**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-QSB**

 
| **(Mark One)**                                   | ** **                                                                                       |
|--------------------------------------------------|--------------------------------------------------------------------------------------------------|
| ** **                                       | ** **                                                                                       |
| ý                                           | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                             | ** **                                                                                       |
| **For the quarterly period ended June 30, 2005** |
| ** **                                       |
| o                                                | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  EXCHANGE ACT OF 1934**           |

 

**For the transition period from          to          **

** **

**Commission file number 000-50712**

** **

**ETS PAYPHONES, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **Delaware**                                                     | ** ** | **58-2131736**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
|                                                             | ** ** |                                  |
| **1490  Westfork Drive, Suite G, Lithia Springs, Georgia**       | ** ** | **30122-1509**                        |
| (Address of principal  executive offices)                        | ** ** | (Zip Code)                            |
| ** **                                                       | ** ** | ** **                            |
| **(770) 819-1600**                                          |
| (Issuer’s telephone  number)                                |

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

** **

Check whether the registrant filed alldocuments and reports required to be filed by Section 12, 13 or 15(d) ofthe Exchange Act after the distribution of securities under a plan confirmed bya court. Yes ý No o

 

As of August 12, 2005, there were outstanding 4,987,624 shares of the Issuer’s commonstock $.0001 par value.

 

 

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**ETS PAYPHONES, INC.**

**INDEX TO FORM 10-QSB**

**JUNE 30, 2005**

 
|                          | **Page Numbers**                                                                                                    |
|-------------------------------|---------------------------------------------------------------------------------------------------------------------|
| Part I. Financial Information | 3                                                                                                                   |
| Item 1.                  | Financial Statements                                                                                                | 3 |
|                          | Balance Sheet June 30, 2005 (Unaudited)                                                                             | 3 |
|                          | Statements of Operations For  the three and six months ended June 30, 2005 and June 30, 2004  (Unaudited) | 4 |
|                          | Statements of Cash Flows For  the three and six months ended June 30, 2005 and June 30, 2004  (Unaudited) | 5 |
|                          | Notes to  Financial Statements (Unaudited)                                                                          | 6 |
| Item 2.                  | Plan of Operation                                                                                                   | 8 |
| Item 3.                  | Controls and Procedures                                                                                             | 10 |
| Item 5.                  | Other Information                                                                                                   | 10 |
| Part II. Other Information    | 11                                                                                                                  |
| Item 6.                  | EXHIBITS AND  REPORTS ON FORM 8-K.                                                                                  | 11 |
| Signatures                    |                                                                                                                | 12 |

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

**ETS PAYPHONES, INC.**

**BALANCESHEET**

**JUNE 30, 2005**

**(Unaudited)**

 
| **ASSETS**                                                                                                      |   |       |      |
|-----------------------------------------------------------------------------------------------------------------|--------|------------|-----------|
| CURRENT ASSETS                                                                                                  |   |       |      |
| Cash                                                                                                            |   | $          | 1,251,583 |   |
| Cash, restricted                                                                                                |   | 426,235    |      |
| Accounts receivable                                                                                             |   | 2,875,239  |      |
| Inventories                                                                                                     |   | 440,221    |      |
| Prepaid expenses                                                                                                |   | 99,052     |      |
|                                                                                                            |   |       |      |
| TOTAL CURRENT ASSETS                                                                                            |   | 5,092,530  |      |
| FIXED ASSETS                                                                                                    |   |       |      |
| Payphones                                                                                                       |   | 4,674,641  |      |
| Other property and equipment                                                                                    |   | 1,366,712  |      |
|                                                                                                            |   | 6,041,353  |      |
| Accumulated depreciation                                                                                        |   | (2,623,898 | )         |
|                                                                                                            |   | 3,417,455  |      |
| OTHER ASSETS                                                                                                    |   |       |      |
| Deposits                                                                                                        |   | 153,234    |      |
|                                                                                                            |   |       |      |
| TOTAL ASSETS                                                                                                    |   | $          | 8,663,219 |   |
|                                                                                                            |   |       |      |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                  |   |       |      |
| CURRENT LIABILITIES                                                                                             |   |       |      |
| Accounts payable                                                                                                |   | $          | 715,868   |   |
| Accrued expenses                                                                                                |   | 4,149,861  |      |
| Accrued property, excise and sales taxes                                                                        |   | 1,029,133  |      |
| 401k payable                                                                                                    |   | 4,118      |      |
| TOTAL CURRENT LIABILITIES                                                                                       |   | 5,898,980  |      |
| NON-CURRENT LIABILITIES                                                                                         |   |       |      |
| Accrued property, excise and sales taxes                                                                        |   | 125,730    |      |
| SHAREHOLDERS’ EQUITY                                                                                       |   |       |      |
| Common Stock, par value $.0001 per share;  authorized 6,000,000 shares; 4,987,624 shares issued and outstanding |   | 499        |      |
| Additional Paid in Capital                                                                                      |   | 11,432,656 |      |
| Accumulated deficit                                                                                             |   | (8,794,646 | )         |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                 |   | 2,638,509  |      |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                 |   | $          | 8,663,219 |   |

