SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
Form 10-QSB
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000 OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to ____________
Commission File Number: 000-27699
ePHONE Telecom, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 98-020-4749
--------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1145 Herndon Parkway
Herndon, Virginia 20170-5535
--------------------------------------------------------------
(Address of principal executive offices and Zip (Postal) Code)
(703) 787-7000
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes _X_ ; No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Company has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. YES n/a NO n/a
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of June 30, 2000, the
Company had outstanding 13,787,400 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: (check one): Yes ; No X
---- ----
<PAGE>
ePHONE Telecom, Inc.
FORM 10 - QSB
For the Period Ended June 30, 2000
INDEX
PART I. FINANCIAL INFORMATION.............................................1
Item I. Financial Statements (unaudited)
Balance sheet - June 30, 2000 and December 31, 1999 ......................1
Statements of operations - six months
ended June 30, 2000 and 1999 and for the period April 30, 1996
(inception) to June 30, 2000 .......................................... 2
Statements of operations - three months
ended June 30, 2000 and 1999 .......................................... 3
Statements of cash flows - six months
ended June 30, 2000 and 1999 and for the period April 30, 1996
(inception) to June 30, 2000 .............................................4
Notes to financial statements ............................................5
Item II. Management's Discussion and Analysis or Plan of Operation .......8
PART II.OTHER INFORMATION
Item 1. Legal Proceedings.............................................10
Item 2. Changes in Securities.........................................10
Item 3. Defaults Upon Senior Securities...............................11
Item 4. Submission of Matters to a Vote of Security-Holders...........11
Item 5. Other Information.............................................11
Item 6. Exhibits and Reports on Form 8-K..............................11
Signatures................................................................12
<PAGE>
ePHONE Telecom, Inc.
(A Development Stage Company)
Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................. $ 7,514,327 $ 82,747
Restricted cash ........................................................... 1,910,831 --
Advances .................................................................. 368,224 269,200
Accounts receivable ....................................................... 10,024 --
Inventory ................................................................. 148,980 --
Other receivables ......................................................... 9,823 --
----------- -----------
Total Current Assets ................................................. 9,962,209 351,947
Property and Equipment ......................................................... 560,816 125,474
Other Assets ................................................................... 2,097,014 --
----------- -----------
$12,620,039 $ 477,421
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable .......................................................... $ 225,250 $ 282,898
Accrued liabilities ....................................................... 581,243 332,000
Due to related parties .................................................... -- 91,995
Customer Advances ......................................................... 13,606 --
----------- -----------
820,099 706,893
----------- -----------
Stockholders' Equity:
Common stock, par value $0.001,50,000,000 shares authorized, 13,787,400 and
13,170,667 issued and outstanding at June 30, 2000 and
December 31, 1999, respectively ...................................... 13,787 13,171
Additional paid in capital ................................................ 5,556,072 1,375,954
Special Warrants, net...................................................... 14,013,397 --
Deficit accumulated during the development stage .......................... (7,783,316) (1,618,597)
----------- -----------
11,799,940 (229,472)
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... $12,620,039 $ 477,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
ePHONE Telecom, Inc.
(A Development Stage Company)
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended (Inception)
June 30, April 30, 1996 to
2000 1999 June 30, 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net Revenues ..................... $ 52,241 $ -- $ 52,241
Operating expenses
Cost of revenues .............. 22,152 -- 22,152
Sales and marketing ........... 1,820,100 85,824 2,039,978
General and administrative..... 4,176,656 33,257 4,553,414
Professional fees ............. 218,093 83,610 1,240,054
------------ ------------ ------------
Total operating expenses 6,237,001 202,691 7,855,598
------------- ------------- -------------
Loss from operations.............. (6,184,760) (202,691) (7,803,357)
Interest and other (income), net (20,041) -- (20,041)
------------- ------------- -------------
Net Loss ......................... $ (6,164,719) $ (202,691) $ (7,783,316)
============= ============= =============
Loss per share -(basic and diluted) $ (.46) $ (.02)
============= =============
Weighted average number of common
shares outstanding................ 13,391,770 10,044,199
============= =============
</TABLE>
===============================================================================
See accompanying notes to financial statements.
