL REVENUE $ -$ -
COSTS AND EXPENSES
Research and development (including $109,646
and $101,240 for the periods ended
June 30, 1997 and 1998 respectively and
$302,188 for the period ended 192,502 2,297,282
December 31, 1998 incurred with affiliate)
Licensing fees, including $450,000 for the
period ending June 30, 1998 incurred
with affiliate 37,500 450,000
General and administrative (including $223,488
and $61,131 for the period ended June 1997
and 1998 respectively, and $60,000 for the
period ended December 31, 1998 incurred
with affiliate) 540,722 1,109,801
Depreciation and amortization 10,522 29,131
Stock based compensation - 150,000
Interest expense - -
TOTAL COSTS AND EXPENSES (781,246) (4,036,214)
NET (LOSS) FROM OPERATIONS $ (781,246) (4,036,214)
LOSS FROM UNCONSOLIDATED SUBSIDIARY
INCLUDING $150,000 RESERVE FOR BAD DEBT - (304,845)
NET (LOSS) $ (781,246)$(4,341,059)
BASIC LOSS PER COMMON SHARE $ (.100)$ (.465)
COMMON SHARES OUTSTANDING 7,806,457 9,336,340
DILUTED LOSS PER COMMON SHARE $ (.068)$ (.313)
COMMON SHARES AND EQUIVALENTS OUTSTANDING 11,481,457 13,883,185
The accompanying notes are an integral part of these financial statements.
F-3
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Operations - (Continued)
From
October 2,
For the 1996
Six (Date of
Months Inception)
Ended to
December 31, December 31,
1998 1998
(Unaudited) (Unaudited)
$ - $ -
1,887,210 4,376,994
- 487,500
717,786 2,368,309
165,721 205,374
655,750 805,750
14,600 14,600
(3,441,067) (8,258,527)
(3,441,067) (8,258,527)
- (304,845)
$(3,441,067)$(8,563,372)
$ (.251)$ (.500)
13,736,365 17,109,043
$ (.160)$ (.344)
21,536,960 24,909,638
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Deficit
From July 1, 1996 to June 30, 1998 and December 31, 1998 (Unaudited)
Number Common Treasury
of Shares Stock Stock (Deficit) Total
Balance, July 1, 1996,
as previously
reported 9,876,800 $ 389,291 $ - $(671,039) $ (281,748)
Conversion of Loans
Payable to Common
Stock 1,500,000 5,000 - - 75,000
Conversation of
Accounts Payable
to Common Stock 27,465 6,866 - - 6,866
One-for-Ten Reverse
Common Stock Split (10,263,838) - - - -
Assignment of
Certain Assets and
Liabilities of
Prior Tecma
Laboratories, Inc.
to TLI Industries,
Inc. and Spin-off
of 100% of TLI
Industries Common
Stock to
Shareholders, net
of $46,990 Loss
from Discontinued
Operations and
Dividend of $11,404 - - - 133,332 133,332
Subtotal 1,140,427 471,157 - (537,707) (66,550)
Issuance of Common
Stock in
Consideration for
100% of the Common
Stock of Lightpaths,
Inc. 6,600,000 66,550 - - 66,550
Elimination of
Predecessor Retained
Deficit in
Recapitalization - (537,707) - 537,707 -
Balance as Restated
for Recapitalization,
Effective for
October 2, 1996
(Date of Inception
for Lightpaths, Inc.)7,740,427 $ - $ - $ - $ -
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Deficit (Continued)
From July 1, 1996 to June 30, 1998 and December 31, 1998 (Unaudited)
Number Common Treasury
of Shares Stock Stock (Deficit) Total
Balance, as Restated 7,740,427 $ - - - -
Issuance of Common
Stock, in Private
Placement Transactions,
Net of Offering Costs
of $138,931 594,270 758,474 - - 758,474
Net (Loss) for the
Year - $ - $ - $ (781,246) $ (781,246)
Balance, June 30,
1997 8,334,697 758,474 - (781,246) (22,772)
Issuance of Common
Stock, Net of
Offering Costs
of $205,203 2,195,014 1,472,015 - - 1,472,015
Issuance of Common
Stock for Services 300,000 150,000 - - 150,000
Issuance of Common
Stock in Connection
with investment in
Subsidiary 250,000 125,000 - - 125,000
Repurchase of 13,750
Shares of Common
Stock at Cost - - (7,973) - (7,973)
Issuance of common
stock in
consideration for
100% of the common
stock of Microphase
Telecommunications,
Inc. 2,500,000 1,710,000 - - 1,710,000
Net loss for the year - - - (4,341,059) (4,341,059)
Balance, June 30,
1998 13,579,711 $4,215,489$ (7,973) $(5,122,305) $ (914,789)
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Deficit (Continued)
From July 1, 1996 to June 30, 1998 and December 31, 1998 (Unaudited)
Number Common Treasury
of Shares Stock Stock (Deficit) Total
Balance, July 1,1998 13,579,711 $4,215,489 $(7,973) $(5,122,305) $(914,789)
Issuance of common
shares for services
(unaudited) 414,332 655,750 - - 655,750
Issuance of common
stock net of offering
costs of $184,065
(unaudited) 3,115,000 3,105,500 - - 3,105,500
Net loss for nine
months ended
March 31, 1999
(unaudited) - - - (4,360,732)(4,360,732)
Balance, March 31,
1999 (unaudited) 17,109,043 8,579,136 (7,973) (9,483,037) (911,874)
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flow
From
October 2,
1996
(Date of For the
Inception) Year Ended
June 30, June 30,
1997 1998
Cash Flow Used In Operating Activities:
Net (Loss) $ (781,246)$(4,341,059)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and Amortization 10,522 41,467
Depreciation of research and
development equipment 2,053 27,374
Interest expense - -
Loss on unconsolidated subsidiary - 304,845
Stock based compensation - 150,000
Changes in assets and liabilities:
(Increase) Decrease in deposits - -
(Increase) Decrease in prepaid expenses (6,705) (9,295)
Increase in accounts payable 86,297 1,620,387
Increase in accrued expenses 227,197 452,180
Increase in due to affiliate 425,766 78,294
Increase in deferred revenue - license fee - -
Increase in cash overdraft - 8,432
Increase in receivables from subsidiary - (150,000)
Net cash (used in) operating activities (450,216) (1,817,375)
Cash Flow Used in Investing Activities:
Investment in organizational costs (54,110) -
Investment in licensing rights (655) -
Investment in fixed assets (80,906) (29,254)
Investment in unconsolidated subsidiary - -
Net cash (used in) investing activities (135,641) (29,254)
Cash Flow From Financing Activities:
Proceeds from loan - 210,000
Proceeds from issuance of common stock, net
of offering costs of $138,931, $205,203
and $132,666 747,674 1,482,815
Repurchase of Treasury stock at cost - (7,973)
Net cash provided by financing activities 747,674 1,684,842
Net Increase (Decrease)in Cash 161,787 (161,787)
Cash, Beginning of Period - 161,787
Cash, End of Period $ 161,787 $ -
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flow - (Continued)
From
October 2,
For the 1996
Six (Date of
Months Inception)
Ended to
December 31, December 31,
1998 1998
(Unaudited) (Unaudited)
$(3,441,067)$(8,563,372)
149,510 201,499
18,234 47,661
12,600 12,600
- 304,845
655,750 805,750
(7,415) (7,415)
11,600 (4,400)
583,704 2,290,288
(29,896) 649,481
(83,239) 6,821
40,000 40,000
- 8,432
- (150,000)
(2,090,219) (4,357,810)
(720) (54,830)
- (655)
(44,881) (155,041)
- -
(45,601) (210,526)
- 210,000
3,105,500 5,335,989
- (7,973)
3,105,500 5,538,016
969,680 969,680
- -
$ 969,680 $ 969,680
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
NOTE 1 - LOSSES DURING THE DEVELOPMENT STAGE:
The Company and its predecessor corporation, discussed in Notes 2 and 3 below,
have recorded operating losses since inception, totaling $5,840,334 through June
30, 1998 which represents $718,029 operating losses by the predecessor and
$5,122,305 by the Company since the recapitalization.
Management plans to raise additional capital, primarily through the issuance of
common stock, until successful operations are obtained and the Company is no
longer in the development stage.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to underwrite the Company's
development stage through completion will provide the necessary financial
requirements which in turn will provide the opportunity for the Company to
continue as a going concern.
NOTE 2 - ORGANIZATION AND NATURE OF BUSINESS:
The Company and its predecessor corporation was organized in the State of New
Jersey in December, 1979 under the name Tecma Laboratories, Inc. On April 7,
1997, the Company amended its certificate of incorporation and changed its name
to Lightpaths TP Technologies, Inc. On June 2, 1997, the Company amended the
certificate of incorporation and changed its name to mPhase Technologies, Inc.
The predecessor corporation was a development stage company primarily engaged in
research, development and the exploitation of certain products in the medical
and health care field. Since the recapitalization discussed in Note 3, the
Company is still in the development stage. The present activities of the Company
are focused on the completion of its proprietary Traverser Digital Data Delivery
System utilizing existing twisted pair copper wire infrature in "plain old
telephone systems" or "POTS".
