On June 5, 2001, ZeroPlus.com announced a phased shutdown of operations and the immediate termination of all services and the majority of employees. This was done in an effort to conserve cash while seeking to pursue and consider any possible alternatives to recapitalize our business, or to seek value for our technology and/or relationships through an asset sale, merger, or other business arrangement. We made the decision to suspend operations after we determined that the Company no longer had the resources to continue to support the operating losses we have experienced. On June 27, 2001 ZeroPlus.com voluntarily consented to having its stock delisted by NASDAQ. Prior to June 27, NASDAQ had placed an indefinite halt to trading pending further information concerning our June 5, 2001 announcement. On June 12, 2001, the Company entered into a forbearance agreement with its principal secured lender, pursuant to which the secured creditor agreed to forbear from pursuing its remedies against the Company until September 10, 2001.
Prior to suspending operations, ZeroPlus.com, Inc. engaged in the business of providing Internet telephony services to consumers worldwide, including free PC-to-PC phone services, and fee-based PC-to-phone, phone-to-PC and phone-to-phone services. We also have developed an e-commerce solution, ZPCommerce, which enables companies to voice-enable their websites. ZeroPlus.com can route calls from customers' PCs to existing call centers entirely over the Internet, thereby drastically reducing e-commerce companies' inbound 800-number service costs.
During fiscal 2000, we refocused the main thrust of our business onto our consumer and e-commerce Internet telephony solutions, as reflected by our merger with our wholly-owned subsidiary, ZeroPlus.com Incorporated and our name changed from e-Net, Inc. to ZeroPlus.com, Inc., in February 2000. During the transition, we reduced our emphasis on selling certain of our Telecom 2000(TM) products ("Telecom 2000 Products"). These products generally provided high fidelity duplex voice and fax through the Internet, private Internet Protocol networks and "intranets," and other types of digital data networks (collectively, "Digital Data Networks"). They also generally offered traditional telephony features like call waiting, call holding, call transfer, conference calling, billing, voice-mail and the like. These features, functions and capabilities became the basis for building the service-based product set offered through ZeroPlus.com.
ZeroPlus.com differs from its competitors in the Internet telephony industry by being built around Internet telephone numbers. This concept, for which we have a patent application pending (the "Pending Patent"), provides Internet consumers with a unique phone number that can be identical to their home phone numbers, except that "0" is the first digit. We believe that, if granted, the Pending Patent may provide certain strategic and technological advantages in the emerging market for Internet telephony. We can make no assurances that our application for the Pending Patent will be granted, or if granted, as to the advantages or protection that may result. Our current and anticipated product line is not wholly dependent on the validity or applicability of the Pending Patent. The Pending Patent would not cover all of our products.
COMPANY BACKGROUND
Since our founding in 1995, we have focused on the development of software-based telecommunications products that enable, enhance or manage telephone communications. We announced our first Telecom 2000 Products in April 1996, then we established "beta" test sites for the Telecom 2000 system. After completing "beta" testing, in May 1997 we announced the Internet Protocol version of Telecom 2000.
We began to sell Telecom 2000 Products in July 1997 with the introduction of the Telecom 2000 Desktop System. We announced the Telecom 2000 Customer Premise Equipment Gateway Systems, also known as the Telecom 2000 T1/E1 Digital Trunk Interface, in October 1997; that product became generally available in February 1998. We announced the general availability of our Telecom 2000 retail system called "NetConnect" in May 1998. In 1998, we also delivered our 24 port and 30 port T1/E1 Digital Trunk Interface product in the medium system range, and we developed customer relationships with emerging communications services companies in the domestic U.S., Latin America, and Europe. In 1997-1998, we also began planning for large-systems development in 1998 and began to develop voice-over-cable-television products in conjunction with various strategic partners.
In 1998, we recognized that the delay in growth of generally forecast demand for Digital Data Network telephony meant that we needed to focus our immediate sales activities in niche areas. By early 1999, we had identified three such niche markets: voice-over-cable-television, small-to-mid-sized newer telecommunications services companies ("Next-Generation
Telcos"), and World Wide Web-based Internet telephony for Internet commerce and otherwise. To further the voice-over-cable-television niche, we expanded our cable television modem project to include more telephone features and to address Internet Protocol. To further the Next-Generation Telco niche, we completed development of an intelligent module for the medium-sized Digital Trunk Interface product called the T2000 Gatekeeper, and we developed the capability to use our products on wireless Digital Data Networks, offering this customer base a low infrastructure cost system alternative. To further the World Wide Web-based Internet telephony niche, we developed and enhanced our software-only T2000 product, T2000 TS Express. As a distribution strategy for this niche, we created a wholly owned subsidiary, ZeroPlus.com Incorporated.
The third niche quickly became our primary focus. In keeping with that focus, we introduced our PC-to-PC consumer solution, available at our Internet website, ZeroPlus.com, in June 1999. In October 1999 we began connecting PC-to Phone calls to 800-type toll free telephone numbers and began providing a free instant messaging service. In November 1999, we provided free unlimited PC-to-Phone calling for the Thanksgiving holiday for members who added at least $25 to their prepaid accounts. In December 1999, we first provided Phone-to-PC and Phone-to-Phone calls, as well as sponsored free calling on the Christmas and New Years holidays for members with a minimum deposit of $15 in their account. International calling to Western Europe was made available in February 2000 and world-wide calling was made available in May 2000. We also developed our e-commerce solution, which was announced in January 2000 and became available for testing in June 2000. In keeping with this change in focus, we merged with our wholly owned subsidiary, ZeroPlus.com Incorporated and changed our name from e-Net, Inc. to ZeroPlus.com, Inc. in February 2000.
