<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE YEAR ENDED JUNE 30, 2000
</TABLE>
COMMISSION FILE NO.000-24969
------------------------
MPHASE TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
NEW JERSEY 22-2287503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
587 CONNECTICUT AVE., NORWALK, CT 06854-1711
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: (203) 838-2741
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
------------------------
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 / /
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K is not contained herein, and will not be contained to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
the Form 10-KSB. /X/
Transitional Small Business Disclosure Format: Yes / / No /X/
Registrant had 31,719,540 shares of Common Stock, no par value, stated value
$.01, outstanding on September 14, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
mPhase Technologies, Inc. (the "Company") is a development stage company
engaged in the development of high-bandwidth telecommunications products
incorporating digital subscriber line, or DSL technology. The Company's products
are designed to enable high speed broadband transmission over the installed
copper telephone wire infrastructure. The Company believes that its DSL
technology is unique in that it enables cost effective and reliable simultaneous
delivery of high-speed internet access, digital television programming and
telephone communications over an existing telephone line on an unshared
platform.
To date, the Company has had insignificant operating revenue. There can be
no assurance whatsoever that its DSL technology (the "Traverser") and other
products, when fully developed and manufactured in significant quantity, 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 research and development
expenses, marketing and sales, advertising, engineering, drafting,
manufacturing, assembly, quality control, cost of materials and general and
administrative expenses. Consequently, the Company will continue to have high
levels of operating expenses before developing significant revenues and will be
required to make substantial capital expenditures in connection with our ongoing
research and development activities.
CURRENT PRODUCTION STATUS AND PRODUCTS PLAN
The Company has begun to deploy its Traverser DVDDS version 1.1 at Hart
Telephone. As of the fiscal year end, 4 Hart customers were utilizing the system
to receive television content and access the internet. Additional customers are
scheduled to have the Traverser installed, resulting in 50 Hart customers fully
up and running on the system by the end of calendar year 2000. The remaining 950
ports will be delivered to Hart during this fiscal year. The system being
deployed at Hart is capable of delivering up to 192 channels of broadcast
television pay-per-view and customized content. This location, as it is the
first to be configured with the commercial production system, is the showcase
for the Company's flagship product.
MPHASE TELEVISION.NET, INC.
In a parallel effort, the Company, through mPhase Television.net, Inc. its
joint venture with AlphaStar International, Inc. ("AlphaStar"), has secured 54
channels of broadcast television content by way of agreements to test the
delivery of TV signals over copper wires using the Traverser system. This
content is an essential part of the turn key solution mPhase plans to make
available to telecommunications providers worldwide. We anticipate that the
testing phase will be completed in stages starting November 2000 resulting in
affiliation agreements with each of the networks. The affiliation agreements
will be subject to satisfying the networks that their standards for delivery
quality will be assured. Currently Hart Telephone is successfully receiving the
signals being transmitted from our earth station located in Oxford, Connecticut.
In March 2000 the Company acquired a 50% interest in mPhase Television.net,
Inc., an incorporated joint venture with AlphaStar for a cash investment of
$20,000. Additionally the agreement provided for the grant of options to the
Company's joint venture partner to purchase 200,000 shares of the Company's
common stock for $4.00 per share. The agreement stipulates that AlphaStar must
provide to the venture the right at AlphaStar's facilities to transmit MPEG2
digital content. Additionally the Company loaned the joint venture $1,000,000 at
8% interest per annum. The loan is repayable to the Company from equity
infusions not later than such time that the joint venture qualifies for a NASDAQ
small cap market listing. Subsequent to March 2000, the Company acquired an
additional 6.5% interest in mPhase Television.Net, Inc., for an additional
$1,500,000 investment. The
2
<PAGE>
joint venture is a consolidated subsidiary of the Company. The Company believes
that its rights under the joint venture agreement enables it to cost effectively
deliver digital television content as part of its Traverser System products and
services.
The Company anticipates developing a number of future product enhancements
that can be incorporated ino the mPhase Traverser family of products and
services. In addition to digital television and internet usage, applications
such as interactive television, local and national ad insertion, digital
telephony, proprietary content, video on demand, and specialized content
packages become a technical and economic possibility.
In addition to our Traverser system, the Company has also designed a
proprietary line of interoperable DSL component products which consist of
customer premises and central office POTS (Plain Old Telephone Service) filters
and splitters for G.lite and full rate DSL applications. These component
products are currently being marketed and sold to telecommunications equipment
providers and carriers worldwide. The Company does not believe that its inherent
competitive advantage will be impaired by the sale of these component products
to potential competitors.
During the next twelve months the Company anticipates ongoing research,
development and manufacturing costs. Additionally, the Company anticipates
expanding the staff, as needed, to support anticipated demand for products and
correlated support services.
MPHASETV.NET
The Company has organized a subsidiary corporation, mPhaseTV.net, which is
an integrator of internet content. mPhaseTV.net has signed an agreement with
InfoSpace.com Inc. a leading provider of internet content that aggregates and
co-brands internet content and root services for the Company. 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. Included on the mPhaseTV.net website
are features such as yellow and white pages, classifieds, finance, shopping, net
community, and city guide.
COLLABORATIONS AND ASSOCIATED RISKS
Our Traverser product line is designed to provide a cost effective and
reliable solution to deliver digital television over the installed twisted pair,
copper wire infrastructure, as an alternative to cable access television and
direct broadcast satellite services. By using the installed public telephone
infrastructure, the Traverser product line supports high speed communication
solutions without requiring costly upgrades from copper to coaxial cable or
fiber optics.
Our Traverser DVDDS products utilize technology licensed on an exclusive
basis from Georgia Tech Advanced Research Corporation and technology owned by
the Company. Under a Basic Ordering Research Agreement, Georgia Tech conducts a
significant portion of the engineering research and design efforts for the
Company in developing the Traverser product line.
If the Traverser product line is successfully developed, the Company intends
to direct its marketing efforts to telephone companies, competitive local
exchange carriers, domestic and international local exchange carriers, and
Regional Bell Operating Companies (RBOCs). The Company expects to stress to
these service providers that use of the Traverser DVDDS will enable them to
offer customers a complete suite of communications services over a single
unshared platform.
The Company relies significantly on Georgia Tech for research involved with
the development of its products. The Company's Basic Ordering Research Agreement
with Georgia Tech, includes a series of delivery orders providing guidelines for
the research and development of portions or components of the Traverser. The
Company's business would be materially adversely affected if Georgia Tech does
not
3
<PAGE>
perform its responsibilities on an acceptable basis or terminates our
relationship, and the Company is unable to replace Georgia Tech's development
services on a prompt basis.
The Company has secured a third party, Flextronics, Inc. to manufacture the
Traverser DVDDS. Even so the potential for dependence on a third party
manufacturer is inherently risky. If there is a disruption in supply from
Flextronics or another vendor that supplies the Company with products and or
components, it may be unable to complete the products it desire to sell. Sales
would suffer as a result of a disruption in the operations of any the Company's
manufacturers.
Necdet F. Ergul, the Company's Chairman of the Board, Ronald A. Durando, the
Company's President and Chief Executive Officer, and Gustave T. Dotoli, the
Company's Chief Operating Officer, respectively, are officers of Microphase
Corporation and Necdet F. Ergul and Ronald Durando are shareholders as well of
Microphase Corporation. The Company currently purchases from Microphase passive
components for the Traverser. Microphase also provides resources and technology
related to the development of the Traverser. Microphase may not be the most
economical provider of these components and resources. In addition, the Company
will pay to Microphase, going forward, a royalty of 3% comprised of a percentage
of the commercial product sales of DSL-related technologies.
The Company's success depends in part on its ability to protect its
intellectual property. To protect its proprietary rights, the Company has filed
provisional patents and copyright applications relating to some of its proposed
products and technology. Georgia Tech has filed an application for U.S. Patent
for Georgia Tech's Digital Video and Data System. Although the Company believes
that our technology is patentable, the patents may not be obtained. Even if the
patents are obtained, they may not afford us sufficient protection for our
technologies from third party infringement. The Company may elect to seek
foreign patent protection, but foreign patent protection may not be granted. Our
failure to protect our intellectual property could materially adversely affect
us.
EMPLOYEES AND CONSULTANTS
The Company presently has 17 individuals who are employees and consultants,
three of whom are concurrently employed by Microphase Corporation.
ITEM 2. PROPERTIES
Our corporate headquarters are located at 587 Connecticut Avenue, Norwalk,
CT 06856-1711. We leased this office space from Microphase Corporation on a
month to month basis for $10,000 per month through December 31, 1999 and $11,050
beginning in January 2000 in a lease which includes certain administrative
services. The Company also maintain an office and research facility at the
Georgia Tech Research Corporation in Atlanta, Georgia as part of its basic
ordering agreement with Georgia Tech.
In addition, the Company's joint venture mPhase Television, Inc. leases two
facilities from affiliates of its joint venture partner; one in Oxford CT that
houses the satellites for $11,250 per month and the other located in Byram CT.
for management and administration offices for $11,250 per month.
ITEM 3. LEGAL PROCEEDINGS
During the year ended June 30, 2000 the Company settled litigation with
Global Music and Media Inc. which has asserted it had the exclusive right to
market our technology. This litigation was resolved in August 1999 in a
settlement agreement wherein Global Music surrendered any claim to the Company's
technology in exchange for the Company to settle claims of Hal Willis against
Global for a cash payment of $100,000, the issuance of 75,000 shares of the
Company's common stock and option to purchase another 75,000 shares at $5.6275
per share and the payment of $90,000 to Global to settle employee claims, the
cost of which had been recorded in the financial statements as of June 30, 1999.