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation. These include mPhase Technologies, Inc. (formerly
Lightpaths, Inc.), a Delaware corporation, formed on October 2, 1996; which is
the effective date of inception for the Company as the historical financial
statements are those of mPhase Technologies, Inc. as the transaction is
accounted for as a recapitalization of mPhase Technologies, Inc. Additionally,
the predecessor Company formed another wholly owned subsidiary alled TLI
Industries, Inc. on January 29, 1997, shares of which were spun off to the
stockholders of the Company, effective March 31, 1997, after transferring
certain assets and liabilities, primarily fixed assets, patents and shareholder
loans. Effective for the period beginning July 1, 1998, these also include
Microphase Telecommunications, Inc. ("Microtel"). The liabilities in excess of
basis, and therefore the resultant gain on the disposal of discontinued
operations reduced by the loss from this discontinued operation through March
31, 1997, was treated as a decrease of the accumulated deficit prior to the
recapitalization.
F-10
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
The consolidated financial statements do not include an affiliate (see Note 5 -
Related Party Transactions) which the Company has been dependent upon for
facilities and technological assistance (see also Note 3).
Schedule of NonCash Investing and Financing Activities:
From
October 2, For the
1996 For the Six
(Date of Year Months
Inception) Ended Ended
to June 30, June 30, December 31,
1997 1998 1998
(Unaudited)
Accounts payable assumed in the
reverse acquisition of Lightpaths, Inc. $ 66,500
Common stock issued in connection with
investment in subsidiary $ 125,000
Common stock issued for services $ 150,000 $655,750
Common stock issued in connection with
the acquisition of Microphase
Telecommunications, Inc. $1,710,000
Other Supplemental Cash Flow Information:
Interest paid $ 0 $ 0 $ 2,000
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of five years.
Research and Development:
Research and development costs are charged to operations as incurred.
Income Taxes:
Income taxes have been provided using the liability method in accordance with
FASB Statement No. 109, Accounting for Income Taxes.
Dependence:
The Company is dependent on an affiliated company for facilities and
technological assistance. (See Note 5 - Related Party Transactions). The
Company is also dependent on a co-patent holder, a research institute affiliated
with Georgia Tech University. This institute presently has the most significant
commitment of the Company. (See Note 6)
F-11
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
Intangible Assets:
Intangible assets are stated at cost. Amortization is computed using the
straight-line method over the estimated useful life of the asset, generally five
years for patents and copyrights and ten years for goodwill. At June 30, 1998,
the Company had capitalized $1,131,026 for patents and copyrights and $998,085
for goodwill, primarily in connection with its purchase of "Microtel" pursuant
to APB16.
Amortization expense was $10,133, $24,252 and $145,627 for the years ended June
30, 1997 and 1998 and the six months ended December 31, 1998.
Effect of Uncertainty of Affiliate:
The affiliated companies for which the Company's depended on have not been
audited. Management has indicated that the affiliated companies have fiscal
uncertainties which question their ability to continue as a going concern. No
liabilities have been recorded in these financial statements for this
uncertainty.
Financial Instruments:
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles (GAAP) requires the use of management's estimates.
The following methods and assumptions were used by the Company to estimate fair
values of financial instruments as discussed herein:
Cash and equivalents:
The carrying amount approximates fair value because of the short period of
maturity.
Receivables from and Payables to Affiliates:
The carrying amount approximates fair value because the Company anticipates
either repayment or offsets in the current period.
Marketing Expenses:
Marketing expenses are charged to Operations as incurred. Included in General
and Administrative expenses is $85,941 and $118,858 of marketing expenses for
the periods ended June 30, 1997 and 1998 respectively.
Licensing Rights:
Licensing rights are recorded at cost including $51,555 acquired in the
acquisition of Lightpaths, Inc. and are being amortized over the license period
of sixty months.
Equity Method:
The investment in a corporation in which the company has a 41.724% interest is
carried at cost, adjusted for the corporation's proportionate share of their
undistributed earnings or (loss).
"Earnings Per Share," to compute earnings per share. Basis EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
F-12
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
Loss per Common Share
For the period ended June 30, 1997, and all periods subsequent thereto, the
Company adopted FASB 128 Statements of Financial Accounting Standards No. 128,
EPS reflects 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. EPS from inception to date at December 31, 1998 is computed as if all
these shares were outstanding for all periods presented.
Long-Lived Assets
In March, 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of" which states that
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable and long-lived assets and certain identifiable
intangibles are to be disposed of, they should be reported at the lower of
carrying amount or fair value less cost to sell. SFAS No. 121 also established
the procedures for review of recoverability and measurement of impairment, if
necessary, of long-lived assets and certain identifiable intangibles to be held
and used by an entity. The Company adopted SFAS No. 121 for the year ended June
30, 1997, and all periods subsequent thereto. The carrying value of assets of
the Company have not been affected by this statement.
Stock-Based Compensation:
The Company accounts for stock based compensation in accordance with SFAS No.
123, "Accounting for "Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of the Accounting Principles Board (APB)
Opinion No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair value-based method, as defined in SFAS No. 123, had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure required by SFAS No. 123. As such,
compensation expense is generally recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Purchase of Subsidiary
In June, 1998, the Company issued 2,500,000 post reverse split shares in
exchange for all of the issued and outstanding shares of Microphase
Telecommunications, a Delaware corporation. The transaction is an acquisition
accounted for as a purchase of Microphase Telecommunications, Inc. pursuant to
APB 16. The excess (approximately $998,085) of the total acquisition cost over
the recorded value of assets acquired was allocated to goodwill and will be
amortized over ten years effective July 1, 1998. Pursuant to the agreement of
merger, Microphase Telecommunications has become a wholly owned subsidiary. As
such, the Company will no longer be subject to the licensing fee for technology
development and transfer discussed in Note 6. The agreement of merger further
provides for the payment of a 3% royalty on the net sales of mPhase
Technologies, Inc. to be paid to Microphase Corporation, an affiliate. The
agreement also provides that the Company shall receive from Microphase
Corporation a 3% royalty on the net sales of digital subscriber line components.
F-13
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
Condensed financial information for the corporation immediately before the
acquisition is as follows:
June 30,
Balance Sheet 1998
Assets:
Patents, net of $12,336 accumulated amortization $ 131,830
Total Assets $ 131,830
Liabilities Due to Affiliates $ 286,169
Common stock 1,000
Retained Deficit (155,339)
Total Liabilities and Shareholders Deficit $ 131,830
For the
Year
Ended
June 30,
Summary of Statement of Operations 1998
Revenues - including
Licensing fees from M-Phase Technologies, Inc. $ 457,500
Expenses 400,551
Operating Income 72,288
Gain on sale of patents and license rights 366,650
Net Income $ 438,938
F-14
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
Investment in Unconsolidated Subsidiary
On July 31, 1997 the Company and or its designates, agreed to purchase up to a
50% interest in Complete Telecommunications, Inc., together with Global Music
and Medica, Inc., a Tennessee corporation, a transaction which was memorialized
in an October 27, 1997 license agreement. Complete was intended to be a local
cable provider and a marketing vehicle for the Company's technology in certain
markets in the United States. The October 27th licensing agreement with
Complete, provided Complete certain rights of distribution in the continental
United States for mPhase technology for $2,000,000, the terms of which were
$300,000 cash and $1,700,000 to be paid upon the receipt by Complete of a
proposed financing ranging from $3,000,000 to $5,000,000 pursuant to a memo of
understanding between the Company and Global dated April 30, 1997.
The Company has an interest in a corporation, Complete Telecommunications, Inc.
which is involved in marketing the Company's technology. The investment is
accounted for using the equity method and represents a 41.724% ownership in the
subsidiary. The Company's accumulated deficit in the unconsolidated loss of the
corporation included in retained deficit at June 30, 1998 amounted to $304,845.
Unaudited condensed financial information of the unconsolidated subsidiary is as
follows:
Balance Sheet June 30, 1998
Assets:
Licensing fee, Net of $300,000
accumulated amortization $ 0
Pre-organizational costs, net of
$120,908 of accumulated amortization 211,081
TOTAL ASSETS $ 211,081
Liabilities, including $150,000
note payable to mPhase 641,704
Common stock 300,000
Retained Deficit (730,623)
TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT $ 211,081
Summary of Statement of Operations June 30, 1998
Revenues $ 0
Expenses (730,623)
NET LOSS $(730,623)
F-15
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
NOTE 4 - COMMON STOCK:
Prior to June 30, 1989 the predecessor corporation issued 8,800,200 shares of
common stock for aggregate consideration of $222,093, after giving effect for a
stock split of 600 for 1 on September 1, 1987.
During 1988 the predecessor corporation entered into an Underwriting Agreement
with First Nutley Securities, Inc. for the proposed sale of its securities. The
underwriter agreed to sell 600,000 units to the public on a "best efforts,
250,000 unit or more" basis as to the first 250,000 units, and a "best efforts
basis" as to the remaining 350,000 Units at a price to the public of $1.00 per
unit. Each unit consisted of four shares of common stock, no par value, four
Class A redeemable common stock purchase warrants, and four Class B redeemable
common stock purchase warrants. Each Class A warrant and Class B warrant had
entitled the holder to purchase one share of common stock at a purchase price of
$.50 and $1.00 per share for a two and three year period respectively, after the
offering. The terms of the Class A and Class B warrants were extended to
February 13, 1997 and February 13, 1998 respectively and are now expired. Prior
to their expiration 4,400 net warrants for a like amount of common shares were
exercised for consideration of $2,125.
On July 20, 1989 the unit public offering was completed, 256,050 units were
issued, and the Company received $206,062 which was net of certain expenses of
the sale and offering costs of $49,988, and after giving effect to deferred
offering costs it had previously recorded of $53,015, generated net proceeds to
the Company of $153,048. Concurrently, the predecessor corporation issued
102,440 warrants to the underwriter for $.00025 per warrant and received $25.
During the six months ended December 31, 1995 the predecessor corporation issued
48,000 shares for aggregate consideration of $12,000.