 

The accompanying notes arean integral part of these financial statements.

 

3

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**ETS PAYPHONES, INC.**

**STATEMENTSOF OPERATIONS**

**(Unaudited)**

 
| ** **                                            | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| REVENUE                                               |       |                                    |       |                                  |       |   |   |   |   |
| Coin Calls                                            |       | $                                       | 3,014,053  |                                  | $          | 3,731,431 |   | $ | 5,904,087 |   | $ | 7,309,767 |   |
| Non - coin calls                                      |       | 1,085,574                               |       | 1,112,887                             |       | 2,463,984 |   | 2,401,663 |   |
| Other payphone revenue                                |       | 196,685                                 |       | 200,857                               |       | 374,880 |   | 362,670 |   |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| Total Revenue                                         |       | 4,296,312                               |       | 5,045,175                             |       | 8,742,951 |   | 10,074,100 |   |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| OPERATING EXPENSES                                    |       |                                    |       |                                  |       |   |   |   |   |
| Telephone Charges                                     |       | 1,420,132                               |       | 1,595,490                             |       | 2,833,923 |   | 3,326,998 |   |
| Commissions                                           |       | 1,313,546                               |       | 1,406,263                             |       | 2,564,237 |   | 2,746,240 |   |
| Service, maintenance and network costs                |       | 1,408,587                               |       | 1,502,515                             |       | 2,930,208 |   | 3,351,567 |   |
| Depreciation & amortization                       |       | 278,264                                 |       | 277,210                               |       | 558,408 |   | 573,815 |   |
| Selling, general and administrative                   |       | 1,154,898                               |       | 1,419,341                             |       | 2,372,092 |   | 2,861,562 |   |
| Total operating expenses                              |       | 5,575,427                               |       | 6,200,819                             |       | 11,258,868 |   | 12,860,182 |   |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| Loss from Operations                                  |       | (1,279,115                              | )          | (1,155,644                            | )          | (2,515,917 | ) | (2,786,082 | ) |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| OTHER INCOME (EXPENSE)                                |       |                                    |       |                                  |       |   |   |   |   |
| Interest income (expense)                             |       | 1,017                                   |       | 33                                    |       | (35 | ) | (599 | ) |
| Reorganization expense                                |       | (10,000                                 | )          | (75,216                               | )          | (20,710 | ) | (129,655 | ) |
| Gain(loss) on asset disposition                       |       | 380,712                                 |       | (72,015                               | )          | 387,732 |   | (123,467 | ) |
| Other income(expense)                                 |       | 1,000,198                               |       | (80,698                               | )          | 1,216,020 |   | 681,394 |   |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| Total other income(expense)                           |       | 1,371,927                               |       | (227,896                              | )          | 1,583,007 |   | 427,673 |   |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| NET INCOME(LOSS)                                      |       | $                                       | 92,812     |                                  | $          | (1,383,540 | ) | $ | (932,910 | ) | $ | (2,358,409 | ) |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| Basic and diluted net income(loss) per  common share  |       | $                                       | 0.02       |                                  | $          | (0.28 | ) | $ | (0.19 | ) | $ | (0.47 | ) |
|                                                  |       |                                    |       |                                  |       |   |   |   |   |
| Weighted average number of common shares  outstanding |       | 4,987,624                               |       | 4,985,826                             |       | 4,987,624 |   | 4,985,826 |   |

 

The accompanying notes arean integral part of these financial statements.