During fiscal 2001, our efforts were focused on pursuing strategic relationships with network and marketing partners. In May 2000, we announced our Internet Protocol Telephone Service Participation agreement with Priceline Long Distance, LLC. By this agreement, ZeroPlus was to be one of three VoIP carriers for Priceline's customers. In February 2001, we signed a formal contract with Worldwide Consumer Direct to operate as their primary telephony service provider. This agreement was enacted after approximately six months trial period, of which four months were paid trials. The Worldwide Consumer Direct (WCD) contract accounted for the majority of our VoIP revenues during fiscal 2001. To support the WCD contract, ZeroPlus negotiated a carrier services contract with Qwest Communications, Inc. in October 2000. In January 2001, we announced a strategic relationship with Uniden America Corporation. Uniden is the world's largest manufacturer of cordless phones. Our agreement with Uniden provides for a cordless phone design incorporating one button access to the ZeroPlus VoIP network. However, we have not been able to raise sufficient capital to take advantage of our agreement with Uniden. Furthermore, with the suspension of operations on June 5, 2001, all Internet telephony services have been terminated.
INDUSTRY BACKGROUND
In the mid-1990's, companies began to develop and market products that delivered audio, including voice, over the Internet. Such products were the first to use "Voice-over-Internet Protocol," or the transmission of voice as digital data on Internet Protocol-compatible networks, including the Internet as well as Internet-compatible, private Digital Data Networks such as "Intranets." However, early Internet telephone calls required cumbersome components to make Internet-based telephone calls, such as personal computer speakers and microphones. In addition, participants in the telephone call had to use identical software, running at the same time. Voice quality was often poor. Many products had a half-duplex nature and experienced long delays. However, the promise of this technology was established because of the low cost of the Internet telephone call, which could seemingly be made "free," even over long international distances.
Internet telephone calls are less expensive than traditional international long distance calls primarily because these calls are carried over the Internet or private Internet Protocol Digital Data Networks and therefore bypass a significant portion of international long distance costs. Currently, Internet telephone companies use a technology called "packet-switching" to break calls into discrete data packets, route them over the Internet or a private, Internet Protocol Digital Data Network and reassemble them into their original form for delivery to the recipient. Traditional international long distance calls, in contrast, are made using a technology called "circuit switching", which carries these calls over international voice telephone networks. Circuit switching requires a dedicated connection between the caller and the recipient that remains open for the duration of the call. As a result, circuit-switching technology is inherently less efficient than packet-switching technology, which allows data packets representing multiple conversations to be carried over the same line. This greater efficiency creates network cost savings that can be passed on to the consumer in the form of lower long distance call costs, even "free" calls in some circumstances and under some business models.
Therefore, despite earlier quality problems, many technology analysts forecast a large target market for Internet telephone calls and other Internet telephony products, such as voice coupled with full-duplex, call waiting, call holding, call transfer, conference calling, billing, voice-mail and the like. Reports issued by technology industry analysts forecast the annual Internet telephony market to grow to almost a billion minutes by 2002, and that more than 10% of all telecommunications traffic will travel over Internet Protocol Digital Data Networks 2002.
OUR PRODUCTS
ZeroPlus.com, introduced in June 1999, is an Internet telephony service that currently provides PC-to-PC, PC-to-phone, phone-to-PC and phone-to-phone service. We built ZeroPlus.com around a unique concept, Internet telephone numbers, for which we have applied for the Pending Patent. See "--Patent, Trademark, Copyright and Proprietary Rights". This concept is unique to the Internet telephony industry because it provides customers with a unique phone number identical to their home phone number, except that a "0" is inserted as the first digit. For example, if a person's home phone number is 1-212-555-1212, the Internet phone number becomes 0-212-555-1212.
There are three key reasons why we believe the Internet phone number scheme is an important advance in Internet telephony. First, most Internet telephony services offering PC-to-PC capability route calls using an alphanumeric nickname. However, because most people have multiple Internet nicknames associated with various email accounts, users are often confused over which nickname to use when calling another person. Second, consumers have been using phone numbers for over 100 years, making it an easily understood concept. We believe that this will allow us to target mainstream consumers more easily, in addition to those who are technologically proficient. Third, our Internet telephone-dialing plan is based on the traditional phone network's standard dialing plan. This enables existing telecommunications equipment to route ZeroPlus.com calls, thus providing more complete integration of our Internet telephony service with the existing phone network.
CONSUMER SOLUTION
ZeroPlus.com offered four types of Internet telephony services. First, our PC-to-PC service allows users to call each other over the Internet for free using Internet-connected, Windows-based PCs. Consumers signed up for the service at no charge by visiting our website, providing their name, city, state, country, and the number they wish to reserve as their Internet phone number. After downloading the software to install the program, they began making free calls to other ZeroPlus.com members.