Prior to recapitalization due to the reverse acquisition discussed in Note 3,
the Company issued 1,500,000 and 27,465 shares of stock in cancellation of
$75,000 of loans and $6,866 of accounts payable respectively, bringing the
aggregate shares to 11,404,270.
The Company effected a one-for-ten reverse split for the shares above, effective
March 31, 1997.
The Company issued 6,600,000 post reverse split shares in connection with the
reverse acquisition of Lightpaths, Inc. discussed in Note 3.
In June of 1997, the Company issued 594,270 post reverse split shares for
897,405, which net of offering costs of $138,931, generated net proceeds of
$758,474 to the Company. Included in the net proceeds was a stock subscription
of 10,800 which was collected in early July, 1997.
In October, 1997, the Company issued 250,000 shares in connection with its
investment in an unconsolidated subsidiary valued at $125,000 considering the
Rule "144" restrictions to which they were subject.
F-16
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
During the year ended June 30, 1998, the Company issued 2,195,014 post reverse
split shares for $1,677,218, which net of offering costs of $205,203, generated
net proceeds of $1,472,015 to the Company.
During the year ended June 30, 1998, the Company issued 250,000 shares valued at
$125,000 in connection with an investment in subsidiary.
During the year ended June 30, 1998, the Company issued 300,000 shares, valued
at $150,000, considering the Rule "144" restrictions which they were subject to,
and charged the same to stock based compensation in the statement of operations.
On June 25, 1998, the Company issued 2,500,000 shares, valued at $1,710,000 in
consideration for 100% of the common stock of Microphase Telecommunications,
Inc.
During the six month period ended December 31, 1998, the Company issued 360,000
shares, valued at $615,000, considering the Rule "144" restrictions which they
were subject to, and charged the same to stock based compensation in the
statement of operations.
During the period ended December 31, 1998, the Company issued 54,332 shares
valued at $40,750 for services.
During the period ended December 31, 1998, the Company issued 3,115,000 shares
for $3,197,416, which net of offering costs of $132,666, generated net proceeds
of $3,064,750 to the Company.
RESERVED SHARES:
On August 15, 1997, the Board of Directors authorized the grant of options to
purchase 3,675,000 shares of the Company's common stock at $1.00 per share,
including grants to purchase 3,000,000 shares of the Company's common stock to
officers and directors, upon the approval and implementation of a stock option
plan. No compensation was charged to expense as the grant price approximates
the fair market value of the options considering the Rule "144" restrictions on
the shares if exercised during the period. No shares have been exercised under
these grants. During the year ended June 30, 1998, the Company terminated an
employee for cause, which under the terms of the Company's stock option plan
voided a grant of options to purchase 750,000 shares at $1.00 per share. The
effect of such was to reduce the options outstanding from 3,675,000 to
2,925,000. During the period ended December 31, 1998, the Company also issued
options to purchase an additional 2,648,750 shares of the Company's common stock
at $1.00 per share, bringing the total to 5,573,750 of such options.
During the six month period ended December 31, 1998, the Company issued options
to purchase 80,000 shares of the Company's common stock at $1.50 per share, and
50,000 shares of the Company's common stock at $2.00 per share.
During the period ended December 31, 1998, the Company issued 1,621,845 warrants
to purchase one share of common stock at a price of $0.75 per share, exercisable
for five years from the date of issuance. These warrants are callable by the
Company if the trading price of the common stock traded on the exchange in which
the Company is listed remains over $5.00 per share for a specified period of
time.
F-17
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
During the six month period ended December 31, 1998, the Company also issued
400,000 warrants to purchase one share of common stock at a price of $1.00 per
share, exercisable for five years from the date of issuance. These warrants are
callable by the Company is the trading price of the common stock traded on the
exchange in which the Company is listed remains over $5.00 per share for a
specified period of time.
During the six month period ended December 31, 1998, the Company issued 25,000
warrants on September 15, 1998 to purchase one share of common stock at a price
of $1.06 per share, and 50,000 warrants on September 15, 1998 to purchase one
share of Common Stock at a price of $2.4375 exercisable for five years from the
date of issuance. These warrants are callable by the Company if the trading
price of the common stock traded on the exchange in which the Company is listed
remains over $5.00 per share for a specified period of time.
NOTE 5 - RELATED PARTY TRANSACTIONS:
The management of the Company are also employees of an affiliated Company which
have recorded material transactions with the Company. The Company's management
is in a position to, and in the future may, influence future operations of the
Company for the benefit of other companies that are under their control.
During the period ended June 30, 1997, the Company advanced $164,000 and
$250,000 to companies then under common control. Additionally, the Company
agreed to reimburse another affiliate $383,266 for research and development
expenses as well as certain marketing expenses and $42,500 for other costs
including licensing fees and facilities and administrative services discussed
in Note 6. The Company has agreed in principle to have a convertible option to
convert its $164,000 account receivable to equity in that affiliate.
On August 15, 1997 the Board of Directors of the Company and the Board of
Directors of the affiliates agreed to permit the right of offset for the above
advances against the liability of the affiliate discussed in Note 6.
On October 27, 1997, the Company, in connection with a planned joint venture
licensing agreement discussed in Note 3, became the 41.724% owner in an
unconsolidated subsidiary which included the investment of $300,000 and 250,000
shares of common stock valued at $125,000. Additionally, the Company advanced
$150,000 in the form of a note receivable bearing interest of 12% and due within
one year. No interest income was recorded in the statement of operations as the
unconsolidated subsidiary has failed to make any payments under the note. The
proposed joint venture partner in the unconsolidated subsidiary has continually
failed to raise and contribute its originally planned equity contributions to
the unconsolidated subsidiary and commenced an action against the Company and
the Company is presently negotiating a proposed revised licensing agreement with
the co-owners of the subsidiary.
F-18
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
During the period ended June 30, 1998, the "CTI" subsidiary is not consolidated
in these financial statements as management of the Company does not believe it
had effective control of the subsidiary.
During the period ended June 30, 1997, the Company paid $95,141 in offering
costs to a securities firm owned by a director, and during the period ended June
30, 1998 the Company paid offering costs to the same firm totaling $153,999.
The licensing fees paid by the Company, discussed in Note 6, were paid to an
affiliate. The acquisition, pursuant to an agreement dated June 25, 1998,
discussed in Note 2, was of the same affiliate the licensing fees were
previously paid to and this company was acquired from another affiliate the
Company will be obligated to pay a 3% royalty to on revenues from the Company's
proprietary TRAVERSER Digital Video Data Delivery System.
During the six months period ended December 31, 1998 the Company paid $60,000 in
administrative reimbursement, and $240,000 for technical assistance to
Microphase Corporation.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
On February 15, 1997 the Company entered into a Technology, Patent and Trademark
License Agreement with Microphase Telecommunications, Inc., an affiliated
Company. The agreement permits the Company to utilize the patent and trademark
technology of Microphase Telecommunications, Inc. under a licensing arrangement
with payments as follows:
(1) a one time non-refundable payment of $37,500 which the Company has
recorded as a license agreement in the Balance Sheet.
(2) Minimum annual royalties, based upon sales of the Company at rates of ten
(10%) percent on the first $1,000,000 of sales; nine (9%) percent for
sales between $1,000,001 and $5,000,000; eight (8%) percent for sales
between $5,000,001 and $10,000,000; seven (7%) percent for sales between
$10,000,001 and $20,000,000; and six (6%)percent for sales above
$20,000,000 per year. Regardless of the Company sales, the Company has
agreed to pay $50,000, $250,000 and $500,000 as a minimum payment in years
one, two and three and additionally, $1,000,000 every year thereafter.
(3) The Company also agreed to make payments of $37,500 per month, starting
June 1, 1997 and during the life of the Agreement, which in periods where
no royalties are earned, can be applied to the minimum royalty above, for
technology development and transfer. The Agreement is for the life of the
trademark and patented items, which have been applied for and are expected
to be seventeen years. During the period ended June 30, 1997, $37,500 has
been charged to expense under this Agreement.
On May 1, 1997 the Company entered into an agreement with Microphase
Corporation, an affiliate with common yet unidentical ownership, whereby the
Company will use office space as well as the administrative services of the
Company including the use of accounting personnel. This Agreement is for $5,000
per month and is on a month to month basis. During the period ended June 30,
1997, $10,000 has been charged to expense under this Agreement.
The predecessor corporation had previously abandoned its Bridgewater, New Jersey
facility and has claimed no obligation for rent under a lease which has since
expired during the current period. The Company has recorded $54,250 for unpaid
rent under this Agreement and the same is included in accounts payable at June
30, 1997. Management believes it will have no obligation under this lease and
if it is found otherwise, believes such obligation will be less than the amounts
recorded in the financial statements. F-19
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
The Company has entered into various agreements with Georgia Tech Research
Corporation, GTRC, a Company affiliated with Georgia Tech Research Institute,
located in Atlanta, Georgia, pursuant to which the Company receives technical
assistance in developing the commercialization of its digital video and data
system. If and when sales commence utilizing this particular technology, the
Company will be obligated to record and pay to GTRC a royalty of net sales of 3%
to 5%, determined by mutual agreement on a product by product basis.
The dollar amount incurred by the Company of GTRC for technical assistance with
respect to its Research and Development activities during the year ended June
30, 1998 totaled $2,100,644 and included in accounts payable at June 30, 1998 is
$1,310,062 to GTRC. For the six months ended December 31, 1998, the $1,565,068
of research and development expenses with GTRC and $1,847,249 was included in
accounts payable to GTRC at December 31, 1998.