2
<PAGE>
ePHONE Telecom, Inc.
A Development Stage Company)
Statements of Operations
(unaudited)
Three Months Ended
June 30,
2000 1999
------------ ------------
Net Revenues ..................... $ 52,241 $ --
Operating expenses
Cost of revenues ............... 22,152 --
Sales and marketing ............ 1,678,020 85,824
General and administrative...... 3,722,399 28,958
Professional fees .............. 103,491 75,333
------------ ------------
Total operating expenses 5,526,062 190,115
------------ ------------
Loss from operations (5,473,821) (190,115)
Interest and other (income), net (20,041) --
------------- -------------
Net Loss ......................... $ (5,453,780) $ (190,115)
============= =============
Loss per share -(basic and diluted) $ (.41) $ (.02)
============= =============
Weighted average number of common
shares outstanding................ 13,442,400 12,000,000
============= =============
================================================================================
See accompanying notes to financial statements.
3
<PAGE>
ePHONE Telecom, Inc.
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months (Inception)
Ended April 30, 1996 to
June 30, June 30, 2000
------------- ------------ -------------
2000 1999
---- ----
<S> <C> <C> <C>
Net loss .................................................... $ (6,164,719) $ (202,691) $ (7,783,316)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation ........................................... 41,857 -- 73,929
Amortization ........................................... 110,369 -- 110,369
Stock issued for services rendered ..................... 768,750 -- 769,750
Stock option benefits charged to operations ............ 3,161,984 -- 3,564,109
Changes in operating assets and liabilities:
Decrease in accounts payable ........................ (57,648) 145,450 225,250
Increase in inventory................................ (148,980) -- (148,980)
Increase in Prepaid and other assets................. (99,024) -- (368,224)
Increase in accounts receivable and other receivables (19,847) -- (19,847)
Increase in accrued liabilities ..................... 249,243 -- 581,243
Decrease due to related parties ..................... (91,995) 1,756 --
Increase in customer deposits........................ 13,606 -- 13,606
----------- ----------- -----------
Net cash flows used in operating activities ................. (2,236,404) (55,485) (2,982,111)
=========== =========== ===========
Cash flow from investing activities:
Purchase of fixed assets .................................... (477,199) (199,458) (634,745)
Purchase of array license ................................... (2,207,383) -- (2,207,383)
Investment at restricted cash ............................... (1,910,831) -- (1,910,831)
----------- ----------- -----------
Net cash flows used in investing activities ................. (4,595,413) (199,458) (4,744,959)
=========== =========== ===========
Cash flow from financing activities:
Proceeds from issuance of common stock ................. 250,000 375,000 1,228,000
Proceeds from issuance of special warrants, net ........ 14,013,397 -- 14,013,397
----------- ----------- -----------
Net cash flows provided by financing activities ............. 14,263,397 375,000 15,241,397
=========== =========== ===========
Net increase in cash and cash ............................... 7,431,580 120,058 7,514,327
equivalents
Cash and cash equivalents, beginning of period .............. 82,747 -- --
----------- ----------- -----------
Cash and cash equivalents, end of period .................... $ 7,514,327 $ 120,058 $ 7,514,327
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
ePHONE Telecom, Inc.
(A Development Stage Company)
Notes to Financial Statements
(unaudited)
1. Business and Summary of Significant Accounting Policies
ePHONE Telecom, Inc. was incorporated in 1996 under the laws of the State of
Florida, and is traded on the over-the-counter market, on the OTC Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.,
under the trading symbol "EPHO".
The Company's vision is to become a global telecommunications carrier providing
a full complement of telecommunications services, including phone-to-phone
one-step dialing, using Voice over Internet Protocol ("VoIP") technology. Using
a call origination approach that involves its own Customer Premise Equipment
("CPE"), and a combination of its own dedicated Internet Protocol ("IP")
network, the public Internet and the public switched telephone network
("PSTN"),the Company plans to develop the capacity to provide voice and fax
transmission and other telephony features at high quality and low cost.