We also offered PC-to-phone, phone-to-PC and phone-to-phone services. Once members have signed up for PC-to-PC service, they were able to visit a secure portion of the website to fund a ZeroPlus.com debit account. Our PC-to-phone service allowed our customers to call any phone on the public telephone network, anywhere in the world, from their PC. Our phone-to-PC service allowed our customers to call from any phone on the U.S. public telephone network to any ZeroPlus.com customer, anywhere in the world, who was logged on to his or her PC. Finally, our phone-to-phone service allowed our customers to call from any phone on the U.S. public telephone network to any other phone on the public telephone network, anywhere in the world. The cost savings of these services can be significant over traditional full-rate long distance telephone service.
In addition to offering these basic Internet telephony services, ZeroPlus.com was working toward duplicating the other enhanced service provided by traditional telephony vendors. Our goal was to provide a service functionally identical to the phone service that consumers use every day. For no charge, we provided consumers with call hold, caller ID, speed dialing, call waiting, call forwarding and call transfer functions in the software.
Assuming that we are able to recapitalize our business and restore operations, ZeroPlus.com's long-term goal is to develop a single, integrated communications portal for all Internet users. To accomplish this, we hope to provide instant messaging and text chat free to all our members. In the future, we hope to add unified messaging and voice mail, and may also add additional communication services such as shadow services and fax, some of which we currently expect will be fee-based services.
e-COMMERCE SOLUTION
While there is a consensus that selling products via the Internet is quite cost-effective, e-commerce is still hampered by its inability to provide sufficient customer service over the Internet, in both business-to-consumer and business-to-business scenarios. Customers with questions often feel more comfortable talking to a customer service representative. In order to take full advantage of both the capabilities of the Internet and the personalized service that can be offered by a live representative, such simultaneous support has required the customer simultaneously to be connected to a website and to call a customer service number. Unfortunately, many consumers access the Internet by their sole telephone line, making it impossible for them to do
both at the same time. Moreover, because vendors typically pay for inbound calls to their customer service centers, adding voice interaction with a customer service representative drives up the cost of an e-commerce transaction.
ZeroPlus.com has developed a solution to these impediments: our e-commerce solution, ZPCommerce. ZPCommerce enables companies to "voice-enable" their websites using coded icons that can be placed on the customer service portion of the website, or even next to individual products. By clicking on a ZPCommerce icon, customers will launch a ZeroPlus.com call over the Internet to the vendor's existing call center. Only one phone line will be required to simultaneously browse a website and talk over the Internet.
There are two key components to ZPCommerce. The first is software. Our suite of software products is comprised of several units that can be used independently or as an integrated solution. ZPDial icon and ZPLite are software products that initiate the Voice Over Internet Protocol call from a website customer's personal computer to the website's call center or customer support site. This software must be sufficiently small so that download time does not too unduly delay first-time users when they click on a ZPCommerce icon. We currently are redesigning this software to require the minimal download, while we work on a Java applet version of our software to improve the e-commerce users' experience. ZPSoft Agent is a software solution that allows the website's call center or customer support site to receive Voice Over Internet Protocol calls directly at their personal computer and allows the website to determine how an incoming call should be routed.
The other key component to our e-commerce solution is the call center hardware. We have been designing voice over Internet Protocol hardware for more than five years. We already have developed the equipment necessary for "brick-and-mortar" call centers to accept Internet phone calls. This equipment eliminates the need for the call to ever touch the traditional public telephone network. Therefore, inbound calls can be delivered at very little cost. The fees and per-minute charges to vendors for ZPCommerce may yield cost reductions of 50-90% over traditional inbound toll-free charges.
ZPCommerce can be completely integrated with existing call centers, which can take advantage of existing legacy systems. Our equipment can be integrated into existing Interactive Voice Response ("IVR") systems, and customer service representatives can answer both traditional and Internet calls on their existing equipment.
Our e-commerce solution offers the following advantages to our customers:
O No Routing Required Over Public Telephone Network: A call launched from a customer's PC may travel to the vendor's call center entirely over the Internet; the call does not need to be routed to the standard public telephone network. Our competitors, however, currently route calls to the public telephone network. Therefore, unlike our competitors' current products, ZPCommerce provides significant savings on inbound toll-free service charges.
O Automatic Placement in Proper IVR Queue: ZPCommerce recognizes the location of the icon clicked by the customer, so call center equipment can intelligently connect a caller to the customer service representative most familiar with the product in which he or she is interested. Competitors' products currently place customers at the highest level of the IVR system, requiring them to answer multiple prompts to get to the proper queue. Therefore, we believe our e-commerce solution enables vendors to provide better customer service and a faster response time.
O Automatic Access to Customer Information: Because ZeroPlus.com and ZPCommerce use Internet phone numbers and have caller ID capabilities, ZPCommerce can route a caller's Internet phone number and personal registration information for previous ZeroPlus.com users to the vendor's customer service representative. In many cases, the customer's Internet phone number can be identical to his or her phone number. The customer service representatives will have access to this information without having to ask the customer.