4
<PAGE>
The agreement also called for the repurchase of 75,000 shares of the Company's
common stock from the owners of Global by the Company or its co-defendant,
Microphase Corporation. Microphase repurchased these shares in August, 1999.
As of June 30, 2000 the Company was and is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As described in the Company's Definitive Proxy Statement (DEF-14A), filed on
April 27, 2000, the following proposals were submitted to shareholders for their
approval: (1) a proposal to elect eight (8) Directors to hold office until the
next Annual Meeting; (2) a proposal to increase of authorized capitalization of
the Company from 50,000,000 to 150,000,000 shares of common stock; (3) a
proposal to adopt the Long-Term Stock Incentive Plan and the increase of
authorized shares available for issuance; and (4) a proposal to ratify the
appointment of Arthur Andersen LLP as the independent accountants for the
Company's fiscal 2000 year. The aforementioned proposals are explained in
greater detail in the Proxy Document; shareholders of record as of April 6, 2000
were entitled to vote before the deadline of May 22, 2000, and all such
proposals were approved by the shareholders on that date.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET PRICES OF COMMON STOCK
The primary market for our common stock is the Nasdaq OTC Bulletin Board,
where it trades under the symbol "XDSL." The Company became publicly traded
through a merger with Lightpaths TP Technologies, formerly known as Tecma
Laboratories, Inc. pursuant to an agreement dated February 17, 1997. The
following table sets forth the high and low closing bid prices for the shares
for the periods indicated as provided by the NASD's OTCBB System. 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 stock split on March 1, 1997.
<TABLE>
<CAPTION>
YEAR/QUARTER HIGH LOW
------------ --------- --------
<S> <C> <C>
Fiscal year ended June 30, 1998
First Quarter.......................................... $ 2.00 $ 1.375
Second Quarter......................................... 1.375 0.625
Third Quarter.......................................... 1.75 0.875
Fourth Quarter......................................... 2.375 1.1875
Fiscal year ended June 30, 1999
First Quarter.......................................... 4.25 0.75
Second Quarter......................................... 3.65625 1.5625
Third Quarter.......................................... 5.625 1.875
Fourth Quarter......................................... 8.75 2.90625
Fiscal year ended June 30, 2000
First Quarter.......................................... 9.25 3.00
Second Quarter......................................... 6.1875 2.50
Third Quarter.......................................... 19.125 6.50
Fourth Quarter......................................... 14.125 6.00
</TABLE>
(B) HOLDERS
As of September 14, 2000, the Company had 31,719,540 shares of common stock
outstanding and approximately 18,250 stockholders of record.
5
<PAGE>
(C) DIVIDENDS
The Company has never declared or paid any cash dividends on its common
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intend to retain future earnings, if any, to
finance operations and the expansion of its business. Any future determination
to pay cash dividends will be at the discretion of the board of directors and
will be based upon the Company's financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by any financing
arrangements and any other factors that the board of directors deems relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
AND PLAN OF OPERATIONS
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 consolidated financial
statements, as well as information relating to the plans of the Company's
current management.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 2000 VS. JUNE 30, 1999
The Company recorded a net loss of $38,161,542 for the year ended June 30,
2000 as compared to a loss of $22,838,344 for the comparable period ended
June 30, 1999, an increase of $15,323,198. This represents a loss per common
share of $1.41 for the year ended June 30, 2000 as compared to a loss per common
share of $1.42 for the period ended June 30, 1999. Research and development
expenses rose to $10,288,692 for the year ended June 30, 2000, including a
$1,010,375 non-cash charge for options granted to Hart Telephone, increased
expenditures with Flextronics in connection with their efforts in assisting the
Company to complete the Traverser Version 1.1 and increased expenditures with
Microphase Corporation for the completion of the first generation of the
Company's component products. This represents an increase of $6,725,791 from the
fiscal 1999 balance of $3,562,901.
General and administrative expenses rose to $17,516,216 in fiscal 2000 from
$4,683,109 for the comparable period in fiscal 1999. The increase in the
administrative costs relate to several factors. The Company increased its
marketing and public relation efforts in anticipation of the deployment of the
Company's initial sales of component products and services. The Company also
incurred substantial non-cash charges for grants of options and common stock to
consultants totaling $9,078,311 for 2000; including $2,633,400 to the Company's
minority co-venturers of mPhase Television.Net, Inc., Alpha Star, $796,350 to a
consultant for services with respect to strategic advisory services and a
$1,808,086 charge recorded for the issuance of common stock in May to recent
investors due to a market value adjustment, as compared to a total of $2,765,453
of such charges for 1999. The non-cash charges for stock based compensation
totaled $10,343,114 in 2000 compared to $13,002,605, a decrease of $2,659,491.
This overall net increase of $4,663,742 of non-cash charges to employees,
consultants and investors, included in general and administrative and research
and development expenses coupled with the Company's increased non-equity outlays
for research and development expense of $5,715,416 represents approximately 68%
of the increase in the Company's loss in fiscal 2000 compared to fiscal 1999,
and increased marketing efforts and additional hirings of full time employees
represent the balance.
6
<PAGE>
PLAN OF OPERATIONS
RESEARCH AND DEVELOPMENT ACTIVITIES
As noted above, Georgia Tech conducts a significant amount of research and
development for the Company 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 Traverser product lines. After the development of the
TRAVERSER DIGITAL VIDEO and DATA Delivery System DVDDS version 1.1, the Company
expects Georgia Tech to continue research and development of the Traverser
product to enhance features and functionality, as well as to coordinate the
effort to develop the Traverser, version 2.0 and support the deployment
additional products utilizing Traverser technology.
For the years ended June 30, 1999 and 2000 and for the period since
inception (October 2, 1996) to June 30, 2000, approximately $2,450,000,
$4,560,000 and $9,160,000 respectively, has been billed to mPhase for research
and development conducted by Georgia Tech, of which approximately $445,594 was
included in accrued expenses as of June 30, 2000.
The Company is the sole, worldwide licensee of the technology developed by
Georgia Tech in conjunction with the Traverser product line. Upon completion of
the commercial product, Georgia Tech will receive a royalty of 3% to 5% of
product sales.
The amount of research and development costs the Company has expended from
October 2, 1996, its inception date, through June 30, 2000 was approximately
$16,340,000. During the year ended June 30, 2000, the Company incurred research
and development expenses of approximately $10,290,000 as a consequence of the
continued development of its current DSL products and services.
STRATEGIC ALLIANCES IMPLEMENTED
The manufacturer of the Company's DVDDS, Flextronics International LTD.
(NASDAQ: FLEX), completed a pilot run of the central office equipment for the
DVDDS system and a pilot run for the Intelligent Network Interface (INI) (a next
generation set top box). The Company delivered its initial prototype to Hart
Telephone in May, 2000. The Company believes that the selection of Flextronics
enhances the Company's ability to implement the delivery system necessary to
satisfy what we hope to be a strong and evolving market demand.
On January 21, 2000 Alcatel S.A., formerly Newbridge Networks Corporation
(NYSE: NN), a leading provider of networking solutions, agreed to re-sell the
Company's filter products, including the "POTS SPLITTER SHELF" and "SPLITTER
CARD." The filter products the Company provides Newbridge Networks are the
Company's first products sold and utilized. The filter products enable Newbridge
Networks customers, which include 350 of the world's largest telecommunication
services providers, to provide quality, cost efficient voice, video and Internet
access applications. In March of 2000, the Company shipped its initial orders
and recorded its initial operating revenue from these products.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000 the Company had working capital of $3,556,587.
In order to provide necessary funds for research and development, capital
expenditures and operating losses, the Company successfully raised additional
capital of approximately $17,620,000 in the fiscal year ended June 30, 2000
through the issuance of common stock to sophisticated investors in a series of
transactions exempt from registration pursuant to Rule 506 of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933. The Company believes that its current resources, along with anticipated
funding, will be sufficient to sustain the Company's operations over the
upcoming year, however, it is anticipated that the Company in connection with
the
7
<PAGE>
full commercial production of its Traverser DVDDS product, it will need to raise
significant additional funds. The Company is currently raising $5,000,000
through an exempt private placement under Rule 506 of Regulation D which is
expected to close not later than September 30, 2000. The Company is also in
current negotiations with a number of investment banking firms to raise
additional equity financing. However, there can be no assurance that such equity
financing will be available or at favorable terms to the Company when needed.
FORWARD LOOKING AND OTHER STATEMENTS
The Company has made statements in this document that are forward-looking
statements that involve substantial risks and uncertainties. These statements
can be identified by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You should
read statements that contain these words carefully because they: (1) discuss the
Company's future expectations; (2) contain projections of the Company's future
results of operations or of the Company's fiscal condition; or (3) state other
"forward looking" information.
The Company believes it is important to communicate its expectations to its
investors. However, there may be events in the future that the Company is not
able to accurately predict or which it does not fully control. Important factors
that could cause actual results to differ materially from these expressed or
implied by our forward-looking statements, include, but are not limited to those
risks, uncertainties and other factors discussed in this document.
RISK FACTORS WHICH MAY AFFECT OUR BUSINESS
The Company expects to incur substantial net losses for the foreseeable
future and expects to raise additional capital through issuances of our common
stock.
The Company expects operating losses and negative cash flow for the
foreseeable future as it must invest in marketing and promotional activities,
maintenance of the Company's technology and operating systems, in addition to
the continued commitment it must maintain for research and development. As such,
the Company anticipates additional public or private offerings of its common
stock. The Company cannot be certain when and if it will achieve sufficient
revenues in relation to expenses to become profitable. The Company believes that
increasing its revenues will depend in large part on its ability to:
- Raise additional capital;
- Complete the Beta-stage of our initial products;
- Gain market acceptance and market share which will be dependent upon the
timing, strength and success of our strategic alliances;
- increase industry awareness of our products and develop effective
marketing and other promotional activities to develop our initial customer
base;
- develop strategic relationships that balance the Company's current and
long-term ability to capitalize on its technology.