In June, 1998, the Company was advised by Global Music & Media, Inc., a
Tennessee Corporation, and a major shareholder in the Company's unconsolidated
subsidiary, Complete Telecommunications, Inc. that they may be subject to suit
for an alleged breach of contract of an April 30, 1997 agreement, and
subsequently a suit was filed. The suit alleges Global was given the exclusive
right to market mPhase Technology as well as television programming and related
services. The Company believes the April 30, 1997 agreement was never intended
to give exclusive rights to its technology; the April 30, 1997 agreement was
superseded by the October 27, 1997 agreement with respect to which Global and a
related Company has defaulted under its obligations and clearly does not provide
for exclusivity. Accordingly, the Company considers the suit meritless and
intends to vigorously defend its position.
NOTE 7 - CORPORATE INCOME TAXES:
No provision has been made for corporate income taxes due to cumulative losses
incurred. The Company has available unrealized tax benefits of approximately
$1,935,000 in the form of net operating loss carryforwards of approximately
$5,221,200 for federal income tax purposes and $5,025,200 for state income tax
purposes to reduce future taxable income.
The Company has recognized these tax benefits as a deferred tax asset subject to
a 100% valuation allowance since it is uncertain whether or not these tax
benefits will be realized.
As of June 30, 1998 these losses expire as follows:
Federal State
June 30, 1998 through 2005 $ 0 $5,025,200
June 30, 1999 and 2000 175,000 0
June 30, 2001 thru 2005 47,000 0
June 30, 2006 76,000 0
June 30, 2007 48,000 0
June 30, 2008 75,000 0
June 30, 2009 73,000 0
June 30, 2010 86,000 0
June 30, 2011 85,600 0
June 30, 2012 519,400 0
June 30, 2013 4,036,200 -
TOTAL: $5,221,200 $5,025,200
F-20
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
NOTE 8 - PROPERTY AND EQUIPMENT:
Property and equipment owned by the Company at June 30, 1997, June 30, 1998 and
December 31, 1998 (Unaudited) as well as the estimated useful lives used in
computing depreciation are as follows:
June 30, June 30, December 31,
1997 1998 1998
(Unaudited)
Equipment used in research
and development (5-7 years) $ 66,906 $ 88,542 $ 130,264
Marketing equipment (3-5 years) 14,000 21,618 24,977
Subtotal 80,906 110,160 155,241
Less accumulated depreciation (2,442) (34,695) (56,812)
Net Total $ 78,464 $ 75,465 $ 98,429
Depreciation expense for the period ended June 30, 1997, June 30, 1998 and
December 31, 1998 (Unaudited) was $389, $4,879 and $3,883 respectively for
marketing equipment and $2,053, $27,374 and $18,234 respectively for equipment
used in research and development.
NOTE 9 - CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK:
In the course of the Company business, it has advanced monies to a supplier and
a licensing agent in the technology industries. Furthermore, these are
affiliated companies with limited history of operations.
These expose the Company to risk of loss of the amounts advanced should the
supplier ultimately be unable to produce what the Company intends upon
purchasing as well as risk of loss should the technology to be assigned
encounters obsolescence prior to its utilization by the Company. Additionally,
the Company may be exposed to off-balance sheet risk arising from potential
claims should the technology or products create a liability in which the
Company's counterparties may fail to satisfy their obligations.
The Company measures its exposure on a commitment by commitment basis. This risk
can be effected by changes in geographic, industrial or other economic factors.
To alleviate the potential for risk concentration, management has monitored the
progress of the supplier as well as the status of technological advances and
changes with its providers and within the industry itself.
F-21
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited for the Six Months Ended December 31, 1998)
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments are as follows:
June 30, 1998 December 31, 1998
(Unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and
Equivalents $ - $ - $ 969,681 $ 969,681
Stock Subscription
Receivable - - - -
Liabilities:
Cash overdraft $ 8,432 $ 8,432 $ - $ -
Accounts payable $1,571,945 $1,571,945 $2,163,449 $2,163,449
Accrued expenses $ 638,554 $ 638,554 $ 601,078 $ 601,078
Due to Affiliate(s) $ 8,432 $ 8,432 $ 699,990 $ 699,990
NOTE 11 - YEAR 2000 ISSUES
Many computer systems and software programs, including several used by the
Company may require modification and conversion to allow date code fields to
accept dates beginning with the year 2000. Major system failures or erroneous
calculations can result if computer system failures are not year 2000 compliant.
The Company is in the process of evaluating the computer systems they now have
in use and does not anticipate a major undertaking to be compliant.
All costs associated with year 2000 compliance that have been incurred by the
Company have been expensed and have not been capitalized. The overall cost to
the Company of modifications and conversion for year 2000 compliance with
relation to the financial statements taken as a whole is not material. The
Company is advised by a substantial majority of its vendors of computer products
upgraded to be year 2000 compliant, or will not be affected by the year 2000
problem. The Company's business could be materially adversely affected if the
Company's computer-based systems are not year 2000 compliant in a timely manner,
the Company incurs significant additional expenses pursuing year 2000
compliance, the Company's vendors do not timely provide year 2000 compliant
products, or the Company is subject to warranty or other claims by the Company's
clients related to product failures caused by the year 2000 problem.
NOTE 12 - SUBSEQUENT EVENTS
Common Stock:
During the period ended June 30, 1999, the Company issued 85,000 shares, valued
at $145,208, considering the Rule "144" restrictions which they were subject to,
and charged the same to stock based compensation in the statement of operations.
F-22
INDEPENDENT AUDITORS' REPORT
March 25, 1997
To the directors and stockholders of
Tecma Laboratories, Inc.:
We have audited the accompanying balance sheets of Tecma Laboratories, Inc. (A
Development Stage Company), at June 30, 1996 and 1995, and the related
statements of operations, stockholders' deficiency, and cash flows for the two
years then ended and for the cumulative period from inception (December 20,1979)
to June 30, 1996. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Tecma Laboratories, Inc. and the results of
operations and cash flows for the two years ended June 30, 1996 and for the
cumulative period from inception (December 20, 1979) to June 30, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and has utilized
substantially all of the cash funds which were derived from the initial public
offering of securities. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Mauriello, Franklin & LaBrace, CPA's
Mauriello, Franklin & LaBrace, CPA's
PAGE 1
F-23
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
BALANCE SHEETS
June 30,
1996 1995
ASSETS
Current assets:
Cash in banks $ 173 $ 39
Prepaid expenses and other current assets - -
Total current assets 173 39
Security deposits 4,370 4,370
Patents, at cost, net of accumulated
amortization of $7,642 and $6,432
respectively (Note 1) 12,939 14,149
Property and equipment, at cost, net of
accumulated depreciation of $39,918 and
$31,176 respectively (Notes 1 and 3) 28,752 37,494
Total assets $ 46,234 $ 56,052
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable-trade $ 57,898 $ 18,898
Accrued interest-stockholders (Note 4) 48,897 31,536
Accrued legal fees 3,000 3,000
Total current liabilities 109,795 53,434
Loans payable-stockholders (Note 4) 218,187 210,767
Total liabilities 327,982 264,201
Stockholders' deficiency:
Common stock-no par value; Authorized-
50,000,000 shares; Issued and outstanding
-9,876,800 shares (1995 - 9,828,800 shares)
(Note 2) $389,291 $377,291
Deficit accumulated during the development stage (671,039) (585,440)
Total stockholders' deficiency $(281,748) $(208,149)
Total liabilities and stockholders' deficiency $ 46,234 $ 56,052
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT
AND NOTES TO FINANCIAL STATEMENTS
PAGE 2
F-24
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
TOTAL FROM INCEPTION TO JUNE 30, 1996
Common Stock Accumulated
Shares Amount Deficit Total
Issued prior to June 30, 1982 4,177,200 $ 159,216
Issued July 1, 1982
to June 30, 1989 4,623,000 62,877
Balance, July 1, 1989 8,800,200 $222,093 $(188,339) $33,754
Proceeds from initial public
offering, net of offering
costs of $103,003 1,024,200 153,048 - 153,048
Sale of 102,440 warrants
at $.00025 each - 25 - 25
Proceeds from exercise
of 4,400 warrants 4,400 125 - 2,125
Net loss for year ended
June 30, 1990 - - (39,145) (39,145)
Net loss for year ended
June 30, 1991 - - (75,739) (75,739)
Net loss for year ended
June 30, 1992 - - (47,854) (47,854)
Net loss for year ended
June 30, 1993 - - (75,650) (75,650)
Net loss for year ended
June 30, 1994 - - (72,910) (72,910)
Net loss for year ended
June 30, 1995 - - (85,803) (85,803)
Proceeds from issuance of
common stock 48,000 12,000 - 12,000
Net loss for year ended
June 30, 1996 - - (85,599) (85,599)
Balance, June 30, 1996 9,876,800 $389,291 $ (671,039) $(281,748)
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT
AND NOTES TO FINANCIAL STATEMENTS
PAGE 3
F-25
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Total From
Years Ended Inception
June 30, To June 30,
1996 1995 1996
Revenue:
Sales $ -0- $ -0- $ 2,409
Interest income -0- -0- 15,132
Total Revenue -0- -0- $17,541
Costs and expenses:
Write off of investment in common
stock- foreign corporation -0- -0- 141,208
Selling and administrative
expenses 57,086 60,107 438,207
Depreciation-property and
equipment 8,742 8,743 39,918
Amortization-patents 1,210 1,209 7,642
Interest expense 18,561 15,744 61,605
$ (85,599) $ 85,803 $688,580
Net loss (Note 5) $ (85,599) $(85,803) $(671,039)
Net loss per share (Note 1) $ -0- $ -0-
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT
AND NOTES TO FINANCIAL STATEMENTS
PAGE 4
F-26
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years Ended Total From
June 30, Inception to
1996 1995 June 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(85,599) $ (85,803) $ (671,039)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 9,952 952 47,560
Interest expense 17,361 14,540 48,897
Increase (decrease) in cash arising from
changes in current assets and liabilities:
Security deposits - - (4,370)
Accounts payable 39,000 2,364 57,898
Accrued expenses - - 3,000
Total adjustments $66,313 $26,856 $152,985
Net cash used in operating activities $(19,286) $(58,947) $(518,054)
CASH FLOWS FROM INVESTING ACTIVITIES:
Patent expenditures - - (20,581)
Property and equipment expenditures - - (68,670)
Net cash used in investing activities - - (89,251)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 12,000 $ - $490,143
Proceeds from sale and exercise of
common stock warrants - - 2,150
Net borrowings from shareholders 7,420 56,022 218,187
Public offering expenditures - - (103,002)
Net cash provided by financing activities $ 19,420 $56,022 $607,478
NET INCREASE (DECREASE) IN CASH $ 134 $(2,925) $ 173
Cash balance, beginning of year 39 2,964
Cash balance, end of year $ 173 $ 39
Supplementary cash flow data:
Interest paid $ - $ - $ -
Income taxes paid $ - $ - $ -
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT
AND NOTES TO FINANCIAL STATEMENTS
PAGE 5
F-27
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Organization and Nature of Business
The Company was organized under the laws of the State of New Jersey on December
20, 1979 for the primary purpose of research, development, and exploitation of
certain products in the medical and health care fields.