O Integrated Toll-Free Phone Numbers: Companies spend a great deal of marketing funds to ensure that consumers remember their toll-free phone numbers. Because it is built around Internet telephone numbers, our e-commerce solution can preserve the recognition built into e-commerce companies' traditional toll-free numbers, an advantage not currently shared by our competitors.
O Access to Consumer Base: We hope to grow our consumer membership base, so that access to those customers will become an additional inducement to e-commerce companies' adoption of our e-commerce solution. We also intend to offer a ZeroPlus.com Yellow Pages in which our e-commerce customers can participate, allowing our consumers to easily make purchases from our e-commerce clients.
GOVERNMENT REGULATION
INTERNET PROTOCOL TELEPHONY
The use of the Internet and private Internet Protocol networks to provide telephone service remains a relatively recent market development. While we believe that the provision of voice communications services over the Internet and private Internet Protocol networks is currently permitted under United States law, some foreign countries have laws or regulations that may prohibit voice communications over the Internet.
UNITED STATES. We believe that, under United States law, based on specific regulatory classifications and recent regulatory decisions, the Internet Protocol communications services that we provide constitute information services (as opposed to regulated telecommunications services). As such, our services are not currently regulated by the Federal Communications Commission (the "FCC") or any state agencies charged with regulating telecommunications carriers. Nevertheless, aspects of our operations may be subject to state or federal regulation, including regulation governing universal service funding, disclosure of confidential communications, copyright and excise tax issues. However, we cannot assure you that our services will not be regulated in the future. Several efforts have been made in the United States to enact federal legislation that would either regulate or exempt from regulation communications services provided over the Internet. Increased regulation of the Internet may slow its growth, particularly if other countries also impose regulations. Such regulation may negatively impact the cost of doing business over the Internet and materially adversely affect our business, operating results, financial condition and future prospects.
In addition, the FCC is currently considering whether to impose surcharges or other common carrier regulations upon some providers of Internet and Internet Protocol telephony, primarily those which provide Internet and Internet Protocol telephony services to end users located within the United States. Although the FCC decided that information service providers, including Internet and Internet Protocol telephony providers, are not telecommunications carriers, various companies have challenged that decision. Congressional dissatisfaction with the FCC's conclusions could result in requirements that the FCC impose greater or lesser regulation, which in turn could materially adversely affect our business, financial condition, operating results and future prospects. On April 10, 1998, the FCC issued a report to Congress discussing its implementation of universal service provisions contained in the 1996 amendments to the Communications Act of 1934. In the report, the FCC indicated that it would examine the question of whether certain forms of phone-to-phone Internet Protocol telephony are information services or telecommunications services. The two are treated differently in several respects, with certain information services being more lightly regulated and not subject to universal service contribution obligations. The FCC noted that it did not have, as of the date of the report, an adequate record on which to make a definitive ruling. However, the record suggested that certain forms of phone-to-phone Internet Protocol telephony appear to have the same functionality as non-Internet Protocol telecommunications services and lack the characteristics that would render them information services. In September 1998, two regional Bell operating companies advised Internet and Internet Protocol telephony providers that they would impose access charges on Internet and Internet Protocol telephony traffic. It is uncertain at this time whether these companies will actually impose access charges or when such charges will become effective. In addition, one of these regional Bell operating companies has recently filed a petition with the FCC seeking the imposition of access charges on phone-to-phone Internet and Internet Protocol telephony services. On September 29, 1999, the FCC released a notice of inquiry seeking information on the extent to which phone-to-phone Internet Protocol telephony services might impact the accessibility of telecommunications services to people with disabilities. This inquiry focused on, among other things, opportunities for achieving greater accessibility for Internet Protocol telephony and the extent to which Internet Protocol telephony is now, or soon will be, an effective substitute for conventional circuit-switched telephony. On October 22, 1999, the FCC released a notice of proposed rulemaking on collecting information on the status of local telephone service competition and the deployment of advanced telecommunications capability. The FCC recognized that, while it does not regulate Internet services, Internet Protocol telephony may become an important substitute for circuit-switched telephony and should be included in evaluating local competition. Also, the FCC asked whether it should undertake a more specific determination of the extent to which the Internet is being used to provide telephony services.
If the FCC were to determine that certain services are subject to FCC regulations as telecommunications services, the FCC may require providers of Internet and Internet Protocol telephony services to be subject to traditional common carrier regulation, make universal service contributions, and/or pay access charges. It is also possible that the FCC may adopt a regulatory framework other than traditional common carrier regulation for Internet and Internet Protocol telephony providers. Any such determinations could materially adversely affect our business, financial condition, operating results and future prospects to the extent that they negatively affect our cost of doing business or otherwise slow the growth of our business.
State regulatory authorities may also retain jurisdiction to regulate the provision of intrastate Internet and Internet Protocol telephony services. Several state regulatory authorities have initiated proceedings to examine the regulation of such services. Others could initiate proceedings to do so. If such regulations are adopted, they could materially adversely affect our business, financial condition, operating results and future prospects.