The Company's future profitability depends on generating and sustaining high
revenue growth while maintaining reasonable expense levels. Slower revenue
growth than it anticipates or operating expenses that exceed the Company's
expectations would harm its business. If the Company achieves profitability, it
cannot be certain that it would be able to sustain or increase profitability in
the future.
THE COMPANY'S OPERATING HISTORY IS VERY LIMITED.
The Company has limited operating history upon which an investor can
evaluate its performance. An interested party or investor in the Company's
common stock should consider the risks and
8
<PAGE>
difficulties the Company may encounter as in the rapidly evolving broadband
telecommunications marketplace. These risks include the Company's ability to:
- complete its flagship products;
- implement its current strategy and obtain market penetration when its
products become available;
- anticipate and adapt to rapid changes in its markets;
- attract initial customers and maintain customer satisfaction.
If the Company does not successfully manage these risks, its business will
suffer. The Company cannot assure you that it will successfully address these
risks or that its business strategy will be successful.
THE COMPANY EXPECTS TO USE 3RD PARTY MANUFACTURERS.
Even though the Company has secured a third party to manufacture its
products, the potential for dependence on a third party manufacturer is
inherently risky. If there is a disruption in supply from Flextronics or another
vendor that supplies the Company with products and or components, it may be
unable to complete the products the Company desires to sell. The Company's sales
would suffer as a result of a disruption in the operations of any of its
manufacturers.
THE COMPANY HAS COMMON MANAGEMENT.
Necdet F. Ergul, our Chairman of the Board, Ronald A. Durando, our President
and Chief Executive Officer, and Gustave T. Dotoli, our Chief Operating Officer
and Executive Vice President, respectively, are officers of Microphase
Corporation and Necdet F. Ergul and Ronald Durando are shareholders as well of
Microphase Corporation. The Company currently purchases from Microphase passive
components for the Traverser. and other DSL products, including the "POTS
Splitter shelf" and "Splittercard". Microphase also provides resources and
technology related to the development of the Traverser. Microphase may not be
the most economical provider of these components and resources. In addition, we
will pay to Microphase, going forward, a royalty comprised of a percentage of
the commercial product sales of DSL-related technologies. Ronald A. Durando and
Gustave T. Dotoli are also President and Vice-President respectively of
PacketPort.com., a Company that is engaged in the business of manufacturing and
marketing computer peripheral hardware and software products for the automated
voice response, telecommunications, computer and multimedia communications
industries.
Ronald A. Durando is Chairman of the Board of Janifast Holdings LTD, a U.S.
holding company which owns Janifast Limited, a company engaged in the
manufacturing of Pots Splitter Shelves and Cards and Filters for the Company.
Janifast may not be the most economical provider of these components and
resources. The manufacturing operations of Janfest Limited are located in Hong
Kong and the Peoples Republic of China.
THE COMPANY'S SUCCESS DEPENDS ON INTELLECTUAL PROPERTY.
The Company's success depends in part on its ability to protect its
intellectual property. To protect its proprietary rights, the Company has filed
provisional patents and copyright applications relating to some of its proposed
products and technology. Georgia Tech has filed an application for U.S. Patent
for Georgia Tech's Digital Video and Data System. Although the Company believes
that certain of its technology is patentable, the patents may not be obtained.
Even if the patents are obtained, they may not afford the Company sufficient
protection for its technologies from third party infringement. The
9
<PAGE>
Company may elect to seek foreign patent protection, but foreign patent
protection may not be granted. The Company's failure to protect its intellectual
property could have a material adverse effect.
COMPETITION
The telecommunications equipment market is characterized by swift
technological change. Several solutions such as fiber optic, cable, wireless and
satellite technologies compete with DSL for market share. Service providers may
use other technologies such as fiber optic cable, hybrid coaxial cable, ISDN to
deploy high-speed transmissions. Based on current industry standards, the
Company believes that RADSL technology can compete, particularly with respect to
telephone companies and other copper wire based service providers.
Among equipment companies that supply DSL technology, our competitors
include ADTRAN, Alacatel S.A., Aware, Inc., Pliant Technologies, CISCO
Systems, Inc., ECI Telecom Ltd., Lucent Technologies, Nokia, LM Ericsson, NEC,
Samsung, Nortel Networks, Next Level Communications, Inc., Orckit
Communications, ADC Telecommunications, TUT Systems, Westell Technologies, AG
Communications Systems, Copper Mountain, Interspeed, Paradyne Networks, Inc.
INTEGRATED SERVICES DIGITAL NETWORK. Emerging technologies for high speed
data transmission over copper lines include Integrated Services Digital Network,
or ISDN. ISDN currently delivers 128 Kbps computer networking connections, which
are two times faster than those available with the fastest analog modems.
While ISDN does provide faster access than analog modems, it is expensive,
difficult to install, and not as fast as competing high speed technologies.
Moreover, it does not allow for simultaneous data transmission and normal
telephone service on the same line and it is not capable of delivering digital
television.
FIBER OPTIC CABLE. Fiber optic cable is another alternative that allows
high bandwidth transmission. However, it is expensive to install.
COAXIAL. Cable companies have begun offering high speed Internet access
through cable modems. These modems provide the potential of wider bandwidth (up
to 10 Mbps as compared to 56 Kbps analog modems). But coaxial cable is
relatively expensive and has the drawbacks associated with a shared bandwidth
medium.
REGULATION
The Federal Communication Commission, or FCC, and various state public
utility and service commissions, regulate most of the Company's potential
domestic customers. Changes to FCC regulatory policies may affect the
accessibility of services, and otherwise affect how telecommunications providers
conduct their business. These regulations may adversely affect our potential
penetration into certain markets. 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 our
business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
Consolidated Financial Statements of the Registrant, mPhase Technologies, Inc.
10
<PAGE>
Financial Statements
<TABLE>
<CAPTION>
PAGES
--------
<S> <C>
Report of Arthur Andersen LLP............................... F-1
Report of Schuhalter, Coughlin & Suozzo, LLC................ F-2
Consolidated Balance Sheet as of June 30, 2000.............. F-3
Consolidated Statements of Operations for the years ended
June 30, 1999 and 2000 and for the period from inception
(October 2, 1996) through June 30, 2000................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the period from inception (October 2, 1996)
through June 30, 1997 and for each of the three years in
the period ended June 30, 1999............................ F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1999 and 2000 and for the period from inception
(October 2, 1996) through June 30, 2000................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
mPhase Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of mPhase
Technologies, Inc. (a New Jersey corporation in the development stage) and
subsidiaries as of June 30, 2000, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended June 30, 2000 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the period
from inception (October 2, 1996) to June 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of mPhase Technologies, Inc. for the period from
inception to June 30, 1998. Such statements are included in the cumulative from
inception to June 30, 2000 totals of the statements of operations, changes in
stockholders' equity and cash flows and reflect total net loss of 7 percent of
the related cumulative totals. Those statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts for the period from inception to June 30, 1998, included in the
cumulative totals, is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of mPhase Technologies, Inc. and subsidiaries as of
June 30, 2000, and the results of their operations and their cash flows for each
of the two years in the period ended June 30, 2000 and for the period from
inception to June 30, 2000, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Stamford, Connecticut
September 26, 2000
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
mPhase Technologies, Inc.:
We have audited the statements of operations, changes in stockholders'
equity, and cash flows for the period October 2, 1996 (date of inception)
through June 30, 1998 of mPhase Technologies, Inc. (a development stage
company). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of its operations and its cash flows for the period of
October 2, 1996 (date of inception) through June 30, 1998 in conformity with
generally accepted accounting principles.