The Company is in the development stage and has had no U.S. operations but has
invested monies in a 97% owned predecessor foreign subsidiary to develop and
produce quinine. The operation was unsuccessful and the investment was written
off in June 1984. Since then, the Company has been engaged in the research,
development and patenting of medicinal products derived from botanical sources.
The Company has patented several products and is in the process of producing and
marketing these products.
In July, 1989 the Company successfully completed a unit public offering of its
securities (See Note 3).
Basis of Presentation
The Company's financial statements have been presented on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.
The Company reported a net loss of approximately $86,000 for the year ended June
30, 1996 and cumulative losses since inception of approximately $671,000.
Further the Company has utilized substantially all of its cash funds which were
derived from the initial public offering of securities.
The continuation of the Company is dependent upon obtaining additional financing
and the commencement of production, marketing, and sales of its patented
products. To obtain these objectives, management is pursuing a number of
options including borrowing of funds from major shareholders, a secondary
offering of securities, and a merger with another corporation (See Note 8).
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Research and Development
Research and development costs are charged to operations as incurred.
Property and Equipment
Property and equipment are stated at cost and depreciation has been provided on
a straight line basis commencing at the time the assets were placed in service
(October 1991) based on the following useful lives:
Useful Lives
Lab equipment and fixtures 10 years
Office equipment 5 years
Office furniture 7 years
Leasehold improvements 10 years
PAGE 6
F-28
TECMA LABORATORIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies (Continued)
Patent Costs
Patent costs are capitalized as incurred and amortized over the remaining
legal life of the patents commencing when the patents are issued by federal
authorities. As of June 30, 1996, five patents were issued and amortization
provided thereon.
Income Taxes
Taxes are computed on pre-tax financial income which is consistent with income
reported for income tax filing purposes.
Loss Per Share
Loss per share is based on the weighted average number of common shares
outstanding.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the 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.
PAGE 7
F-29
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies (Continued)
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less to be cash
equivalents.
Note 2--Capitalization Changes
The Company entered into an Underwriting Agreement with First Nutley Securities,
Inc. for the proposed sale of its securities. The underwriter agreed to sell
600,000 Units to the public on a "best efforts, 250,000 unit or more" basis as
to the first 250,000 Units, and on a "best efforts basis" as to the remaining
350,000 Units at a price to the public of $1.00 per Unit. Each Unit consisted
of four shares of common stock, no par value, four Class A redeemable common
stock purchase Warrants, and four Class B redeemable common stock purchase
Warrants. Both classes of Warrants were exercisable and transferable immediately
upon the successful closing of the offering herein. Each Class A Warrant and
Class B Warrant entitled the holder to purchase one share of common stock at a
purchase price of $.50 and $1.00 per share for two and three year periods
respectively, from the effective date of the offering. The terms of the Class
A and Class B warrants have expired.
On July 20, 1989 the unit public offering was completed, 256,050 Units were
issued, and the Company received $206,062 which is net of certain expenses of
the sale and offering costs of $49,988. Concurrently the Company issued 102,440
warrants to the underwriter for $.00025 per warrant and received $25. The
warrants entitled the Underwriter to purchase 102,440 shares of common stock at
$.30 per share for a period of 48 months commencing February 13, 1990. The term
for exercise of the warrants had been extended until February 13, 1997 at which
time they expired.
Note 3--Property and Equipment
Property and equipment are comprised as follows:
June 30,
1996 1995
Laboratory equipment
and fixtures $ 9,922 $ 9,922
Office equipment 5,239 5,239
Office furniture 30,480 30,480
Leasehold improvements 23,029 23,029
Total cost 68,670 68,670
Accumulated depreciation 39,918 31,176
Net $ 28,752 $ 37,494
PAGE 8
F-30
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 4--Related Party Transactions
During the years ended June 30, 1996 and 1995, the Company engaged in the
following related party transactions:
1. Was advanced unsecured funds with no stated maturity from two major
stockholders of $7,420 and $56,022 to pay for rent and other related
operating expenditures of which $218,187 and $210,767 was owing as of
June 30, 1996 and 1995 respectively.
2. Was charged 8% interest per annum on such loans totaling $17,361 in 1996
and $14,540 in 1995 of which $48,897 and $31,536 was outstanding at June
30, 1996 and 1995 respectively.
Note 5--Corporate Income Taxes
No provision has been made for corporate income taxes due to cumulative losses
incurred. As of June 30, 1996 and 1995, the Company has available unrealized tax
benefits of approximately $253,000 and $219,000 respectively in the form of net
operating loss carryforwards which can reduce future taxable income.
The Company has recognized these tax benefits as a deferred tax asset subject to
a 100% valuation allowance since it is more likely than not that these tax
benefits will not be realized.
As of June 30, 1996 these losses expire as follows:
Federal State
December 31, 1996 thru 1999 $175,000 $ -0-
June 30, 1997 thru 2000 -0- 233,000
June 30, 2001 thru 2005 47,000 222,000
June 30, 2006 76,000 -0-
June 30, 2007 48,000 -0-
June 30, 2008 75,000 -0-
June 30, 2009 73,000 -0-
June 30, 2010 86,000 -0-
June 30, 2011 86,000 -0-
$666,000 $455,000
PAGE 9
F-31
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 6-Fair Value of Financial Instruments
The fair value of the Company's long-term debt to stockholders is deemed equal
to its reported value based on estimated interest rates available to the Company
for debt of similar terms and maturity.
Note 7-Commitments
The Company is committed to a three year operating lease covering its plant and
office facility in Bridgewater, New Jersey, commencing from August 12, 1996. The
minimum annual rent is $32,775 and is without regard to the Company's
proportionate share of real estate taxes, utilities, and maintenance costs which
it is obligated to pay. The Company reported lease charges of $48,136 and
$47,866 in the years ended June 30, 1996 and 1995 respectively.
Future minimum rental payments for the five years ending June 30, 2001 and
thereafter are as follows:
Year Ended June 30,
1997 $ 27,312
1998 32,775
1999 32,775
2000 5,463
2001 -0-
Thereafter -
Total $ 98,325
Note 8--Subsequent Events
Effective January 27, 1997 the Company terminated its facility lease due to
constructive eviction. The Company is disputing both unpaid and paid rent and
escalation charges from the landlord based on the Company being the last tenant
in an unoccupied building which has not been maintained. The Company feels the
settlement of such dispute shall not have a material adverse effect on the
financial statements.
Effective February 5, 1997 the Company authorized the issuance of 1,500,000 and
27,465 shares of unissued common stock in consideration for the forgiveness of
$75,000 of loans payable -stockholders as described in Note 4 and accounts
payable of $6,866.
PAGE 10
F-32
<PAGE>
TECMA LABORATORIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 8--Subsequent Events (Continued)
On March 24, 1997 a majority of the stockholders of the Company approved the
following resolutions:
1) Agreed to the terms of an Exchange and Plan of Reorganization Agreement
dated January 15, 1997 with the stockholders of Lightpaths, Inc., a
Delaware Corporation, wherein the Company shall acquire 100% of the issued
and outstanding common stock of Lightpaths, Inc. in consideration for 6.6
million post reverse split shares of the Company. The Company shall
account for the acquisition as a pooling of interests for financial
reporting purposes.
Summarized operating data giving effect to the acquisition had it occurred
on July 1, 1995 has not been disclosed since there is minimal historical
operating data for Lightpaths, Inc.
2) Authorized a 1 for 10 reverse stock split to be effective March 31, 1997
for stockholders of record of the same date and to change the name of the
Company to Lightpaths TP Technologies, Inc.
3) Authorized the transfer to a newly formed wholly-owned subsidiary, TLI
Industries, Inc. all of its assets and all of its liabilities effective
March 31, 1997. Immediately thereafter the Company shall spin off all of
the outstanding shares of TLI's common stock to the stockholders of the
Company as a dividend.