INTERNATIONAL. The regulatory treatment of Internet and Internet Protocol telephony outside of the United States varies widely from country to country. A number of countries that currently prohibit competition in the provision of voice telephony may also prohibit Internet and Internet Protocol telephony. Other countries permit but regulate Internet and Internet Protocol telephony. Some countries will evaluate proposed Internet and Internet Protocol telephony service on a case-by-case basis and determine whether it should be regulated as a voice service or as another telecommunications service. Finally, in many countries, Internet and Internet Protocol telephony have not yet been addressed by legislation or regulatory action. Increased regulation of the Internet and/or Internet and Internet Protocol telephony providers or the prohibition of Internet and Internet Protocol telephony in one or more countries, or more aggressive enforcement of existing regulations in such countries, could materially adversely affect our business, financial condition, operating results and future prospects.
For example, we believe that our services fall outside the classification of regulated voice telephony services in the European Union. The European Union regulatory regime distinguishes between voice telephony services and other telecommunications services. In Services Directive 90/388/EEC, issued in 1990, the European Commission required Member States to allow competition for all telecommunications services except voice telephony and certain other services. The Services Directive was amended in 1996 by Commission Directive 96/19/EC, which required the liberalization of all telecommunications services, including voice telephony, by January 1, 1998, except in certain member states that were granted extended compliance periods. In addition, Directive 96/19/EC requires that services other than voice telephony be subjected to no more than a general authorization or declaration procedure. For purposes of these Directives, "voice telephony" is defined as the commercial provision for the public of the direct transport and switching of speech in real time between public switch network termination points.
On January 10, 1998, the Commission issued a Notice addressing whether Internet Protocol telephony was voice telephony and thus subject to regulation as voice telephony by the Member States. As noted by the Commission, a determination that Internet Protocol telephony constitutes "voice telephony" may trigger significant regulatory consequences with respect to, among other things, licensing requirements and contributions to universal service funding. Consistent with its earlier directives, the Commission stated that Internet telephony could properly be considered voice telephony only if all elements of its "voice telephony" definition were met. In this January 1998 Notice, the Commission concluded that no form of Internet Protocol telephony currently meets the definition of "voice telephony" subject to Member States' regulation. The Commission noted, however, that its conclusion that Internet Protocol telephony cannot be considered voice telephony may not apply to particular forms of service provisions. For example, this conclusion may not apply where an Internet Protocol telephony service is marketed as an alternative form of voice telephony service, users can dial out to any telephone number, and the provider guarantees the quality of the Internet Protocol voice service by bandwidth reservation and claims that the quality of the Internet Protocol voice service is the same as traditional voice telephony service. Accordingly, the Commission concluded that while voice over the Internet services cannot "for the time being" be generally classified as "voice telephony," the situation must be kept under review in light of technological and market developments. The Commission intends to review its Notice periodically.
On November 10, 1999, the Commission released a communication stating: "Assuming that over time the voice over the Internet service meets the key criteria for classification as voice telephony under the regulatory framework," this service would be regulated like other voice telephony services and covered by general authorizations. The Commission has announced that it is drafting a report on regulating the quality of voice telephony services and related consumer protection issues and another report discussing the new Internet telecommunications services and their impact on the European Union's regulatory and policy framework. We cannot predict what the content of such reports will be, or what impact, if any, they may have on our business. Based on the Commission's current position, providers of Internet Protocol telephony should be subjected to no more than a general authorization or declaration requirement by the European Union Member States. The Member States of the European Union are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom. However, we cannot assure you that individual Member States will not impose more stringent regulatory requirements, since the Commission's Notice is not binding on the Member States. The Member States therefore are not obligated to reach the same conclusions as the Commission on this subject so long as they adhere to the definition of "voice telephony" in the Services Directive. In fact, France is currently conducting an investigation into how Internet Protocol telephony should be regulated. We cannot assure you that the services provided over our network will not be deemed voice telephony subject to heightened regulation by one or more EU Member States. Moreover, we cannot
assure you that our failure or the failure of any of our partners to obtain any necessary authorizations will not have a material adverse effect on our business, financial condition, operating results and future prospects.
As we make our services available in foreign countries, and as we facilitate sales by our partners to end users located in foreign countries, such countries may claim that we are required to qualify to do business in the particular foreign country. Such countries may also claim that we are subject to regulation, including requirements to obtain authorization for the provision of voice telephony or other telecommunications services, or for the operation of telecommunications networks. It is also possible that such countries may claim that we are prohibited in all cases from providing our services or conducting our business as conducted in those countries. Our failure to qualify as a foreign corporation in a jurisdiction in which we are required to do so or to comply with foreign laws and regulations could materially adversely affect our business, financial condition, operating results and future prospects. In particular, this may subject us to taxes and penalties or preclude us from, or limit us in, enforcing contracts in such jurisdictions.
We or our partners may also currently be, or in the future may become, subject to requirements to qualify to do business in a particular foreign country, comply with regulations (including requirements to obtain authorizations for the provision of voice telephony or other telecommunications services or for the operation of telecommunications networks), or to cease providing services or conducting business as conducted in that country. We cannot be certain that either we or our partners are currently in compliance with any such requirements, will be able to comply with any such requirements, or will continue in compliance with any such requirements. The failure of us or our partners to comply with such requirements could materially adversely affect our business.