Schuhalter, Coughlin & Suozzo, LLC
Raritan, New Jersey
January 28, 1999
F-2
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 6,432,417
Accounts receivable......................................... 151,186
Note receivable............................................. 250,000
Prepaid expenses and other current assets................... 578,726
------------
Total current assets...................................... 7,412,329
------------
Production advances--related parties........................ 1,109,641
Property and equipment, net................................. 1,323,756
Patents and licenses, net................................... 1,338,520
------------
Total assets.............................................. $ 11,184,246
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,520,505
Accrued expenses............................................ 1,837,532
Due to officers and related party........................... 412,400
Due to related parties...................................... 85,305
------------
Total current liabilities................................. 3,855,742
------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock, stated value $.01, 150,000,000 shares
authorized; 31,404,540 shares issued and outstanding...... 314,045
Additional paid-in capital.................................. 74,370,291
Deferred compensation....................................... (1,225,668)
Deficit accumulated during development stage................ (66,122,191)
Less--treasury stock, 13,750 shares, at cost................ (7,973)
------------
Total stockholders' equity................................ 7,328,504
------------
Total liabilities and stockholders' equity................ $ 11,184,246
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000 AND
FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 2000
<TABLE>
<CAPTION>
FROM INCEPTION
FOR THE YEARS ENDED JUNE 30, (OCTOBER 2,
----------------------------- 1996) TO
1999 2000 JUNE 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
TOTAL REVENUES...................................... $ -- $ 279,476 $ 279,476
------------ ------------ ------------
COSTS AND EXPENSES:
Research and development............................ 3,562,901 10,288,692 16,341,377
General and administrative.......................... 4,683,109 17,516,216 23,999,846
Licensing fees...................................... -- -- 487,500
Depreciation and amortization....................... 410,303 471,101 921,057
Non-cash charges for stock-based employee
compensation...................................... 13,002,605 10,343,114 23,345,719
------------ ------------ ------------
Total costs and expenses.......................... 21,658,918 38,619,123 65,095,499
------------ ------------ ------------
Loss from operations.............................. 21,658,918 38,339,647 64,816,023
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Minority interest loss in consolidated subsidiary... -- 20,000 20,000
Loss from unconsolidated subsidiary................. (1,161,622) -- (1,466,467)
Interest income (expense), net...................... (17,804) 158,105 140,299
------------ ------------ ------------
Total other income (expense)...................... (1,179,426) 178,105 (1,306,168)
------------ ------------ ------------
Net loss.......................................... $(22,838,344) $(38,161,542) $(66,122,191)
============ ============ ============
LOSS PER COMMON SHARE, basic and diluted............ $ (1.42) $ (1.41)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic
and diluted....................................... 16,038,009 26,974,997
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------ TREASURY PAID-IN DEFERRED ACCUMULATED
SHARES $.01 STATED VALUE STOCK CAPITAL COMPENSATION DEFICIT
---------- ----------------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 2, 1996
(date of inception)......... 1,140,427 $ 11,404 $ -- $ 459,753 $ -- $ (537,707)
Issuance of common stock of
Tecma Laboratories, Inc.,
for 100% of the Company..... 6,600,000 66,000 -- (537,157) -- 537,707
Issuance of common stock, in
private placement, net of
offering costs of
$138,931.................... 594,270 5,943 -- 752,531 -- --
Net loss...................... -- -- -- -- -- (781,246)
---------- -------- ------- ----------- ----------- ------------
BALANCE, JUNE 30, 1997........ 8,334,697 83,347 -- 675,127 -- (781,246)
Issuance of common stock with
warrants, in private
placement, net of offering
costs of $84,065............ 999,502 9,995 -- 791,874 -- --
Issuance of common stock for
services.................... 300,000 3,000 -- 147,000 -- --
Issuance of common stock in
connection with investment
in unconsolidated
subsidiary.................. 250,000 2,500 -- 122,500 -- --
Repurchase of 13,750 shares of
common stock................ -- -- (7,973) -- -- --
Issuance of common stock with
warrants in private
placement, net of offering
costs of $121,138........... 1,095,512 10,955 -- 659,191 -- --
Issuance of common stock for
financing services.......... 100,000 1,000 -- (1,000) -- --
Issuance of common stock in
consideration for 100% of
the common stock of
Microphase
Telecommunications, Inc..... 2,500,000 25,000 -- 1,685,000 -- --
Net loss...................... -- -- -- -- -- (4,341,059)
---------- -------- ------- ----------- ----------- ------------
BALANCE, JUNE 30, 1998........ 13,579,711 $135,797 $(7,973) $ 4,079,692 $ -- $(5,122,305)
---------- -------- ------- ----------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
(DEFICIT)
EQUITY
-------------
<S> <C>
BALANCE, OCTOBER 2, 1996
(date of inception)......... $ (66,550)
Issuance of common stock of
Tecma Laboratories, Inc.,
for 100% of the Company..... 66,550
Issuance of common stock, in
private placement, net of
offering costs of
$138,931.................... 758,474
Net loss...................... (781,246)
------------
BALANCE, JUNE 30, 1997........ (22,772)
Issuance of common stock with
warrants, in private
placement, net of offering
costs of $84,065............ 801,869
Issuance of common stock for
services.................... 150,000
Issuance of common stock in
connection with investment
in unconsolidated
subsidiary.................. 125,000
Repurchase of 13,750 shares of
common stock................ (7,973)
Issuance of common stock with
warrants in private
placement, net of offering
costs of $121,138........... 670,146
Issuance of common stock for
financing services.......... --
Issuance of common stock in
consideration for 100% of
the common stock of
Microphase
Telecommunications, Inc..... 1,710,000
Net loss...................... (4,341,059)
------------
BALANCE, JUNE 30, 1998........ $ (914,789)
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------ TREASURY PAID-IN DEFERRED ACCUMULATED
SHARES $.01 STATED VALUE STOCK CAPITAL COMPENSATION DEFICIT
---------- ----------------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998........ 13,579,711 $135,797 $(7,973) $ 4,079,692 $ -- $(5,122,305)
Issuance of common stock with
warrants in private
placements, net of offering
costs of $107,000........... 3,120,000 31,200 -- 2,981,800 -- --
Issuance of common stock for
services.................... 1,599,332 15,993 -- 8,744,873 -- --
Issuance of common stock with
warrants in private
placement, net of offering
costs
of $45,353.................. 642,000 6,420 -- 1,553,227 -- --
Issuance of common stock in
private placement, net of
offering costs of
$679,311.................... 4,426,698 44,267 -- 10,343,167 -- --
Issuance of stock options for
services.................... -- -- -- 7,129,890 -- --
Issuance of warrants for
services.................... -- -- -- 16,302 -- --
Deferred employee stock option
compensation................ -- -- -- -- (140,000) --
Net loss...................... -- -- -- -- -- (22,838,344)
---------- -------- ------- ----------- ----------- ------------
BALANCE, JUNE 30, 1999........ 23,367,741 233,677 $(7,973) $34,848,951 $ (140,000) $(27,960,649)
Issuance of common stock and
options in settlement....... 75,000 750 -- 971,711 -- --
Issuance of common stock upon
exercise of warrants and
options..................... 4,632,084 46,321 -- 5,406,938 -- --
Issuance of common stock in
private placement, net of
cash offering costs of
$200,000.................... 1,000,000 10,000 -- 3,790,000 -- --
Issuance of common stock in
private placement, net of
cash offering costs of
$466,480.................... 1,165,500 11,655 -- 9,654,951 -- --
Issuance of common stock for
services.................... 1,164,215 11,642 -- 8,612,265 -- --
Issuance of options for
services.................... -- -- -- 9,448,100 -- --
Deferred employee stock option
compensation................ -- -- -- 1,637,375 (1,637,375) --
Amortization of deferred
employee stock option
compensation................ -- -- -- -- 551,707 --
Net loss...................... -- -- -- -- -- (38,161,542)
---------- -------- ------- ----------- ----------- ------------
BALANCE, JUNE 30, 2000........ 31,404,540 $314,045 $(7,973) $74,370,291 $(1,225,668) $(66,122,191)
========== ======== ======= =========== =========== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
(DEFICIT)
EQUITY
-------------
<S> <C>
BALANCE, JUNE 30, 1998........ $ (914,789)
Issuance of common stock with
warrants in private
placements, net of offering
costs of $107,000........... 3,013,000
Issuance of common stock for
services.................... 8,760,866
Issuance of common stock with
warrants in private
placement, net of offering
costs
of $45,353.................. 1,559,647
Issuance of common stock in
private placement, net of
offering costs of
$679,311.................... 10,387,434
Issuance of stock options for
services.................... 7,129,890
Issuance of warrants for
services.................... 16,302
Deferred employee stock option
compensation................ (140,000)
Net loss...................... (22,838,344)
------------
BALANCE, JUNE 30, 1999........ $ 6,974,006
Issuance of common stock and
options in settlement....... 972,461
Issuance of common stock upon
exercise of warrants and
options..................... 5,453,259
Issuance of common stock in
private placement, net of
cash offering costs of
$200,000.................... 3,800,000
Issuance of common stock in
private placement, net of
cash offering costs of
$466,480.................... 9,666,606
Issuance of common stock for
services.................... 8,623,907
Issuance of options for
services.................... 9,448,100
Deferred employee stock option
compensation................ --
Amortization of deferred
employee stock option
compensation................ 551,707
Net loss...................... (38,161,542)
------------
BALANCE, JUNE 30, 2000........ $ 7,328,504
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000 AND
FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 2000
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FROM INCEPTION
JUNE 30, (OCTOBER 2, 1996)
--------------------------- TO JUNE 30,
1999 2000 2000
------------ ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(22,838,344) $(38,161,542) $(66,122,191)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization............................ 454,494 756,055 1,279,629
Loss on disposal of fixed assets......................... 7,062 5,796 12,858
Loss on unconsolidated subsidiary........................ 1,161,622 -- 1,466,467
Non-cash common stock, common stock option
and warrant expense.................................... 15,768,058 20,431,800 36,349,858
Changes in assets and liabilities--
Accounts receivable...................................... -- (151,186) (151,186)
Prepaid expenses and other current assets................ (82,100) (480,626) (578,726)
Production advances--related parties..................... -- (1,109,641) (1,109,641)
Cash overdraft........................................... (8,432) -- --
Note receivable.......................................... -- (250,000) (250,000)
Receivables from subsidiary.............................. -- -- (150,000)
Accounts payable......................................... (1,272,815) 1,086,736 1,520,505
Accrued expenses......................................... 1,400,779 (391,997) 1,688,160
Due to officers and related party........................ -- 412,400 412,400
Due to related parties................................... (511,394) 70,965 (350,370)
------------ ------------ ------------
Net cash used in operating activities.................. (5,921,070) (17,781,240) (25,982,237)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated subsidiary.................. -- -- (300,000)
Proceeds from defaulted license agreement with
unconsolidated subsidiary.............................. -- -- 300,000
Investment in licensing rights and organizational
costs.................................................. (59,907) (38,272) (152,944)
Purchase of property and equipment....................... (280,744) (1,348,210) (1,726,778)
------------ ------------ ------------
Net cash used in investing activities.................. (340,651) (1,386,482) (1,879,722)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan payable................................ (210,000) -- --
Net proceeds from private placement of common stock and
exercise of options and warrants....................... 14,449,581 17,622,279 34,302,349
Repurchase of treasury stock at cost..................... -- -- (7,973)
------------ ------------ ------------
Net cash provided by financing activities.............. 14,239,581 17,622,279 34,294,376
------------ ------------ ------------
Net increase (decrease) in cash............................ 7,977,860 (1,545,443) 6,432,417
CASH AND CASH EQUIVALENTS, beginning of period............. -- 7,977,860 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period................... $ 7,977,860 $ 6,432,417 $ 6,432,417
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. ORGANIZATION AND NATURE OF BUSINESS
mPhase Technologies, Inc. ("mPhase" or the "Company") was organized on
October 2, 1996.