 

4

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**ETS PAYPHONES, INC.**

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | **June 30,  2005**   | ** ** | **June 30,  2004** | ** ** |
|                                                                        |       |                 |       |   |   |
| Operating Activities                                                        |       |                 |       |   |   |
| Net Loss                                                                    |       | $                    | (932,910   | ) | $ | (2,358,409 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities |       |                 |       |   |   |
| Depreciation and amortization expense                                       |       | 558,408              |       | 706,066 |   |
| Site licenses written down for sites taken  out of service                  |       | —               |       | 120,712 |   |
| Decrease in restricted cash balance                                         |       | 405,164              |       | 26,640 |   |
| Gain from sale of payphones                                                 |       | (380,711             | )          | — |   |
| Changes in operating assets and  liabilities:                               |       |                 |       |   |   |
| Decrease in accounts receivable                                             |       | 28,826               |       | 1,093,491 |   |
| Decrease in inventories                                                     |       | 36,064               |       | 12,779 |   |
| (Increase)Decrease in prepaid expenses                                      |       | (28,910              | )          | 15,710 |   |
| Decrease in accounts payable                                                |       | (480,517             | )          | (99,531 | ) |
| Decrease in accrued expenses and other  liabilities                         |       | 510,497              |       | 194,353 |   |
| (Increase)Decrease in other non-current  assets                             |       | 2,843                |       | (13,110 | ) |
|                                                                        |       |                 |       |   |   |
| Total Adjustments                                                           |       | 651,664              |       | 2,057,110 |   |
|                                                                        |       |                 |       |   |   |
| Net cash used by operating activities                                       |       | (281,246             | )          | (301,299 | ) |
|                                                                        |       |                 |       |   |   |
| Investing Activity                                                          |       |                 |       |   |   |
| Purchase of fixed assets                                                    |       | (12,170              | )          | (22,261 | ) |
|                                                                        |       |                 |       |   |   |
| Financing Activity                                                          |       |                 |       |   |   |
| Cash used for stock issuance costs                                          |       | —               |       | (140,351 | ) |
|                                                                        |       |                 |       |   |   |
| Net decrease in cash                                                        |       | (293,416             | )          | (463,911 | ) |
|                                                                        |       |                 |       |   |   |
| Cash – Beginning of Period                                             |       | 1,544,999            |       | 1,794,745 |   |
| Cash - End of Period                                                        |       | $                    | 1,251,583  |   | $ | 1,330,833 |   |
|                                                                        |       |                 |       |   |   |
| Supplemental Disclosure of Cash Flow  Information                           |       |                 |       |   |   |
| Cash paid for interest                                                      |       | $                    | 35         |   | $ | 721 |   |
|                                                                        |       |                 |       |   |   |
| Supplemental Disclosure of Non-Cash  Investing Activity                     |       |                 |       |   |   |
| See “Sale of Payphone Assets” Footnote C                          |       |                 |       |   |   |

 

The accompanying notes arean integral part of these financial statements.

 

5

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**ETS PAYPHONES, INC.**

**NOTES TO FINANCIAL STATEMENTS (UNAUDITED)**

**JUNE 30, 2005**

 

**NOTE A— BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Summary Information***

*** ***

The accompanying unaudited condensed financial statements have beenprepared in accordance with generally accepted accounting principles in theUnited States of America (“GAAP”) for interim financial information and thegeneral instructions to Form 10-QSB. Accordingly, they do not include all information and footnotes requiredby GAAP for complete financial statements. These interim financial statementsshould be read in conjunction with our audited financial statements and notesthereto included in our Annual Report on Form 10-KSB for the fiscal year endedDecember 31, 2004. Interim results are not necessarily indicative of results tobe expected for the entire year.  Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses. Actual results could differ from thoseestimates.

 

In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.

 

***The Company***

*** ***

ETS Payphones, Inc. (“ETS” or the “Company”)is a Delaware corporation that operates, services, and maintains a system ofpayphones. ETS is one of the largest independent payphone operators in theUnited States, and managed approximately 15,500 payphones from eight branchoffices handling 29 states, Washington D.C., and Puerto Rico before the sale ofthe majority of its payphones in New York, New Jersey, Connecticut,  and Massachusetts, which occurred on June 30,2005.  After this sale, the Company willmanage approximately 13,000 payphones from seven branch offices handling 25states.