F-33
To the Board of Directors and Stockholders of
Microphase Telecommunications, Inc.
We have audited the accompanying balance sheets of Microphase Telecommunications
, Inc. as of June 30, 1997 and June 30, 1998 and the related statements of
operations, changes in stockholders' equity, and cash flows for the period
September 12, 1995 (date of inception) through June 30, 1998. 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 financial position of the Company at June 30, 1998 and the results
of its operations and its cash flows for the period of September 12, 1995 (date
of inception) through June 30, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 3, substantially all transactions of the Company have been
incurred with affiliates, and the Company is dependent on these affiliates.
The Company was in the development stage as of June 30, 1998. As discussed in
Note 2, on June 25, 1998, effective for accounting purposes July 1, 1998, the
Company was acquired by mPhase Technologies, Inc. Recovery of the Company's
assets is dependent upon future events, the outcome of which is indeterminable.
In addition, successful completion of the Company's development program and its
transition, ultimately, to attaining profitable operations is dependent upon
obtaining adequate financing to fulfill its development activities and achieving
a level of sales adequate to support the Company's cost structure.
/s/ Schuhalter, Coughlin & Suozzo, LLC
Schuhalter, Coughlin & Suozzo, LLC
Raritan, New Jersey
January 28, 1999
F-34
<PAGE>
MICROPHASE TELECOMMUNICATIONS, INC.
(A Development Stage Company)
Consolidated Balance Sheet
June 30,
1997 1998
ASSETS
Cash and equivalents $ - $ -
Patents and licensing rights, at cost, less
accumulated amortization of $9,639 and $12,336 154,230 998,585
Goodwill, less accumulated amortization of
$0 - 998,585
TOTAL 154,230 1,997,170
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to affiliates 747,507 286,170
TOTAL LIABILITIES 747,507 286,170
STOCKHOLDERS EQUITY
Common stock, no par value, 5,000,000 shares
authorized; 1,000 shares issued and
outstanding at June 30, 1997 and 1998
shares issued and outstanding at
June 30, 1998 1,000 1,000
Retained Deficit (594,277) (155,339)
Additional paid in capital - 1,865,339
TOTAL STOCKHOLDERS' EQUITY (593,277) 1,711,000
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 154,230 $1,997,170
The accompanying notes are an integral part of these financial statements
F-35
<PAGE>
MICROPHASE TELECOMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Operations
From From
Inception Inception
to to
(September 12, For the (September 12,
1995) Year 1995)
Through Ended Through
June 30, June 30, June 30,
1997 1998 1998
TOTAL REVENUE $ 119,712 $ 472,839 $ 592,551
COSTS AND EXPENSES
Marketing (including $350,000 and
$161,750 for the periods ended
June, 1997 and 1998, respectively
incurred with affiliate) 350,000 161,750 511,750
Research and development (including
$136,750 for the period ended
June 30, 1997 incurred with affiliate) 136,750 - 136,750
General and administrative (including
$217,600 for the periods ended
June 1997 and June 30, 1998 incurred
with affiliate) 217,600 217,600 435,200
Depreciation and amortization 9,639 21,201 30,840
TOTAL COSTS AND EXPENSES (713,989) (400,551) (1,114,540)
NET INCOME (LOSS) FROM OPERATIONS (594,277) 72,288 (525,989)
GAIN ON SALE OF PATENTS AND
LICENCE RIGHTS - 366,650 366,650
NET INCOME (LOSS) $(594,277) $ 438,938 $ (155,339)
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
MICROPHASE TELECOMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
From September 12, 1995 (Date of Inception) to June 30, 1998
Additional
Number Common Paid in
of Shares Stock Capital (Deficit) Total
September 12, 1995 - $ 1,000 $ - $ - $ -
Initial capitalization 1,000 1,000 - - 1,000
Net (Loss) for the
Period from September
12, 1995 to June 30,
1997 - - - (594,277) (594,277)
Balance, June 30, 1997 1,000 1,000 - (594,277) (593,277)
Increase in additional
paid in capital in
connection with push
down accounting
pursuant to merger
agreement dated
June 25, 1998 - - 1,865,339 - 1,865,339
Net income for the year - - - 438,938 438,938
Balance, June 30, 1998 1,000 $ 1,000 $1,865,339 $(155,339) $1,711,000
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
MICROPHASE TELECOMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Cash Flows
From From
Inception Inception
to to
(September 12, For the (September 12,
1995) Year 1995)
Through Ended Through
June 30, June 30, June 30,
1997 1998 1998
Cash Flow From Operating Activities:
Net (Loss) Income $(594,277) $ 438,938 $ 155,339
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities:
Depreciation and Amortization 9,639 21,201 30,840
Gain on the sale of patents and
license rights - (366,650) (366,650)
Changes in assets and liabilities:
Increase (decrease) in due
to affiliate 747,507 (93,489) 654,018
Net cash from operating
activities 162,869 - 162,869
Cash Flow Used in Investing Activities:
Investment in licensing rights (163,869) - (163,869)
Net cash (used in) investing
activities rights (163,869) - (163,869)
Cash Flow From Financing Activities:
Proceeds from issuance of common 1,000 - 1,000
Net cash provided by financing
activities 1,000 - 1,000
Net Increase (Decrease)in Cash - - -
Cash, Beginning of Period - - -
Cash, End of Period $ - $ - $ -
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
MICROPHASE TELECOMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 1 - DEVELOPMENT STAGE ENTERPRISE:
The Company was organized in the State of Delaware on September 12, 1995.
The Company is a development stage company primarily engaged in research and
development of technological products in the defense and communications
industries. On June 25, 1998 the Company sold all its technology relating to the
defense industry to one affiliate and, simultaneously retained all its
technology relating to the communications industry. The present activities of
the Company are focused on the completion of its proprietary Traverser Digital
Date Delivery System utilizing existing twisted pair copper wire infrastructure
in "plain old telephone systems" or "POTS".
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Push Down Method of Accounting
The financial statement includes the accounts of the Company, as adjusted for a
write up of intangible assets for its merger(acquisition by mPhase Technologies,
Inc. "mPhase") whereby the Company became a wholly owned subsidiary of mPhase,
utilizing the push down method of accounting.
Intangible Assets
Patents and goodwill are recorded at cost. Amortization is provided on the
straight-line method over the estimated useful lives of seventeen and ten years,
respectively.
Research and Development
Research and development costs are charged to operations as incurred.
Income Taxes
Income taxes have been provided using the liability method in accordance with
FASB Statement No. 109, Accounting for Income Taxes.
Dependence
The Company is dependent on an affiliated company for facilities and
technological assistance. (See Note 3 - Related Party Transaction)
Financial Instruments
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles (GAAP) requires the use of management's estimates.
The following methods and assumptions were used by the Company to estimate fair
values of financial instruments as discussed herein:
Receivables from and Payables to Affiliates
The carrying amount approximates fair value because the Company anticipates
either repayment or offsets in the current period.
F-39
MICROPHASE TELECOMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Long-Lived Assets
In March, 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which states that
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable and long-lived assets and certain identifiable
intangibles are to be disposed of, they should be reported at the lower of
carrying amount of fair value less cost to sell. SFAS No. 121 also established
the procedures for review of recoverability and measurement of impairment, if
necessary, of long-lived assets and certain identifiable intangibles to be held
and used by an entity. The Company adopted SFAS No. 121 for the year ended June
30, 1997, and all periods subsequent thereto. The carrying value of assets of
the Company have not been affected by this statement.
NOTE 3 -RELATED PARTY TRANSACTIONS:
The management of the Company are also employees of an affiliated Company which
have recorded material transactions with the Company. The Company's management
is in a position to, and in the future may, influence future
operations of the Company for the benefit of other companies that are under
their control.
The licensing fees received by the Company, discussed in Note 2, were paid by an
affiliate. The acquisition, pursuant to an agreement dated June 25, 1998,
discussed in Note 2, was of the same affiliate the licensing fees were
previously received from and this company has acquired the Company from another
affiliate. The Company will be obligated to pay a 3% royalty to on revenues
from the Company's proprietary TRAVERSER Digital Video Data Delivery System to
the affiliate going forward.
Prior to June 25, 1998, the Company was dependent on an affiliate experiencing
financial difficulties. Subsequent to June 25, 1998, the Company became the
wholly owned subsidiary for a different affiliate whose financial statement
indicated going concern uncertainties.
NOTE 4 - CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK:
In the course of the Company business, it has advanced monies to a supplier and
a licensing agent in the technology industries. Furthermore, these are
affiliated companies with limited history of operations.
These expose the Company to risk of loss of the amounts advanced should the
supplier ultimately be unable to produce what the Company intends upon
purchasing as well as risk of loss should the technology to be assigned
encounters obsolescence prior to its utilization by the Company. Additionally,
the Company may be exposed to off-balance sheet risk arising from potential
claims should the technology or products create a liability in which the
Company's counter parties may fail to satisfy their obligations.
The Company measures its exposure on a commitment by commitment basis. This risk
can be effected by changes in geographic, industrial or other economic factors.
To alleviate the potential for risk concentration, management has monitored the
progress of the supplier as well as the status of technological advances and
changes with its providers and within the industry itself.
F-40
MICROPHASE TELECOMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 5 - INCOME TAXES:
No provisions for income taxes have been made for the periods preserved as the
Company has incurred cumulative losses during those periods.
Total Deferred Tax Assets $ 52815
Less: Valuation Allowance (52815)
Net Deferred Tax Assets $ 0
Deferred tax assets are attributable to available net operating loss carry
forwards. The valuation allowance increased by $202,054 in 1997 and decreased
by $149,233 in 1998.