The primary business of mPhase is to design, develop, manufacture and market
high-bandwidth telecommunications products incorporating direct subscriber line
("DSL") technology. The present activities of the Company are focused on the
deployment of its proprietary Traverser-TM- and component products and service
utilizing existing twisted pair copper wire infrastructure in "plain old
telephone systems" ("POTS").
On February 17, 1997, the Company acquired Tecma Laboratories, Inc.,
("Tecma") in a transaction accounted for as a reverse merger.
On June 25, 1998, the Company acquired Microphase Telecommunications, Inc.
("MicroTel") a Delaware corporation, through the issuance of 2,500,000 shares of
its common stock in exchange for all the issued and outstanding shares of
MicroTel (Note 4). The assets acquired in this acquisition were patents and
patent applications utilized in the Company's proprietary Traverser-TM- Digital
Video Data Deliver System ("Traverser-TM-").
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 video services over the internet.
On March 2, 2000 the Company acquired a 50% interest in mPhase
Television.Net, Inc. ("mPhase Television"), an incorporated joint venture with
AlphaStar International, Inc. for a cash investment of $20,000 (Note 9). The
Company acquired an additional interest in the joint venture of 6.5% in April of
2000 for $1.5 million. At June 30, 2000 the Company has a controlling interest
in mPhase Television. The operating results of mPhase Television for the period
March 2, 2000 to June 30, 2000 are included in the consolidated results of the
Company as of June 30, 2000.
2. LOSSES DURING THE DEVELOPMENT STAGE
The Company has incurred operating losses totaling $66,122,191 from
inception (October 2, 1996) through June 30, 2000.
The Company is in the development stage and its present activities are
focused on the deployment of its proprietary Traverser and associated component
products. Because mPhase is in the development stage, the accompanying financial
statements should not be regarded as typical for normal operating periods.
The Company believes that its remaining cash resources at June 30, 2000,
along with cash flows expected to be generated from financings that are expected
to close in the short term will be sufficient to fund the Company's operations
through 2001. Additional funding will be required to complete the product
deployment stage, and the transition, ultimately, to profitable operations.
However, there can be no assurance that the Company will generate sufficient
revenues to provide positive cash flows from operations or that sufficient
capital will be available, when required, to permit the Company to realize its
plans.
F-8
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly owned and majority owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of three to five years.
REVENUE RECOGNITION
Substantially all of the Company's revenues for the year ended June 30,
2000, resulted from the sale of the Company's POTS filters, POTS splitters and
shelves. Revenue from such components is recognized when the products are
shipped and title has been transferred, at which time, the Company has no
significant further obligations other than typical warranty support.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred in
accordance with Statement of Financial Accounting Standards ("SFAS"), No. 2,
"Accounting for Research and Development Costs."
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
in accordance with SFAS No. 139 "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that includes the enactment date.
F-9
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS AND LICENSES
Patents and licenses are capitalized when the Company determines there will
be a future benefit derived from such assets, and are stated at cost.
Amortization is computed using the straight-line method over the estimated
useful life of the asset, generally five years.
Amortization expense was $400,299 and $442,444 for the years ended June 30,
1999 and 2000, respectively.
LONG-LIVED ASSETS
The Company accounts for long-lived assets under the provisions of 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. The Company does not believe that any such changes in
circumstances have occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents and accounts payable
approximate their fair values due to their short maturities.
LOSS PER COMMON SHARE, BASIC AND DILUTED
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 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.
Common equivalent shares have been excluded from the computation of diluted EPS
since their effect is antidilutive.
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 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 as if the fair value-based method,
as defined, 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. Compensation expense is generally recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price.
F-10
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of the
implementation of SAB No. 101 until the fourth quarter of fiscal 2000.
Management is currently evaluating the impact of adopting this SAB, but does not
believe that this SAB will have a material impact on its financial position or
its results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities." The Statement establishes accounting and reporting
standards for derivative instruments (including certain derivative instruments
embedded in other contracts) and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters beginning after June 15, 2000 (as amended by
SFAS No. 137) and will not require retroactive restatement of prior-period
financial statements. The Company currently does not use derivative and
therefore this new pronouncement is not applicable.
4. ACQUISITION OF MICROTEL
In June 1998, the Company issued 2,500,000 shares of common stock in
exchange for all of the issued and outstanding shares of MicroTel, a wholly
owned subsidiary of Microphase, Inc. ("Microphase") The transaction was
accounted for as a purchase pursuant to APB Opinion No. 16. The total purchase
price of approximately $1,870,000, which was based on the fair market value of
the shares issued, was allocated to the patents and is being amortized over an
estimated useful life of five years. Pursuant to the agreement of merger,
MicroTel has become a wholly owned subsidiary of the Company.
5. NOTE RECEIVABLE
As consideration for a letter of settlement with a former consultant of the
Company, the Company has loaned the former consultant $250,000 in the form of
Note the ("Note") secured by 75,000 shares of the former consultants common
stock of mPhase. The Note is due April 7, 2001 and accrues interest at a rate of
6.0% quarterly. The Company has included the Note in current assets on the
accompanying consolidated balance sheet.
F-11
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at June 30, 2000 is as follows:
<TABLE>
<S> <C>
Equipment................................................... $1,468,881
Office and marketing equipment.............................. 245,437
----------
1,714,318
Less--Accumulated depreciation.............................. (390,562)
----------
$1,323,756
==========
</TABLE>
Depreciation expense for the years ended June 30, 1999 and 2000 was $54,195
and $313,611, respectively of which $44,191 and $284,954, respectively is
included in research and development.
7. ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Accrued Bonuses............................................. $1,056,511
Georgia Tech Research Corporation (Note 12)................. 445,594
Other....................................................... 335,427
----------
$1,837,532
==========
</TABLE>
8. DUE TO OFFICERS AND RELATED PARTY
For consulting services rendered in connection with the joint venture
(Note 9), the Company has agreed to pay two officers of the Company and a
related party $412,400 which is included on the June 30, 2000 consolidated
balance sheet of the Company. This amount has been paid by the Company
subsequent to year end.
9. INVESTMENT IN CONSOLIDATED SUBSIDIARY
In March 2000, the Company acquired a 50% interest in mPhase Television.Net,
Inc, (formerly Telco Television Network, Inc.), an incorporated joint venture,
for $20,000. The agreement provided for the grant of warrants to the joint
venture partner in consideration of the execution of the Joint Venture
Agreement, to purchase 200,000 shares of the Company's stock for $4.00 (valued
at $2,633,400) which is included in general and administrative expenses in the
accompanying statement of operations as of June 30, 2000. The agreement also
stipulates for the Company's joint venture partner, AlphaStar International,
Inc., to provide mPhase Television right of first transmission for its
transmissions including MPEG-2 digital satellite television. In addition, the
Company loaned the joint venture $1,000,000 at 8% interest per annum in March
2000. The loan is repayable to the Company from equity infusions to the
subsidiary, no later than such time that mPhase Television qualifies for a
NASDAQ Small Cap Market Listing. During April 2000, the Company acquired an
additional 6.5% in interest in mPhase Television for $1,500,000.
F-12
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
10. STOCKHOLDERS' EQUITY
The Company initially authorized capital of 50,000,000 shares of common
stock with no par value.
On January 26, 2000 the board of directors of the Company resolved that the
stated value of the common stock was $.01 for accounting purposes and, as such,
the financial statements have been retroactively restated to reflect this
change.
On February 23, 2000, the board of directors proposed and on May 22, 2000
the shareholders approved an increase in the authorized capital to 150,000,000
shares of common stock.
Tecma issued 6,600,000 shares of common stock for all of the issued and
outstanding shares of the Company in the reverse acquisition (Note 1).
In June 1997, the Company sold 594,270 shares of its common stock in a
private placement at $1.51 per share, for proceeds of $758,474, net of offering
costs of $138,931.
In October 1997, the Company issued 250,000 shares of its common stock in
connection with its investment in Complete Telecommunications Inc.
During the year ended June 30, 1998, the Company sold, pursuant to private
placements, 2,095,014 shares of its common stock together with 1,745,179
warrants for proceeds to the Company of $1,472,015, net of offering costs of
$205,203 . The warrants were issued to purchase one share each of common stock
at an exercise price of $0.75. Included in offering costs are 100,000 shares of
common stock issued for services provided by a third party valued at $0.50 per
share, its fair market value.
During the year ended June 30, 1998, the Company issued 300,000 shares of
common stock to consultants for services at $0.50 per share, its fair market
value. The Company recorded a charge to operations of $150,000 in the
accompanying consolidated statement of operations.
On June 25, 1998, the Company issued 2,500,000 shares of its common stock
for all of the outstanding stock of MicroTel (Note 4) for approximately
$1,710,000, its fair market value.
In November 1998, the Company sold, pursuant to private placements,
3,120,000 shares of its common stock together with 1,000,000 warrants, each to
purchase one share of the Company's common stock at a price of $1.00, to several
investors at a price of $1.00 per share, net of offering costs of approximately
$107,000. On June 2, 2000 these warrants were exercised, generating proceeds to
the Company of $1,000,000.
During the year ended June 30, 1999, the Company issued 1,599,332 shares of
common stock to employees and consultants for services performed. The Company
recognized a charge to operations of $8,760,866, based upon the fair market
value of the shares.