One of our competitors recently disclosed that access to its PC-to-phone service was blocked in certain countries in Asia and the Middle East by government-controlled telecommunications companies, and that it intended to negotiate agreements to continue to provide its services in those countries but could not give assurances that such negotiations would be successful. Another of our competitors recently disclosed that it has received a letter from the Israel Minister of Communications requesting that it cease and desist terminating calls over the Internet in Israel. We have not received any similar notices from these regulators and we do not know specifically how these competitors operate in such countries or why they received such notices. However, we cannot assure you that such regulators or any other regulator may not block our service or send us similar cease and desist orders in the future.
OTHER REGULATION AFFECTING THE INTERNET
UNITED STATES. Congress has recently adopted legislation that regulates certain aspects of the Internet, including on-line content, user privacy and taxation. For example, the Internet Tax Freedom Act prohibits certain taxes on Internet uses through October 21, 2001. We cannot predict whether substantial new taxes will be imposed on our services after that date. In addition, Congress and other federal entities are considering other legislative and regulatory proposals that would further regulate the Internet. Congress is, for example, currently considering legislation on a wide range of issues including Internet spamming, database privacy, gambling, pornography and child protection, Internet fraud, privacy and digital signatures. Various states have adopted and are considering Internet-related legislation. Increased United States regulation of the Internet may slow its growth, particularly if other governments follow suit, which may negatively impact the cost of doing business over the Internet and materially adversely affect our business, financial condition, results of operations and future prospects.
The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. These regulations may include requirements that companies establish certain procedures to disclose and notify users of privacy and security policies, obtain consent from users for certain collection and use of information and to provide users with the ability to access, correct and delete personal information stored by the company. These regulations may also include enforcement and redress provisions. There can be no assurance that the policies we adopt will conform with future regulations adopted by the FTC.
Moreover, even in the absence of those regulations, the FTC has begun investigations into the privacy practices of companies that collect information on the Internet. One investigation resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the principles noted above. We may become subject to a similar investigation, or the FTC's regulatory and enforcement efforts may adversely affect the ability to collect demographic and personal information from users, which could have an adverse effect on our ability to provide highly targeted opportunities for advertisers and electronic commerce marketers. Any of these developments would materially adversely affect our business, results of operations and financial condition.
INTERNATIONAL. The European Union has also enacted several directives relating to the Internet. The European Union has, for example, adopted a directive on data protection that imposes restrictions on the processing of personal data, which are more restrictive than current United States privacy standards. Under the directive, personal data may not be collected, processed or transferred outside the European Union unless certain specified conditions are met. In addition, persons whose personal data is processed within the European Union are guaranteed a number of rights. These include the right to access and obtain information about their data, the right to have inaccurate data rectified, the right to object to the processing of their data for direct marketing purposes and in certain other circumstances, and rights of legal recourse in the event of unlawful processing. The Directive will affect all companies that process personal data in, or receive personal data processed in, the European Union, and may affect companies that collect or transmit information over the Internet from individuals in the European Union Member States. In particular, companies with establishments in the European Union may not be permitted to transfer personal data to countries that do not maintain adequate levels of data protection. The directive does not, however, define what standards of privacy are adequate. As a result, the directive may adversely affect the activities of entities such as us that engage in data collection from users in European Union member countries. In addition, the European Union has adopted a separate, complementary directive that pertains to privacy and the processing of personal data in the telecommunications sector. This directive establishes certain requirements with respect to, among other things, the processing and retention of subscriber traffic and billing data, subscriber rights to non-itemized bills, and the presentation and restriction of calling and connected line identification. In addition, a number of European countries outside the European Union have adopted, or are in the process of adopting, rules similar to those set forth in the European Union directives. Although we do not engage in the collection of data for purposes other than routing calls and billing for our services, the data protection directives are quite broad and the European Union privacy standards are stringent. Accordingly, the potential effect of these data protection rules on the development of our business is uncertain.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
The value of our assets is dependent to a significant degree on our proprietary and licensed technology. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions to establish and protect our technology. All key employees have signed confidentiality agreements. These agreements provide that confidential information developed by or with an employee or consultant, or disclosed to such person during his or her relationship with us, may not be disclosed to any third party except in certain specified circumstances. These agreements also require our employees to assign their rights to any inventions to us. The steps taken by us may not, however, be adequate to prevent the misappropriation of our proprietary rights or technology. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technology.
ZeroPlus.com differs from its competitors in the Internet telephony industry in being built around Internet telephone numbers. This concept, which is the subject of our Pending Patent application, provides Internet consumers with a unique phone number that can be identical to their home phone numbers, except that "0" is the first digit.
In March 1996, we acquired all rights, title and interest in and to the U.S. Patent No. 5,526,353, "System and Method for Communicating Audio Data over Packet-Based Networks" ("the 353 Patent"). We believe that the 353 Patent is one of the first patents that specifically involves telephony through Digital Data Networks. With the re-focus of our revised business model in 1999, we are less reliant on the 353 Patent, and therefore, the relative value of the patent has been diminished. Our current and anticipated service offering is not wholly dependent on the validity or applicability of the 353 Patent.
In July 1999, we were issued U.S. Patent No. 5,923,655 titled "Interactive video communication over a packet data network". This patent adds video communications to the previously issued 353 Patent. In addition to the Pending Patent described above, we have filed several other patent applications in conjunction with our voice over Internet protocol business strategy.