 

The Company enters into binding agreementswith location owners to operate payphones at locations such as shoppingcenters, hospitals, hotels, convenience stores, service stations, grocerystores, restaurants, airports, truck stops and bus terminals. In addition toagreements with private property owners, ETS is party to various agreementswith municipalities under which the Company has been granted the right toprovide payphone services on municipal property. In most instances, the siteagreements on location leases entitle the private property owner ormunicipality to a percentage of revenues as “rent.” In other instances, theseagreements take the form of franchises pursuant to which ETS is required to payeither a fixed per phone fee or a percentage of revenues.

 

***Revenue Recognition***

*** ***

The Company derives its revenues from twoprincipal sources: coin calls and non-coin calls. Coin calls represent callspaid for by callers with coins deposited into the payphone. Coin call revenuesare recorded in the amount of coins deposited in the payphones and in theperiod deposited. We also receive revenues from non-coin calls made from ourpayphones. These non-coin calls include credit card, calling card, prepaidcalling card, collect and third-party billed calls where the caller dials “0”plus the number or simply dials “0” for an operator. Non-coin calls oftenrequire a number of services, including automated or live operators to answerthe call, verifying billing information, validating calling cards and creditcards, routing and transmitting the call to its destination, monitoring thecall’s duration and determining the charge for the call, and billing andcollecting the applicable charge. We have contracted with a limited number ofoperator service providers to handle these calls and perform all associatedfunctions, while paying us a commission on the revenues generated thereby.

 

6

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***Net Income(Loss) Per Common Share***

*** ***

Basic income(loss) per share is computedbased on net income(loss) divided by the weighted average number of commonshares outstanding. There were no potential common share equivalentsoutstanding during 2004 or 2005, therefore the diluted loss per common share isthe same as the basic loss per common share.

 

**NOTE B—OTHER INCOME(EXPENSE)**

*** ***

Other income as shown under the heading “OtherIncome and Expense” in the Statement of Operations consists of the following:

 
| **2005**                                                       | ** ** | **Q2**  | ** ** | **Q1** | ** ** | **YTD** | ** ** |
|----------------------------------------------------------------|------------|---------|------------|--------|------------|---------|------------|
|                                                           |       |    |       |   |       |    |       |
| Dial around true-up receipts for prior  years’ operations |       | $       | 237,275    |   | $          | 182,074 |       | $ | 419,349 |   |
| MCI bankruptcy settlement                                      |       | 276,626 |       |   |       | 276,626 |       |
| EUCL and other legal settlements                               |       | 463,099 |       |   |       | 463,099 |       |
| Other miscellaneous income items                               |       | 23,198  |       | 33,748 |       | 56,946  |       |
|                                                           |       |    |       |   |       |    |       |
| Total                                                          |       | $       | 1,000,198  |   | $          | 215,822 |       | $ | 1,216,020 |   |

 
| **2004**                                                       | ** ** | **Q2**   | ** ** | **Q1** | ** ** | **YTD**  | ** ** |
|----------------------------------------------------------------|------------|----------|------------|--------|------------|----------|------------|
| Estimated tax liability adjustment                             |       |     |       | $      | 487,500    |     | $          | 487,500 |   |
| Dial around true-up receipts for prior  years’ operations |       | $        | 31,226     |   | 262,314    |     | 293,539    |   |
| Dial around take-back, prior years                             |       | (140,951 | )          |   |       | (140,951 | )          |
| Other miscellaneous income items                               |       | 29,027   |       | 12,279 |       | 41,306   |       |
|                                                           |       |     |       |   |       |     |       |
| Total                                                          |       | $        | (80,698    | )      | $          | 762,093  |       | $ | 681,394 |   |

 

**NOTE C—SALE OF PAYPHONE ASSETS**

 