During the year ended June 30, 1999, the Company sold, pursuant to private
placements, 642,000 shares of common stock together with 642,000 warrants, each
to purchase one share of the Company's common stock at a price of $2.50. The
warrants expire on June 30, 2004. The proceeds received for the offering were
$1,559,647, net of offering costs of $45,353. During the fiscal year ended
June 30, 2000, 148,000 of these warrants were exercised, generating proceeds to
the Company of $370,000.
In June 1999, the Company sold, pursuant to private placements, 4,426,698
shares of its common stock at a price of $2.50 per share for $10,387,434, net of
offering costs of $679,311, of which $510,500
F-13
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
represented a stock subscription receivable at June 30, 1999. This amount was
received by the Company in July 1999.
In December 1999 and January 2000, the Company sold, pursuant to private
placements, 1,000,000 shares of common stock at a price of $4.00 per share, net
of cash offering costs of $200,000, generating net proceeds to the Company of
$3,800,000. In connection with the private placement, the Company issued 200,000
and 50,000 warrants to purchase common stock. The warrants had an exercise price
of $4.00 and $5.00, respectively. During February 2000, these warrants were
exercised, generating an additional $1,050,000 of proceeds to the Company.
In March 2000, the Company sold, pursuant to private placements, 832,500
shares of common stock at a price of $10.00 per share, net of cash offering
costs of $466,480 and issued 124,875 shares to the investment banking firm for
services, generating net proceeds to the Company of $7,858,520. On May 5, 2000
the Company issued an additional 208,125 shares to these investors due to a
market value adjustment. These shares were valued at $1,808,086, which is
included in general and administrative expenses in the accompanying statement of
operations for the year ended June 30, 2000.
During the year ended June 30, 2000, the Company issued 1,164,215 shares of
common stock to employees and consultants for services performed. The Company
recognized a charge to operations of $8,623,907, based upon the fair market
value of the common stock on the date of grant.
STOCK INCENTIVE PLAN
On August 15, 1997, the Company established its Long Term Stock Incentive
Plan. Included as part of the Long Term Stock Incentive Plan, is the Stock
Option Plan (the "Plan"), in which incentive stock options and nonqualified
stock options may be granted to officers, employees and consultants of the
Company. On February 23, 2000 the board of directors proposed and on May 22,
2000 the stockholders approved an increase in the total shares eligible under
this plan to 15,000,000. Vesting terms of the options range from immediately to
two years and generally expire in five years.
A summary of the stock option activity for the years ended June 30, 1998,
1999 and 2000 pursuant to the terms of the Plan, all of which were nonqualified
stock options, is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding at June 30, 1997........................ -- $ --
Granted........................................... 3,700,000 1.00
Exercised......................................... -- --
Canceled.......................................... -- --
---------- -----
Outstanding at June 30, 1998........................ 3,700,000 1.00
Granted........................................... 2,457,500 1.78
Exercised......................................... -- --
Canceled.......................................... (750,000) 1.00
---------- -----
Outstanding at June 30, 1999........................ 5,407,500 1.35
Granted........................................... 2,710,000 3.49
Exercised......................................... (655,000) 2.93
Canceled.......................................... -- --
---------- -----
Outstanding at June 30, 2000........................ 7,462,500 $2.09
========== =====
Exercisable at June 30, 2000........................ 7,100,171 $1.93
========== =====
</TABLE>
F-14
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted in 1998, 1999 and 2000 was estimated as of
the date of grant using the Black-Scholes stock option pricing model, based on
the following weighted average assumptions: annual expected return of 0%, annual
volatility of 90% in 1998 and 1999 and 115% in 2000, risk-free interest rate
ranging from 4.85 to 6.18 and expected option life of 3 years.
The per share weighted average fair value of stock options granted during
1998, 1999 and 2000 was $1.00, $5.01 and $6.99, respectively. The per share
weighted average remaining life of the options outstanding at June 30, 1998,
1999 and 2000 is 4.17, 3.91 and 3.86 years, respectively.
The Company has elected to continue to account for stock-based compensation
under APB Opinion No. 25, under which no compensation expense has been
recognized for stock options granted to employees at fair market value. Had
compensation expense for stock options granted under the Plan been determined
based on fair value at the grant dates, the Company's net loss for 1999 and 2000
would have been increased to the pro forma amounts shown below.
<TABLE>
<CAPTION>
JUNE 30
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net Loss:
As reported...................................... $22,838,344 $38,161,542
Pro forma........................................ $24,576,165 $40,097,570
</TABLE>
For the year ended June 30, 1999, the Company recorded non-cash charges and
deferred compensation totaling $7,129,890 and $140,000, respectively, in
connection with the grant of 1,607,500 options to employees and 850,000 options
to consultants for services rendered.
For the year ended June 30, 2000, the Company recorded non-cash charges and
deferred compensation totaling $9,448,100 and $1,637,375, respectively, in
connection with the grant of 2,710,000 options to employees and options to
consultants for services rendered or to be rendered. Such charges are the result
of the differences between the quoted market value of the Company's common stock
on the date of grant and the exercise price for options issued to employees and
Black-Scholes stock option pricing calculations for options issued to
consultants. In addition, the Company recorded amortization of deferred
compensation of $551,707 for the year ended June 30, 2000.
WARRANTS
In January and April 1998, the Company issued 25,000 and 50,000 warrants,
respectively, each to purchase one share of common stock at an exercise price of
$1.06 and $2.44, respectively, for consulting services. The warrants expire five
years from the date of issuance. At any time after the date of issuance, the
Company may, at its option, elect to redeem all of these warrants at $0.01,
subject to adjustment, as defined, per warrant, provided that the average
closing price of the common stock for 20 business days within any period of 30
consecutive business days exceeds $5.00 per share. As of June 30, 1999, all of
these warrants remain outstanding. The fair market values of these warrants were
not material.
In July 1998, in connection with the private placements, the Company issued
400,000 warrants, each to purchase one share of common stock at an exercise
price of $1.00 per share. The Company allocated the net proceeds from the sale
of the common stock to the common stock and the warrants. The warrants expire
five years from the date of issuance. The warrant agreement allows the warrant
to
F-15
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
be exercised through the transfer of cash or through a cashless exercise whereby
the number of shares issued to the warrant holder would be reduced by the value
of shares necessary to pay for the exercise of the warrants based on the fair
market value of the Company's common stock on the date of exercise. On July 26,
1999, these 400,000 warrants were converted into 352,239 shares of common stock.
In accordance with the warrant agreement, the warrant holder had the right to
initiate a cashless exercise to convert the warrants into shares of common stock
in lieu of exchanging cash. The number of shares received was determined by
dividing the aggregate fair market value of the shares minus the aggregate
exercise price of the warrants by the fair market value of one share.
In September 1998, the Company issued 6,666 warrants for services, each to
purchase one share of common stock at an exercise price of $0.75 per share. The
warrants expire five years from the date of grant. The Company determined the
fair market value of the warrants issued under the Black-Scholes Option Pricing
Model to be $16,302. This amount is included in the Company's general and
administrative expenses in the accompanying consolidated statement of operations
as of June 30, 1999. These warrants were exercised during the year ended
June 30, 2000 generating proceeds to the Company of $5,000.
In June 1999, in connection with the private placements, the Company also
issued 400,000 warrants each to purchase one share of common stock at an
exercise price of $1.00 per share. The warrants expire five years from the date
of grant. At any time after the date of issuance, the Company may, at its
option, elect to redeem all of these warrants at $0.01, subject to adjustment,
as defined, per warrant, provided that the average closing price of the common
stock for 20 business days within any period of 30 consecutive business days
exceeds $10.00 per share. These warrants were exercised during the year ended
June 30, 2000 generating proceeds of to the Company of $400,000.
In January 2000, in connection with private placements, the Company issued
200,000 and 50,000 warrants, each to purchase one share of common stock, at an
exercise price of $4.00 and $5.00, respectively. The net proceeds of the private
placement were allocated to the warrants and the common stock based on their
respective fair values. The warrants expire five years from the date of
issuance. These warrants were exercised in February 2000.
As a result of the proceeding, on June 30, 2000, 494,000 warrants remain
outstanding with a weighted average exercise price of $2.50.
F-16
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
11. RELATED PARTY TRANSACTIONS
The Company's President, Executive Vice President and Chairman of the Board
of the Company are also employees of Microphase (Note 4). On May 1, 1997, the
Company entered into an agreement with Microphase, whereby the Company will use
office space as well as the administrative services of Microphase, including the
use of accounting personnel. This agreement was for $5,000 per month and was on
a month-to-month basis. In July 1998, the office space agreement was revised to
$10,000 and in January 2000 $11,050 per month. Additionally, in July 1998, the
Company entered into an agreement with Microphase, whereby the Company
reimburses Microphase $40,000 per month for technical research and development
assistance. Microphase also charges fees for specific projects on a project by
project basis. During the period ended June 30, 1999 and 2000 and for the period
from inception (October 2, 1996) to June 30, 2000, $600,000, $2,547,847 and
$3,234,847, respectively, have been charged to expense under these Agreements
and is included in operating expenses in the accompanying consolidated
statements of operations. Also, during the fiscal year ended June 30, 2000,
$2,600,000 was advanced to Microphase in the form of a note which was repaid by
Microphase during the year. The Company recorded $39,000 of interest income on
this note for the year ended June 30, 2000. As of June 30, 2000, the Company has
$3,953 due from Microphase included in production advances-related parties on
the accompanying balance sheet.
On February 15, 1997, the Company entered into a Technology, Patent and
Trademark License Agreement (the "Agreement") with MicroTel (Note 4). The
Agreement permits the Company to utilize the patent and trademark technology of
MicroTel under a licensing arrangement. The Company made payments of $37,500 per
month, commencing June 1, 1997 for technology development. During the period
ended June 30, 1997 and 1998, $37,500 and $450,000 has been charged to expense
under this Agreement and is included in licensing fees in the accompanying
consolidated statement of operations. As of June 25, 1998, the Company acquired
MicroTel and as of that date this Agreement is no longer in effect.