There can be no assurance that our patent applications will result in the issuance of a patent. There can be no assurance that the current patents or future patents (if issued) would adequately protect us against competitive technology or that either would be held valid and enforceable against a challenge. In addition, it is possible that our competitors may be able to design around any such patents. Also, our competitors may obtain patents that we would need to license or circumvent in order to make, use, sell or offer for sale our technology.
We were one of eight defendants in a patent infringement suit brought by Multi-Tech Systems, Inc., which alleged that all defendants have infringed on one or more patents relating to concurrent transmission of voice and data information. For further information regarding this suit, see Part I. Item 3. "Legal Proceedings".
We believe that we do not infringe upon the patent rights of any third party, with the possible exception of the matters covered by the MultiTech litigation. It is possible, however, that other patent infringement claims might be asserted successfully against us in the future. Our ability to make, use, sell or offer for sale our products and services depends on our freedom to operate. That is, we must ensure that we do not infringe upon the patents of others or have licensed all such rights. Except in connection with the MultiTech litigation, we have not requested or obtained an opinion from our outside counsel as to whether our products and services infringe upon the patent rights of any third parties. We are aware that patents have recently been granted to others based on fundamental technologies in the Internet telephony area. Because patent applications in the United States are not publicly disclosed until issued, other applications may have been filed which, if issued as patents, could relate to our services and products. However, foreign patent applications do publish before issuance. Issuance of such a patent or patents could materially adversely affect our ability to operate. A party making an infringement claim could secure a substantial monetary award or obtain injunctive relief. If any of these risks materialize, we could be forced to pay significant amounts to defend our rights.
TRADEMARK APPLICATIONS - UNITED STATES
We do not currently have any other issued trademark registrations or registered copyrights in the United States, nor have we applied for any. There can be no assurance that we will be able to secure significant protection for all of our trademarks. Competitors of ours or others could adopt trademarks similar to ours, or try to prevent us from using our trademarks, thereby impeding our ability to build brand identity and possibly leading to customer confusion.
To date, we have not taken any steps to file applications in foreign countries to obtain protection of our trademarks. To the extent trademark rights are acquired through registration in countries outside the United States, we may not be able to protect our marks or assure that we are not infringing other parties' marks in those countries. Moreover, although we have taken some steps to commence the registration of "ZeroPlus.com" as a domain name with the various international registries, we cannot assure you that this will be accomplished.
We are also aware of other companies that use marks similar to marks that we use. There can be no assurance that companies with marks similar to our marks will not bring suit to prevent us from using the "ZeroPlus.com" mark or other marks. Defending or losing any litigation relating to intellectual property rights could materially adversely affect our business, results of operations and financial condition.
We rely on a variety of technology, primarily software, that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. Of particular note is standards-based compression software that we currently license from elemedia, an affiliate of Lucent Technologies, Inc. We can make no assurances that these technology licenses will continue to be available to us on commercially reasonable terms or at all. We believe that we are not unduly reliant on any of these third parties or their products. We are aware of alternate sources of supply; however, the loss of or inability to maintain any of these technology licenses may result in delays or breakdowns in our ability to continue developing and providing our products and services or to enhance and upgrade our products and services. Any of these results could materially and adversely affect our business, operating results and financial condition.
COMPETITION
LONG DISTANCE MARKET
The long distance telephony market and, in particular, the Internet telephony market, is highly competitive. There are several large and numerous small competitors. The principal competitive factors in the market include price, quality of service, breadth of geographic presence, customer service, reliability, network capacity and the availability of enhanced communications services. Our competitors include AT&T, MCI WorldCom and Sprint in the United States and foreign telecommunications carriers.
Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we have. As a result, certain of these competitors may be able to adopt more aggressive pricing policies, which could hinder our ability to market our Internet telephony services. One of our key competitive advantages is the ability to route calls through the Internet and private
Internet Protocol Digital Data Networks, which allows us to bypass the international settlement process and realize substantial savings compared to traditional telephone service. Any change in our regulatory status as a provider could force us to increase prices and offer rates that are more comparable to traditional telephone call providers. For further details in this regard, see "--Government Regulation".
INTERNET TELEPHONY MARKET
As consumers and telecommunications companies have grown to understand the benefits that may be obtained from transmitting voice over the Internet, a substantial number of companies have emerged to provide voice over the Internet. In addition, companies currently in related markets have begun to provide voice over the Internet services or adapt their products to enable voice over the Internet services. These related companies may potentially migrate into the Internet telephony market as direct competitors.
INTERNET TELEPHONY SERVICE PROVIDERS. During the past several years, a number of companies have introduced services that make Internet telephony services available to businesses and consumers. In addition to ZeroPlus.com, AT&T Jens (a Japanese affiliate of AT&T), net2phone (an affiliate of IDT Corporation), deltathree.com (an affiliate of RSL Communications), I-Link, iBasis (formerly known as VIP Calling), ICG Communications, IPVoice.com, ITXC and OzEmail (which was acquired by MCI WorldCom) provide a range of voice over the Internet services. These companies offer PC-to-phone, phone-to-PC or phone-to-phone services that are similar to the services we offer, although none uses our key concept of the Internet phone number. Some, such as AT&T Jens and OzEmail, offer these services within limited geographic areas.