The Company has net operating loss carry forwards of approximately $155,339
which expire in 2012. The amount of the operating loss carry forwards may be
subject to annual limitations due to IRS regulations as a result of the sale of
a majority interest.
F-41
<PAGE>
Part III
Item 1 Index to Exhibits (Pursuant to Item 601 of Regulation SB)
Exhibit Name and/or Identification of Exhibit
Number
1.* Underwriting Agreement
Not applicable
2.* Plan of Acquisition, Reorganization, Arrangement, Liquidation, or
Succession.
(a) Exchange of Stock Agreement and Plan of Reorganization, Dated
January 15, 1997
(b) Exchange of Stock Agreement and Plan of Reorganization, Dated June
25, 1998
3.* Certificate of Incorporation and By-Laws
(a) Certificate of Incorporation of Tecma Laboratory, Inc. filed
December 20, 1979
(b) Certificate of Correction to Certificate of Incorporation of Tecma
Laboratory, Inc. dated June 29, 1987
(c) Certificate of Amendment of Certificate of Incorporation of Tecma
Laboratory, Inc. dated August 28, 1987 (changing name to Tecma
Laboratories, Inc.)
(d) Certificate of Amendment of Certificate of Incorporation of Tecma
Laboratories, Inc. filed April 7, 1997 (changing its name to
Lightpaths TP Technologies, Inc.
(e) Certificate of Amendment of Certificate of Incorporation filed June
2, 1997 (changing its name to mPhase Technologies, Inc.)
(f) Certificate of Incorporation of Lightpaths, Inc. Filed October 2,
1996 with the Delaware Secretary of State
(g) By-Laws of mPhase Technologies, Inc.
(h) mPhaseTV.net/Inc. Certificate of Incorporation dated August 21, 1998.
(i) Certificate of Incorporation of Microphase Telecommunications, Inc.
4.* Instruments Defining the Rights of Security Holders
(a) mPhase Long Term Stock Incentive Plan authorized by the Company on
August 15, 1997
(b) A warrant agreement between the Company and Jersey Transfer & Trust
Co., Warrant Agent, relating to the warrants issued pursuant to Rule
505 offering
5.* Opinion on Legality
Not applicable
6.* No Exhibit Required
Not applicable
7.* Opinion on Liquidation Preference
Not applicable
8.* Opinion on Tax Matters
Not applicable
<PAGE>
Exhibit Name and/or Identification of Exhibit
Number
9.* Voting Trust Agreement and Amendments
Not applicable
10.* Material Contracts
(a) Technology agreement Dated February 15, 1997 between Microphase
Telecommunications and mPhase Technologies, Inc.
(b) Loan Agreements and Promissory Notes between Janifast Holdings, LTD
(the Maker) and mPhase Technologies Inc. (the Holder), Dated April
10,1997, May 5, 1997, June 19, 1997 and August 31,
(c) Joint Venture Agreement dated April 30, 1997 between the Company and
Global Music & Medica, Inc. detailing terms and conditions under
which Complete Telecommunications, Inc. is to be organized and
operated.
(d) License Agreement dated October 27, 1997 between the Company,
Complete Telecommunications, Inc. and Global Music & Media, Inc.
(e) License Agreement dated March 26, 1998, by and between Georgia Tech
Research Corporation and the Company relating to the
commercialization of a certain invention entitled "Digital Video and
Data System."
(f) Infospace Content Distribution Agreement dated January 25, 1998, by
and between InfoSpace.com, Inc. and the Company.
(g) IP Equity Internet Investor Communication dated February 1, 1999.
11.* Statement Re Computation of Per Share Earnings
Primary and fully diluted earnings per share
12.* No Exhibit Required
Not applicable
13. Annual or Quarterly Reports - Form 10-Q
Form 10QSB for the Quarter Ended March 31, 1999
14.* Material Foreign Patents
Not applicable
15.* Letter on Unaudited Interim Financial Information
Not applicable
16.* Letter from Mauriello, Franklin & LaBrace, CPAs
17.* Letter on Director Resignation
18.* Letter on Change in Accounting Principles
Not applicable
<PAGE>
Exhibit Name and/or Identification of Exhibit
Number
19.* Reports Furnished to Security Holders
Not applicable
20.* Other Documents or Statements to Security Holders
Not applicable
21.* Subsidiaries of Small Business Issuer
See list of subsidiaries
22.* Published Report Regarding Matters Submitted to Vote of Security Holders
Not applicable
23.* Consent of Experts and Counsel
Consents of Schuhalter, Coughlin & Suozzo, LLC and Mauriello,
Franklin & LoBrace, P.C.
24.* Power of Attorney
Not applicable
25.* Statement of Eligibility of Trustee
Not applicable
26.* Invitations for Competitive Bids
Not applicable
27.* Financial Data Schedule
Not applicable
28.* Information from Reports Furnished to State Insurance Regulatory
Authorities
Not applicable
99.* Additional Exhibits
(a) Patent Application (not supplied to protect confidentiality of
information - can be supplied to Commission if requested under
protective order)
(b) Sample Subscription Agreement for Rule 504 Offering
(c) Sample Subscription Agreement for Rule 505 Offering
* Incorporated by reference Form 10SB dated 4-23-99
SIGNATURES
In accordance with Section 12 of the Securities Act of 1934, the registrant
caused this registration statement to be signed on its behalf by the
undersigned, hereunto duly authorized.
mPhase Technologies, Inc.
(Registrant)
Date: April 23, 1999, except for
additional language in section
A(1) Business Development; and
A(3) Management's Plan of
Operation and clerical edits,
to which the date is July 31, 1999
By: /s/ Ronald Durando
Ronald Durando, Director and President
<PAGE>
EXHIBIT 13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter ended March 31, 1999 Commission File No.000-24969
mPhase Technologies, Inc. (formerly Tecma Laboratories, Inc.)
(Exact name of registrant as specified in its charter)
New Jersey 22-2287503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
587 Connecticut Ave., Norwalk, CT 06854-0566
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (203) 838 - 2741
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
Transitional Small Business Disclosure Format:
Yes: X No:
The number of shares outstanding of each of the registrant's classes of common
stock as of March 31, 1999 is 17,479,043 shares all of one class of $.0001 par
value common stock.
<PAGE>
MPHASE TECHNOLOGIES, INC.
(FORMERLY TECMA LABORATORIES, INC.)
INDEX
PAGE
PART I FINANCIAL INFORMATION
Consolidated Balance Sheet - March 31, 1999 1
Consolidated Statements of Operations - Three and nine
Months Ended March 31, 1999 and 1998 2-3
Consolidated Statement of Cash Flows - Three
Months Ended March 31, 1999 and 1998 4
Notes to Financial Statements 5-6
Management's Discussion and Analysis of financial
conditions and results of operations 7-8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of
Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits on Reports on Form 8-K 9
Signature Page 10
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
March 31, 1999
(Unaudited)
ASSETS
Cash and equivalents $ 122,479
Stock subscription receivable 375,000
Prepaid expenses 19,400
Deposits 7,415
Deferred offering costs 52,673
Equipment used in research and development, less
accumulated depreciation of $58,516 94,260
Marketing equipment, less accumulated depreciation
of $11,056 22,305
Patents and licensing rights, at cost, less
accumulated amortization of $202,000 916,690
Organization costs, less accumulated amortization
of $286 1,089
Note receivable - unconsolidated subsidiary, net
of $150,000 bad debt reserve -
Goodwill, less accumulated amortization of
$74,856 923,229
TOTAL ASSETS 2,534,540
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable 1,169,977
Accrued expenses 652,083
Due to affiliate 1,355,454
Deferred revenue 40,000
Loan(s) payable 228,900
TOTAL LIABILITIES 3,446,414
STOCKHOLDERS DEFICIT
Common stock, no par value, 50,000,000 shares
authorized; 17,479,043 shares issued and
outstanding shares issued and outstanding at
March 31, 1999 (unaudited) 8,579,136
Deficit accumulated during development stage,
subsequent to recapitalization effective
October 2, 1996 (9,483,037)
Treasury Stock, 13,750 shares at cost (7,973)
TOTAL STOCKHOLDERS' DEFICIT (911,874)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,534,540
See notes to the consolidated financial statements. 1.
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Operations
(Unaudited)
October 2,
1996
(Date of
For the Inception)
Three Months Ended to
March 31, March 31,
1998 1999 1999
REVENUE - LICENSING FEES $ - $ - $ -
TOTAL REVENUE - - -
COSTS AND EXPENSES
Research and development (including
$23,268 and $155,838 for the period
ended 1998 and 1999 respectively,
incurred with affiliate) 745,693 402,795 4,779,789
Licensing fees 112,500 - 487,500
General and administrative (including
$131,315 and $30,000 for the period
ended 1998 and 1999 respectively, 276,495 299,445 2,667,754
incurred with affiliate)
Depreciation and amortization 7,230 83,000 288,374
Stock based compensation 50,000 128,125 933,875
Interest - 6,300 20,900
TOTAL COSTS AND EXPENSES (1,191,918) (919,665) (9,178,192)
NET (LOSS) FROM OPERATIONS (1,191,918) (919,665) (9,178,192)
LOSS FROM UNCONSOLIDATED (55,193) - ( 304,845)
SUBSIDIARY
NET (LOSS) $(1,247,111) $(919,665) $(9,483,037)
BASIC LOSS PER COMMON SHARE $(.131) $(.053)
COMMON SHARES OUTSTANDING 9,544,532 17,159,876
DILUTED LOSS PER COMMON SHARE $(.095) $(.037)
COMMON SHARES AND EQUIVALENTS 13,119,199 24,960,471
OUTSTANDING
See notes to the consolidated financial statements 2.