During the year ended June 30, 2000 the Company advanced money to Janifast
Limited, which is owned by U.S. Janifast Holdings, Ltd, a related party of which
three directors of mPhase are significant shareholders, in connection with the
manufacturing of POTS Splitter shelves and component products including cards
and filters sold by the Company. As of June 30, 2000 the amount advanced to
Janifast was approximately $1,106,000 which is included in production
advances-related parties on the accompanying balance sheet.
Due to related parties includes $36,120 due to Nutley Securities, a company
owned by the Company's president and $49,180 due to affiliates of the Company's
joint venture partner, Alpha Star International Inc. both amounts are for
various services performed.
On November 26, 1999, PacketPort, Inc., a company owned by Mr. Durando, the
President and CEO of mPhase, acquired a controlling interest in Linkon Corp.,
which subsequently changed its name to PacketPort.com, Inc. In connection with
this transaction, Mr. Durando transferred 350,000 of his own shares of the
Company's common stock to Packet Port, Inc. Included in other current assets is
$11,694 due from PacketPort.com for certain expenses paid by the Company on
behalf of PacketPort.com.
F-17
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
11. RELATED PARTY TRANSACTIONS (CONTINUED)
In July 2000, the Company added a member to the board of directors who is
employed by an investment banking firm that has assisted and is expected to
continue to assist the Company in raising capital through private financing.
A member of the Company's board of directors is employed by Lintel, Inc, the
parent corporation of Hart Telephone. The Company has installed its prototype
product and commenced beta testing at Hart Telephone. In addition, the Company
has entered into a supply agreement with Hart Telephone upon the completion of
beta testing and the commencement of production of the Traverser. As
consideration for the execution of the agreement with Hart Telephone, in May
2000 the Company issued Hart Telephone 125,000 options each to purchase one
share of common stock at an exercise price of $1.00 (valued at $1,010,375) which
is included in research and development expenses in the accompanying statement
of operations as of June 30, 2000.
The Company will be obligated to pay a 3% royalty to Microphase on revenues
from the Company's proprietary Traverser-TM- Digital Video Data Delivery System.
12. INCOME TAXES
No provision has been made for corporate income taxes due to cumulative
losses incurred. At June 30, 2000 the Company has operating loss carryforwards
of approximately $39.4 million and $39.1 million to offset future federal and
state income taxes respectively, which expire through 2020. Certain changes in
stock ownership can result in a limitation in the amount of net operating loss
and tax credit carryovers that can be utilized each year.
At June 30, 2000 deferred income tax assets are comprised principally of the
tax benefit of net operating loss carryforwards. A full valuation reserve has
been recorded against such assets due to the uncertainty as to their future
realizability.
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into various agreements with Georgia Tech Research
Corporation ("GTRC"), pursuant to which the Company receives technical
assistance in developing the commercialization of its digital video and data
system. The dollar amount incurred by the Company for GTRC technical assistance
with respect to its research and development activities during the years ended
June 30, 1999 and 2000 totaled $2,450,253, and $4,563,560, respectively. If and
when sales commence utilizing this particular technology, the Company will be
obligated to pay to GTRC a royalty of 3% to 5% of product sales as defined.
The Company is a party to employee agreements with certain key executives
providing for cash commitments of $625,000 through June 30, 2001. In addition,
one of the executives is entitled to an annual bonus equal to 5% of the
appreciation in market value of the Company's stock from year to year based on
the change in the Company's issued and outstanding common stock at each fiscal
year end through June 30, 2002, 25% of which is to be paid in cash and the
remainder in common stock of the Company.
F-18
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES
During the year ended June 30, 2000, the Company settled a litigation with
Global Music and Media Inc. ("Global") which had asserted it had the exclusive
right to market the Company's technology. This litigation was resolved in August
1999 in a settlement agreement wherein Global Music surrendered its claim to the
Company's technology in exchange for the Company to settle claims of Hal Willis
against Global for a cash payment of $100,000, the issuance of 75,000 shares of
the Company's common stock and options to purchase another 75,000 shares at
$5.6275 per share and the payment of $90,000 to Global to settle employee clams,
the cost of which had been recorded in the consolidated financial statements as
of June 30, 1999. The agreement also called for the repurchase of 75,000 shares
of the Company's common stock from the owners of Global by the Company or its
co-defendant, Microphase. Microphase repurchased these shares in August 1999.
From time to time, the Company may be involved in various legal proceedings
and other matters arising in the normal course of business. The Company
currently has no material outstanding legal proceedings.
F-19
<PAGE>
ITEM III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company's present executive officers and directors are:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- -------- -----------
<S> <C> <C>
Necdet F. Ergul...................... 76 Chairman of the Board and Director
Ronald A. Durando.................... 43 Chief Executive Officer and Director (principal
executive officer)
Gustave T. Dotoli.................... 63 Chief Operating Officer and Director (principal
financial and accounting officer)
David Klimek......................... 45 Chief Technology Officer and Director
Susan E. Cifelli..................... 42 Executive Vice President--Sales and Marketing
J. Lee Barton........................ 46 Director
Anthony H. Guerino................... 55 Director
J. Allen Layman...................... 48 Director
Craig Vickers........................ 54 Director
Abraham Biderman..................... 52 Director
</TABLE>
The current executive officers and directors, along with their backgrounds,
are set forth below:
NECDET F. ERGUL has served as the Company's Chairman of the Board since
October 1996 with the exception of a three-month period when he temporarily
resigned due to the press of personal business. Mr. Ergul also currently serves
as 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 is a co-founder of mPhase and has served as the Company's
President and Chief Executive Officer since its inception in October 1996. Prior
to joining the Company, Mr. Durando was President and Chief Executive Officer of
Nutley Securities, Inc., a registered broker-dealer. In addition, Mr. Durando
currently serves as the Chief Operating Officer of Microphase Corporation, a
leading developer of telecommunications technology. He is also Chairman of the
Board of Janifast Ltd., a U.S. Holding Corp. for operational and manufacturing
companies in Hong Kong and China. on November 26, 1999 Mr. Durando acquired, via
a 100% ownership of Packet Port Inc., a controlling interest in Linkon
Corporation, now known as PacketPort.Com Inc.
GUSTAVE T. DOTOLI has served as the Company's Chief Operating Officer since
October 1996. In addition, Mr. Dotoli currently serves as the Vice President of
Corporate Development of Microphase Corporation. 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 received a B.S. in Industrial
Engineering from Fairleigh Dickenson University in 1959.
DAVID KLIMEK is a co-founder of mPhase and has served as the Company's Chief
Technology Officer since June 1997 and as Director of Engineering since its
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 R&D manager of Digital Controls,
Inc. Mr. Klimek received his B.S. in Electrical Engineering in 1982 from
Milwaukee School of
III-1
<PAGE>
Engineering, Milwaukee, Wisconsin. In addition, he graduated from the U.S. Navy
Basic Electronics School at Great Lakes Naval Training Center in 1972.
SUSAN E. CIFELLI joined the Company 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 a 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 has served as one of the Company's directors since
February 1999. Mr. Barton also serves as President and Chief Executive Officer
of Lintel, Inc., a holding company that owns 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.
ANTHONY H. GUERINO has served as a director since February, 2000. Since 1998
Mr. Guerino is presently self employed as an Attorney at Law engaging in
criminal and civil litigation. His prior experience includes 20 years as a
municipal court judge, assistant county prosecutor and also as an instructor at
Essex County College. Mr. Guerino holds a Juris Doctorate from Seton Hall
University Law School and also a B.S. in Classical Language from Seton Hall
University.
J. ALLEN LAYMAN has served as a director since February, 2000. Mr. Layman
also currently serves as President and Chief Executive Officer at U.B.
Communications and its subsidiaries. Mr. Layman is a 1974 graduate of
Bridgewater College with a B.A. in Business Administration and Economics.
CRAIG VICKERS has served as a director since March, 2000. Mr. Vickers is
currently the principle of the New York based convergence capital, which
provides strategic advisory services in the media, information communications
and entertainment industry. Earlier Mr. Vickers served as Director, Business
Development, Sports Information Services at Infotechnology. Mr. Vickers received
a B.S. from California State University in California in 1974.
ABRAHAM BIDERMAN has served as a director since August 2000. Mr. Biderman is
currently employed by Lipper & Company as Executive Vice President. He is also
the Managing Director of Lipper Funds, Inc. and Lipper Prime Asset Management.
Mr. Biderman is a certified public accountant in the State of New York and is a
graduate of the City University of New York, Brooklyn College.
III-2
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned by the Company's chief executive officer and our two other most highly
compensated executive officers for services rendered in all capacities to the
Company for the year ended June 30, 1999 and the two previous fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION RESTRICTED
-------------------------------- STOCK UNDERLYING
YEAR SALARY BONUS AWARD(S) OPTIONS/SARS
-------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Ronald A. Durando (1) (2)................ 2000 $297,920 $ 683,500 157,500 250,000
Chief Executive Officer and President $1,714,532
1999 $250,000 $ 275,000 400,000 562,500
1998 $150,000 -- -- --
Gustave Dotoli (1)....................... 2000 216,670 362,000 232,500 175,000
Chief Operating Officer 1999 175,000 100,000 175,000 300,000
1998 120,000 -- -- --
J. Lee Barton (1) (3).................... 2000 -- 285,000 140,000 225,000
Director 1999 -- -- 75,000 100,000
1998 -- -- -- --
Susan E. Cifelli......................... 2000 205,850 30,000 20,000 125,000
Executive Vice President--Sales and 45,080 -- -- 130,000
Marketing 1999 -- -- -- --
1998 -- -- -- --
David Klimek(1).......................... 2000 106,500 30,000 -- 50,000
Chief Technology Officer 1999 77,138 35,000 275,000 150,000
1998 68,500 -- -- --
1997 63,100 -- -- 500,000
</TABLE>
--------------------------
(1) Does not include $15,000 annual stipend as a director.