SOFTWARE/HARDWARE PROVIDERS. Many companies produce software and other computer equipment that may be installed on a user's computer to permit voice communications over the Internet, similar to our former Telecom 2000 Desktop - Small Systems offering, NetConnect. Some of these competing products use the telephone handset, while some rely on PC-based speakers and microphones. Many of these products deliver voice sound that is delayed or which contains echo and "jitter," producing overall low quality. These products generally require each user to have compatible software and hardware equipment and rely on the public Internet for the transmission of traffic, which often results in a further reduction in the quality of communications.
TELECOMMUNICATIONS COMPANIES. A number of telecommunications companies, including AT&T, Deutsche Telekom, MCI WorldCom and Qwest, currently maintain, or plan to maintain, packet-switched networks to route the voice traffic of other telecommunications companies. These companies, which tend to be large entities with substantial resources, generally have large budgets available for research and development and therefore may enhance the quality and acceptance of the transmission of voice over the Internet. However, many of these companies are relatively new to the Internet telephony market, and therefore it is not clear whether they will build brand recognition among consumers for these services. These companies also may not have the range of product and service offerings that are necessary to independently provide a broad set of voice-enabled Web services. AT&T, for example, has attempted to enter the market but has focused its effort on the cable market and it is unclear if it will continue to pursue voice over the Internet. Qwest has taken steps to enter the market by building a high capacity network in the United States. In addition, Qwest has also entered into a three-year strategic alliance with Netscape to provide one-stop access to Internet services including long distance calling, e-mail, voice mail, faxes, Internet access and conference calls.
NETWORK HARDWARE MANUFACTURERS. Several of the world's major providers of telecommunications equipment, such as Alcatel, Cisco, Lucent, Northern Telecom and Dialogic (which was acquired by Intel) have developed or plan to develop network equipment that may be used in connection with the provision of voice over the Web services. This equipment includes routers, servers and related hardware and software. By developing this equipment, these manufacturers may exert substantial influence over the technology that is used in connection with transmission of voice over the Web and may develop products that facilitate the quality and timely roll-out of these networks. However, these companies are dependent upon the operators of Internet telephony networks to purchase and install their equipment into their networks. They are also dependent upon the developers of hardware and software to market their systems to end-users. Cisco currently manufactures Internet telephony equipment for low to medium scale networking, but does not manufacture high-end Internet telephony equipment for large networks. However, Cisco recently acquired two companies that produce devices to help Internet service providers transition voice and data traffic to packet networks while maintaining traditional phone usage and network equipment. Lucent has recently co-developed with VocalTec a set of industry standards that have been adopted by major competitors and is currently marketing Internet telephony hardware, including servers that allow the transmission of calls and faxes over the Internet. Lucent also offers related support products, such as billing centers and "Internet call centers", which allow Internet access and conversation with a customer support agent on a single line, similar to our ZPCommerce e-commerce solution.
VOICE-ENABLED ONLINE COMMERCE PROVIDERS. Several providers have begun to apply Internet telephony technologies in connection with e-commerce transactions. These providers compete with our e-commerce solution, ZPCommerce, by integrating
voice communications into commercial Web sites. These competitors include Net2Phone, which introduced its Click2Talk service in 1999, and USA Global Link, which introduced its Instant Call service in 1998. These systems permit voice communications between a customer on the Web and customer service representatives, although we believe they do not provide some of the other advantages of ZPCommerce, such the cost advantage from routing the customer's entire call over the Internet. In addition, AT&T's Inter@active Communications is a group of services that integrates voice into the Web, including AT&T Chat'N Talk, a voice-enabled chat service, and Click2Dial Conferencing Services, which initiates and manages conference calls. If we are able to recapitalize our business and restore operations, these services may emerge as significant competitors to our current and planned offerings.
RESEARCH AND DEVELOPMENT
At our primary research and development center in Austin, Texas, and as of March 31, 2001, we employed 5 full time developers, whose specialties include software, hardware, switching, Internet security, voice compression, engineering real-time online transactions, billing, and network and call management. Currently, we employ 2 full time developers.
We incurred approximately $1,273,000 and $1,768,000 in product development expenses during fiscal 2001 and fiscal 2000, respectively.
EMPLOYEES
As of March 31, 2001, we had approximately 36 full-time employees, including approximately 14 in technical support and customer service, 6 in sales and marketing, 9 in management and finance, and 7 in research and development. Our employees are not represented by any union, and we consider our employee relations to be good. We have never experienced a work stoppage.
On June 5, 2001, the Company announced the suspension of operations. In conjunction with this announcement, the Company also terminated the majority of its employees. Currently we employ 7 full time employees.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements that we have made herein that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. We and our representatives may from time to time make other written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Other forward-looking statements are those regarding matters that are not historical facts. Forward-looking statements involve known and unknown risks and uncertainties. Many factors could cause the actual results, performance or achievements for us to be materially different from those contemplated by forward-looking statements, including the factors described below in Part II, Item 6, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors". We caution that this list of cautionary statements is not exclusive. We do not undertake to update any forward-looking statements that may be made from time to time by or on behalf of us.