On June 30, 2005 the Company sold to an independent third party substantiallyall of its payphones located in the states of New York, New Jersey,Massachusetts, and Connecticut.   Thissale was made to Empire Payphones, Inc.  Aportion of the sale is contingent on obtaining regulatory approvals.  The sale terms were such that the Companyreceived $200,000 in cash upon contract signing by both parties and willreceive future payments of $62,500 per month for twelve months or $750,000 intotal.  The agreement is included asExhibit 33.1 in this 10-QSB filing and the gain from this sale is calculated asfollows:

 
| Total sale price, $200,000 cash and  $750,000 receivable |                                                           | $      | 950,000  |   |
|----------------------------------------------------------|----------------------------------------------------------------|--------|----------|--------|
| Less:                                                    | $952,116 book value less accumulated  depreciation of $399,809 |   | (552,307 | )      |
|                                                     | Parts inventory transferred to buyer                           |   | (12,798  | )      |
|                                                     | Coin in phones collections not paid to ETS                     |   | (4,184   | )      |
| Gain on Sale                                             |                                                           | $      | 380,711  |   |

 

7

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**NOTE D—GOING CONCERN**

 

The accompanying financial statements havebeen prepared in conformity with generally accepted accounting principles,which contemplate the continuation of the Company as a going concern.  Although the Company reported net incomeduring the quarter ended June 30, 2005, it reported net losses for the sixmonths ended June 30, 2005 and in 2004 and had a working capital deficiency of$806,450 at June 30, 2005.   In viewof the matters described, there is substantial doubt about the Company’sability to continue as a going concern. The liquidity of the recorded assetsand satisfaction of the liabilities reflected in the accompanying balance sheetis dependent upon continued operation of the Company, which is in turndependent upon the Company’s ability to meet its cash flow requirements on acontinuing basis and to succeed in its future operations.  The Company has continued expense reductionefforts in the areas of phone line costs, overhead, and the removal ofunprofitable payphones.  Despite theseefforts to reduce costs as well as efforts to increase revenues, there can beno assurance that management will be successful in implementing its plans. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

**Item 2. Plan of Operation**

 

ETS Payphones, Inc. owns and operatesapproximately 13,000 public pay telephones in 25 states concentrated primarilyin the Eastern and Southern United States, as well as the District of Columbiaand Puerto Rico. We are an independent owner of payphone equipment placed atlocations with client site owners that include retail establishments,convenience stores, hotels, hospitals and other publicly and privately ownedbusinesses. These locations are owned or managed by over 4000 clients thatinclude Fortune 100 companies as well as single store accounts andmunicipalities. We also provide other telecommunications products to certainclients.

 

Our primary business is to install andoperate payphones pursuant to contracts with location owners. We install publicpayphones in properties owned or controlled by others where significant demandexists for public payphone services, such as shopping centers, hospitals,hotels, convenience stores, service stations, grocery stores, restaurants,airports, truck stops and bus terminals. We service and maintain the payphonesand collect the revenue generated.

 

**Risk Factors**

** **

The following risk factors should beconsidered carefully in addition to the other information contained in thisreport.

 

**1.             *Regulatory Issues***

*** ***

The enactment of the Telecommunications Actsignificantly altered the regulatory landscape in which payphone companiesoperate. Although we believe that the Telecommunications Act, as implemented bythe FCC, addressed certain historical inequities in the payphone marketplace,uncertainties relating to the impact and timing of the implementation of thenew regulatory framework still exist. The uncertainty with the greatestpotential financial impact relates to revenue from access code calls andtoll-free dialed calls, also referred to as dial-around compensation.Dial-around compensation accounts for a material percentage of our revenues.Additionally, the March 2004 United States Court of Appeals, D.C. Circuitdecision to vacate the FCC Unbundled Network Element rules will have an unknowneffect on local line access pricing, but is expected to increase prices topayphone service providers.

 

**2.             *Limited FinancialResources***

*** ***

Our future performance and liquidity willdepend on a number of factors, including industry performance, general businessand economic conditions, the absence of contingencies, and other matters, manyof which are beyond our control. We will have limited financial resources, andit may be the case that we will not have the funds to make capital improvementsarising other than in the ordinary course of business.

 

**3.             *Dependence Upon Third-PartyProviders***

*** ***

We assemble payphones from componentsprovided by outside suppliers. In addition, we rely on outside suppliers forlocal line access, billing and collection services, and long-distance andoperator services. We believe that multiple suppliers are available to meet allof our product and service needs at competitive prices and rates and expect theavailability of such products and services to continue in the future. However,we cannot assure the continuing availability of alternative sources.

 

8

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**4.             *Competition***

 

We compete with other telecommunicationsproviders, including providers of wireless services, other payphone providersand long-distance carriers. Many of these competitors have substantiallygreater financial, marketing, and other resources than the Company.