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Operations
(Unaudited)
October 2,
1996
(Date of
For the Inception)
Nine Months Ended to
March 31, March 31,
1998 1999 1999
REVENUE - LICENSING FEES $ - $ - $ -
TOTAL REVENUE - - -
COSTS AND EXPENSES
Research and development (including
$71,268 and $458,026 for the period
ended March 1998 and 1999
respectively, incurred with
affiliate) 1,165,461 2,290,005 4,779,789
Licensing fees 337,500 - 487,500
General and administrative (including
$131,315 and $90,000 for the period
ended March 1998 and 1999
respectively, incurred with
affiliate) 837,949 1,017,231 2,667,754
Depreciation and amortization 21,690 248,721 288,374
Stock based compensation 150,000 783,875 933,875
Interest - 20,900 20,900
TOTAL COSTS AND EXPENSES (2,512,600) (4,360,732) (9,178,192)
NET (LOSS) FROM OPERATIONS (2,512,600) (4,360,732) (9,178,192)
LOSS FROM UNCONSOLIDATED
SUBSIDIARY (121,443) - (304,845)
NET (LOSS) $(2,634,043)$(4,360,732) $(9,483,037)
BASIC LOSS PER COMMON SHARE $ (.297) $(.291)
COMMON SHARES OUTSTANDING 8,878,432 14,960,531
DILUTED LOSS PER COMMON SHARE $(.212) $(.192)
COMMON SHARES AND EQUIVALENTS
OUTSTANDING 12,453,099 22,761,126
See notes to the consolidated financial statements. 3.
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flows
(Unaudited)
October 2,
1996
(Date of
For the Inception)
Nine Months Ended to
March 31, March 31,
1998 1999 1999
(Unaudited)
Cash Flow Used In Operating
Activities:
Net (Loss) $(2,634,043) $(4,360,732) $(9,483,037)
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities:
Depreciation and Amortization 21,690 248,721 300,710
Depreciation of research and
development equipment 19,995 29,089 58,516
Loss on unconsolidated subsidiary 121,443 - 304,845
Stock based compensation 150,000 783,875 933,875
Changes in assets and liabilities:
Deposits (7,415) (7,415)
(Increase) decrease in prepaid
expenses 6,705 (3,400) (19,400)
Increase (decrease) in accounts payable 985,304 (564,950) 1,135,886
Increase in accrued expenses 293,719 13,529 692,906
Increase in due to affiliate 240,151 679,725 769,785
Increase in deferred revenue-
license fee 300,000 40,000 40,000
Increase in cash overdraft 8,432
Increase in accrued interest 18,900
Increase in receivables from
unconsolidated subsidiary (150,000) - (150,000)
Net cash (used in) operating
activities (645,036) (3,128,406) (5,395,997)
Cash Flow Used in Investing Activities:
Investment in organizational costs - (720) (54,830)
Investment in licensing rights - (75,977) (655)
Investment in fixed assets (21,636) - (186,137)
Investment in unconsolidated
subsidiary (304,000) - -
Net cash (used in) investing
activities (325,636) (76,697) (241,622)
Cash Flow From Financing Activities:
Proceeds from loan 210,000
Proceeds from issuance of common stock,
net of offering costs of $138,931 in
1998 and $184,065 in 1999 857,318 3,327,582 5,558,071
Repurchase of Treasury stock at cost (7,973) - (7,973)
Net cash provided by financing
activities 866,372 3,327,582 5,760,098
Net Increase (Decrease)in Cash (121,327) 122,479 122,479
Cash, Beginning of Period 161,787 - -
Cash, End of Period $ 40,460 $ 122,479 $ 122,479
See notes to the consolidated financial statements 4.
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 1999. For the year ending June 30, 1998, and all periods
presented thereafter, the Company adopted FASB 128 to compute earnings per
share. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects 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.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Registration Statement on
form 10-SB for the year ended June 30, 1998 and the interim period ended
December 30, 1998.
Schedule of Non Cash Investing and Financial Activities:
For the nine
Months ended
March 31,1999
Common Stock issued for services:
Charged to operations $ 783,875
Charged to common stock $ 85,415
Common Stock issued for reduction
of accounts payable. $ 27,983
Other Supplemental Cash Flow Information:
Interest Paid $ 2,000
B. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
5.
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
C. RELATED PARTY TRANSACTIONS
The Company is dependent on an affiliated company, Microphase Corporation,
for facilities and technological assistance. During the nine months ended
March 31,1999 and 1998 the Company incurred $458,026 and $71,268 research
and development expenses with an affiliate and $90,000 and $131,315 general
and administrative expenses with the same affiliate. At March 31, 1999 the
Company owed this affiliate, Microphase Corporation, $ 1,355,454.
During the nine months ended March 31,1999 and 1998 the Company paid
$153,999 and $95,141 of finder fees to a corporation owned by a director.
At March 31, 1999 $228,900 was owed to this director including $12,900
accrued interest.
6.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
mPHASE TECHNOLOGIES, INC.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed financial
statements, as well as information relating to the plans of the Company's
current management.
RESULTS OF OPERATIONS AND CURRENT METHOD OF OPERATION
Nine Months Ended March 31, 1999 vs. March 31, 1998
The Company's results of operations for the nine months ended March 31, 1999
consisted of a loss of $4,360,732 as compared to March 31, 1998 which consisted
of a loss of $2,634,043.
The major expenses during the nine month periods were research and development
of $2,290,005 in 1999 compared to $1,165,461 in 1998 and general and
administrative expenses totaling $1,017,231 in 1999 compared with $837,949 for
the same period in 1998.
Liquidity and Working Capital
The Company's working capital (deficit) of $2,929,535 at March 31, 1999 has been
reduced from its previous fiscal year end, June 30, 1998 total of $3,073,299.
As enumerated in the Company's recently filed form 10-SB, the Company estimated
it will need to raise from $10,000,000 to $15,000,000 of additional capital
through the issuance of its common stock, at per share prices to be determined,
to sophisticated investors in a series of transactions which are intended to be
exempt from registration pursuant to Rule 506 of Regulation D promulgated by the
Securities and Exchange Commission. The $375,000 of stock subscription
receivable is included with assets on the balance sheet at March 31, 1999 as
this subscription was collected in the first week of April, 1999. Management
does not believe it will experience much difficulty in raising the targeted
capital.
YEAR 2000 ISSUES
Many computer systems and software programs, including several used by the
Company may require modification and conversion to allow date code fields to
accept dates beginning with the year 2000. Major system failures or erroneous
calculations can result if computer systems are not year 2000 compliant.
The Company is in the process of evaluating the computer systems they now have
in use and does not anticipate a major undertaking to be compliant.
The company anticipates all of the products it is currently developing will be
year 2000 compliant and as such has informed its suppliers and co-developers of
this requirement.
7.
Forward looking and other statements
Forward looking statements above and elsewhere in this report that suggest the
Company will increase revenues or become profitable are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations and cash flows. These
statements are identified by words such as "believes," "expects," "anticipates"
or similar expressions. Such forward looking statements are based on the
beliefs of mPHASE Technologies Inc."mPHASE" or "The Company" and its Board of
Directors in which they attempt to analyze the Company's competitive position
in its industry and the factors affecting its business, including management's
evaluation of its sales potential. Stockholders of the Company should
understand that each of the foregoing risk factors, in addition to those
discussed elsewhere in this quarterly report and in the documents which are
incorporated by reference herein, could affect the future results of mPHASE,
and could cause those results to differ materially from those expressed in the
forward-looking statements contained or incorporated by reference herein. In
addition there can be no assurance that the Company and its Board have correctly
identified and assessed all of the factors affecting the Company's business.
8.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal proceeding nor
does it have knowledge of any threatened litigation, except for a
lawsuit instituted by Global Music and Media Inc, a Tennessee
Corporation, over an alleged breach of an April 30, 1997 agreement
whereby Global alleges it was given the exclusive right to market
mPhase technology as well as television programming and related
services. The Company has asserted the April 30, 1997 agreement
relied upon by Global was superseded by an October 27, 1997 agreement
with respect to which Global and a related company has defaulted
under its obligations. Accordingly, the Company does not believe
there is any merit to the contentions of Global and intends to
vigorously defend the lawsuit.
The Company was previously involved in an action arising out of a
lease entered into by its predecessor in name with U.S. Land
Resources, L.P. which has since been resolved and settled at a
minimal cost. Another matter which did not result in litigation but
was settled by the company involved claims by Thomas A. Murphy, a
former director and executive of the Company who agreed to waive all
claims against the company in return for allowing him to retain the
benefit of 525,000 shares of mPhase common stock he had acquired as
a founding shareholder of Lightpaths, Inc. when it was acquired by
the company and as a director of the Company.
Item 2. Changes in Securities
There have been no changes in the type of securities or amount of
the shares authorized to be issued. During the quarter ended March
31, 1999 the company issued 235,000 shares to sophisticated
investors in a series of transactions intended to be exempt from
registration for cash consideration totaling $587,500 which included
a $375,000 stock subscription collected in April, 1999. Additionally
50,000 shares valued at $85,415 were issued for services in
connection with private offerings of the company's common stock and
85,000 shares valued at $128,125 were issued for services pertaining
to the Company's operations and were recorded as stock based
compensation.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
9.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant, caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
Dated: June 23, 1999 By: /s/Ronald A. Durando
Ronald A. Durando, President, CEO
10.