(2) Contractual stock bonus award
(3) Includes options granted to Hart Telephone, Inc.
No individual named above received prerequisites or non-cash compensation
during the years indicated which exceeded the lesser of $50,000 or an amount
equal to 10% of such person's salary. No other executive officer received
compensation and bonuses that exceeded $100,000 during any year.
III-3
<PAGE>
The following table contains information regarding options granted in the
fiscal year ended June 30, 2000 to the executive officers named in the summary
compensation table above. For the fiscal year ended June 30, 2000, the Company
granted options to acquire up to an aggregate of shares to employees and
directors.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Ronald A. Durando............................... 250,000 13.3 $ 4.0 2005
Gustave T. Dotoli............................... 175,000 9.3 $1.00 2005
J. Lee Barton................................... 100,000 5.3 $4.00 2005
125,000 6.6 $1.00 2005
Susan E. Cifelli................................ 25,000 1.3 $4.00 2005
100,000 5.3 $1.00 2005
David Klimek.................................... 50,000 2.7 $4.00 2005
</TABLE>
The following table sets forth information with respect to the number and
value of outstanding options held by executive officers named in the summary
compensation table above at June 30, 2000. The value of unexercised in-the-money
options is based upon the difference between the closing price of our common
stock on June 30, 2000, and the exercise price of the options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT YEAR END (#) YEAR END ($)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald A. Durando............................ 1,750,000 -- $10,360,375 --
Gustave T. Dotoli............................ 1,090,000 -- $ 6,403,125 --
J. Lee Barton................................ -- -- -- --
Susan E. Cifelli............................. 165,000 90,000 $ 962,813 $545,625
David Klimek................................. 675,000 -- $ 4,129,687 --
</TABLE>
III-4
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 31, 2000 certain information
regarding the beneficial ownership of shares of our common stock:
- by each of our directors;
- by each person who is known by us to beneficially own 5% or more of the
outstanding shares of common stock;
- by each of our executive officers named in the summary compensation table;
and
- by all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
OPTIONS
AMOUNT AND
NATURE OF PERCENTAGE
BENEFICIAL OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP STOCK(2)
--------------------------------------- ---------- ----------
<S> <C> <C>
Necdet F. Ergul...................................... 1,587,500 3.8
Ronald A. Durando(3)(6).............................. 3,800,363 6.5
Gustave Dotoli(6).................................... 1,907,500 2.6
J. Lee Barton(4)..................................... 3,610,000 11.0
David Klimek......................................... 1,067,500 1.2
Susan E. Cifelli..................................... 256,096 --
Lintel, Inc.(5)...................................... 2,445,000 7.7
All executive officers and directors as a group (nine
people)............................................ 12,228,959 25.3
</TABLE>
------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is 587
Connecticut Avenue, Norwalk, Connecticut 06854-1711.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of common stock beneficially owned by them. The percentage for each
beneficial owner listed above is based on 31,554,540 shares outstanding on
August 31, 2000. In accordance with the rules of the Securities and Exchange
Commission, options to purchase shares of common stock that are exercisable
as of August 5, 2000 or exercisable within 60 days thereafter, are deemed to
be outstanding and beneficially owned by the person holding such options for
the purpose of computing such person's percentage ownership, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. The number of shares indicated in the table
include the following number of shares issuable upon the exercise of
warrants or options: Necdet F. Ergul--387,500; Ronald A. Durando--1,750,000;
Gustave Dotoli--1,090,000; J. Lee Barton--125,000; David Klimek--675,000;
and Susan E. Cifelli--255,000.
(3) Includes 120,000 shares held by Nutley Securities, Inc.
(4) Includes 2,445,500 shares held by Lintel, Inc., of which Mr. Barton is the
president and chief executive officer, and 100,000 shares owned by Kim
Barton, his wife and 100,000 shares by Betty Barton his daughter.
(5) The address for Lintel, Inc. is 196 North Forest Avenue, P.O. Box 388,
Hartwell, GA 30643.
(6) Does not include 50,000 options to purchase, at $1.00 per share, assigned to
unrelated parties.
III-5
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's management are affiliated by employment at and/or ownership of
a related group of companies, including Microphase Corporation, Complete
Telecommunications, Inc. (which was dissolved subject to a settlement dated
August 16, 1999), Packet Port, Inc. and PacketPort.com and Janifast Holdings,
Ltd., which may record material transactions with the Company. As a result of
such affiliations, the Company's management in the future may have conflicting
interests with these affiliated companies.
Necdet F. Ergul, Ronald A. Durando and Gustave T. Dotoli, the Company's
Chairman, Chief Executive Officer and Chief Operating Officer, respectively, are
executive officers and shareholders of Microphase and Ronald Durando and Gustave
Dotoli are president and vice-president of PacketPort.com.
- The Company reimburses Microphase $51,050 per month for research and
development services and administrative expenses incurred for the use of
Microphase's office space, lab facilities and administrative staff.
- On June 25, 1998, the Company issued 2,500,000 shares to several
individuals, including Necdet F. Ergul, Ronald A. Durando and Gustave T.
Dotoli, in consideration for all the issued and outstanding shares of
Microphase Telecommunications, Inc., which at the time was an affiliate of
Microphase.
In June 1999, the Company issued 200,000 shares of common stock to David
Klimek, one of its directors and executive officers, as a technical advisory fee
in connection with the Company's acquisition of Microphase
Telecommunications, Inc. referred to above.
Ronald A. Durando is the owner/sole shareholder of Nutley Securities, Inc.,
a former registered broker-dealer, which is not a private investment company
under the Investment Advisors Act of 1940.
- In February 1997 the Company issued 600,000 shares to Nutley Securities as
a "finder's fee" in connection with the acquisition of Lightpaths, Inc. of
which 280,000 shares were contemporaneously assigned to co-finders.
- During the period ended June 30, 1997, the Company paid $95,141 to Nutley
Securities in offering costs, and during the period ended June 30, 1998,
the Company incurred offering costs with Nutley Securities totaling
$153,999.
In August 1997, the Company granted Thomas A. Murphy a former director and
officer of mPhase, options to purchase 750,000 shares of its common stock at an
exercise price of $1.00 per share. Mr. Murphy has agreed to waive his right to
purchase such shares as part of a settlement relating to his termination as an
employee at mPhase.
In October 1997, in connection with a planned joint venture licensing
agreement with Global Music & Media, Inc., a Tennessee corporation, the Company
became the 41.724% owner of Complete Telecommunications, Inc. mPhase invested
$300,000 in Complete Telecommunications and issued to Global Music & Media
250,000 shares of its common stock. The Company also loaned $150,000 to the
joint venture. No payments have been received by the Company from the joint
venture with Global Music & Media. During the fiscal year 1998, Global Music &
Media commenced an action against the Company alleging it was the holder of an
exclusive license to market the Company's Traverser technology and related
projects, which action was settled on August 16, 1999, the effect of which was
included in the Loss on Unconsolidated Subsidiaries for the year ended June 30,
1999. See "Legal Proceedings."
One of the Company's directors, J. Lee Barton, is the president and chief
executive officer of Lintel Inc. Lintel is the parent corporation of Hart
Telephone Company, our beta customer located in
III-6
<PAGE>
Hartwell, Georgia, where the Company has installed its prototype product and
commenced beta testing. In December 1998, the Company issued 3,115,000 shares in
a private placement to J. Lee Barton, several members of his family, Lintel,
several employees of Lintel and two employees of Microphase for a purchase price
of approximately $1.03 per share, or an aggregate purchase price of $3,197,416.
Janifast Holdings, Ltd., a Delaware corporation, is the parent corporation
of the manufacturer which has produced components for the Company's prototype
Traverser DVDDS product, and will produce such components for the Company in the
upcoming fiscal year. Necdet F. Ergul, Ronald A. Durando and Gustave T. Dotoli
are controlling shareholders of Janifast with an aggregate ownership interest of
greater than 75% of Janifast. Mr. Durando is chairman of the board of directors
and each of Messrs. Dotoli and Ergul are directors of Janifast.
On November 26, 1999, PacketPort, Inc. a company owned 100% by Mr. Durando,
acquired controlling interest in Linkon Corp., which subsequently changed its
name to PacketPort.com, Inc. In connection with this transaction, Mr. Durando
transferred 350,000 shares of mPhase common stock to Packet Port, Inc.
Mr. Durando was elected president and Mr. Dotoli vice president of
PacketPort.com, Inc.
(a)(1) Following is a list of exhibits filed as part of this Annual Report
on Form 10-KSB. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT NUMBER
REFERENCE DESCRIPTION
--------------------- -----------
<C> <S>
(3a)* Articles of Incorporation, as amended
(3b)* By-laws, as amended
(4)* Specimen of Common Stock certificate
(10b)* Incentive Stock Option Plan
(10c)* Form of Incentive Stock Option
</TABLE>
III-7
<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.
<TABLE>
<S> <C> <C>
MPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
Dated: September 28, 2000 By: /s/ RONALD A. DURANDO
-----------------------------------------
Ronald A. Durando
PRESIDENT, CEO
</TABLE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Necdet F. Ergul Chairman of the Board September 28, 2000
Ronald A. Durando President, CEO September 28, 2000
Gustave T. Dotoli COO September 28, 2000
</TABLE>
III-8