 

**5.             *Technological Changeand New Services***

 

Continuous technological change, frequentservice and product innovations, and evolving industry standards characterizethe telecommunications industry. We believe that our future success will dependin part on our ability to anticipate technological changes and respond in atimely and effective manner to meet new industry standards. Any failure to keeppace with technological change (including the technical support componentrequired to operate payphones) and new customer service demands could have amaterial adverse effect on our business.

 

**6.             *Impact of Seasonality***

*** ***

Our revenue from payphone operations isaffected by seasonal variations. Because many of our payphones are locatedoutdoors, weather patterns have differing effects on our revenue depending onthe region of the country where the payphones are located and the enclosurehousing of the phone. For example, our payphones throughout the midwestern andeastern United States produce their highest call volumes during the second andthird quarters, when the climate tends to be more favorable. Seasonalvariations in revenues could have a material adverse effect on our business.Changes in the geographic distribution of our payphones may in the futureresult in different seasonal variations in our results.

 

**7.             *No established marketfor the Common Stock.***

*** ***

Our Common Stock is not listed on any stockexchange. Our Common Stock was issued to approximately 12,500 individuals andentities. Ownership interests are tracked by the transfer agent, American StockTransfer and Trust Company (“AST&T”), and transfers of ownership may bedocumented through AST&T. The Common Stock is not traded on any recognizedstock exchange, stock market or bulletin board system and there are no marketmakers for the Common Stock. There can be no assurance that an active or liquidtrading market for our shares of Common Stock will develop or be maintained.

 

**8.             *Possiblediscontinuance of operations***

*** ***

If we are unable to achieve profitability, orif operating losses increase in the future, we may not be able to remain aviable company and may have to discontinue operations. Our expenses havehistorically exceeded our revenues and we have sustained losses since ourbankruptcy reorganization in December 2002. Based on a continued erosionof revenue and despite management’s reduction of operating expenses, there issubstantial doubt about the Company’s ability to continue as a going concern.

 

9

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**Item 3. Controls and Procedures**

 

Our Chief Executive Officer and ChiefFinancial Officer (collectively, the “Certifying Officers”) are responsible forestablishing and maintaining disclosure controls and procedures for theCompany. Based upon such officers’ evaluation of these controls and proceduresas of a date within 45 days of the filing of this Quarterly Report, andsubject to the limitations noted hereinafter, the Certifying Officers haveconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in this Quarterly Report isaccumulated and communicated to management, including our principal officers asappropriate, to allow timely decisions regarding required disclosure.

 

The Certifying Officers have also indicatedthat there were no significant changes in our internal controls or otherfactors that could significantly affect such controls subsequent to the date oftheir evaluation, and there were no corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Our management, including each of theCertifying Officers, does not expect that our disclosure controls or ourinternal controls will prevent all error and fraud. A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. In addition, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations on all control systems, noevaluation of controls can provide absolute assurance that all controls issuesand instances of fraud, if any, within a company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people or by management override ofthe control. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and their can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, control may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of these inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**Item 5.  Other Information**

 

Effective August 19, 2005, James B. Leimbach,Vice-President, Accounting, voluntarily resigned.  Mr. Leimbach did not resign due to anydisagreement with the Company on any matter relating to the Company’soperations, policies or practices. He has accepted a position with anothercompany.

 

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**PART II.OTHER INFORMATION**

** **

**ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                 |
|---------------------|------------|---------------------------------------------------------------------------------|
| 10.1                |       | Asset sale agreement between ETS Payphones, Inc. and Empire  Payphones, Inc.    |
| 31.1                |       | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 31.2                |       | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1                |       | Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
| 32.2                |       | Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

(b)                                 Reports on Form 8-K

 

Form 8-K was filed on July 7, 2005 (FileNo.  000-50712).

 

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**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                  | ETS PAYPHONES, INC. |
|-----------------------|---------------------|
|                  |                |
| Date: August 17, 2005 | By:                 | /s/ GUY A. LONGOBARDO |
|                  |                | Guy A. Longobardo |
|                  |                | *President and Chief Executive Officer* |
|                  |                | * * |
|                  | By:                 | /s/ MICHAEL H. MCCLELLAN |
|                  |                | Michael H. McClellan |
|                  |                | *Executive Vice President,  Chief Financial Officer and Treasurer* |

 

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