The Company is a development stage company as defined in Statement of Financial
Accounting Standard ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises" and, since its incorporation has engaged in organizational
activities and the development of its VoIP technology. The Company has not yet
commenced commercial operations and has operated at a net loss each year since
inception.
The Company has prepared the accompanying unaudited financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
These financial statements should be read together with the financial statements
and notes in the Company's 1999 Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The accompanying
financial statements reflect all adjustments and disclosures, which in our
opinion are necessary for fair presentation. All such adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of the results of the entire year.
2. Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives of 2 to 5 years.
At June 30, 2000 and December 31, 1999, property and equipment consisted of the
following:
June 30, December 31,
2000 1999
----- -----
Computer equipment $ 40,374 $ 19,820
Furniture and fixtures 220,047 --
Telecommunications equipment 374,324 137,726
--------- ---------
634,745 157,546
Less: accumulated depreciation (73,929) (32,072)
--------- ---------
Property and Equipment $ 560,816 $ 125,474
========= =========
5
<PAGE>
3. Other Assets
On March 31, 2000, the Company entered into a Strategic Alliance Agreement and a
License Agreement with Comdial Corporation ("Comdial") and Array Telecom
Corporation ("Array Telecom"), a wholly owned subsidiary of Comdial. In
connection with the Agreement and the License, the Company made an initial
payment to Comdial of $2,650,000. As part of the Agreement, the Company received
the fixed assets of Array Telecom, with a book value of approximately $443,000
and assumed the lease of Array Telecom's Herndon, Virginia facility. The
License grants the Company an exclusive license for all Voice over Internet
Protocol (VoIP) technology that has been developed by Array Telecom for a period
of five years.
The License Agreement requires the Company to pay an additional $2,180,000 for
the VoIP technology over the next 5 years with minimum payments of $180,000 due
in the first year and $500,000 in each of the next four years. Additional
royalty payments will be payable to the extent that 2% of gross sales as defined
in the Agreement exceed minimum payments for the VoIP technology. As part of the
arrangement, the Company also agreed to pay an additional amount of $350,000 to
employees of Array Telecom as compensation for benefits forfeited by them as a
result of the creation of the Strategic Alliance.
The following is a schedule of future minimum rental payments required under
this lease.
Year Ending December 31,
2000 $ 168,728
2001 173,790
2002 179,004
2003 184,374
2004 62,061
---------
Total future minimum
lease payments $ 767,957
=========
4. Stockholders' Equity
The Company completed the following equity related transactions during the six
months ended June 30, 2000.
Beginning in November 1999 and ending in February 2000, the Company sold a total
of 1,350,000 "units" for $0.75 a unit to investors outside the United States
pursuant to Regulation S under the Securities Act. Each "unit" consisted of one
share of our common stock and one warrant to purchase an additional share of
common stock at $1.25. These investors currently hold 1,350,000 shares of common
stock in the aggregate and are entitled to receive up to 1,350,000 shares of
common stock in the aggregate upon exercise of the warrants.
On March 31, 2000, April 10, 2000 and April 20, 2000 the Company sold a total of
13,780,837 special warrants to investors outside of the United States pursuant
to Regulation S under the Securities Act of 1933, as amended (referred to herein
as the Securities Act). Each special warrant was purchased for $1.10, and each
special warrant when exercised entitles the holder to one share of common stock
for no additional consideration and one purchase warrant to purchase an
additional share of common stock for $1.60. Holders of special warrants are
entitled to receive up to 13,780,837 shares of common stock in the aggregate
upon exercise of the special warrants and up to an additional 13,780,837 shares
of common stock in the aggregate upon exercise of the purchase warrants. The
purchase warrants expire on March 31, 2002.
On April 20, 2000, the closing of the sale of the last portion of the special
warrants, the Company had received $14,013,397, net of $1,145,325 in offering
costs.
In connection with the sale of special warrants described above, the Company
granted GroomeCapital.com, Inc., which served as its agent in the sale of the
special warrants, pursuant to Regulation S under the Securities Act, warrants to
purchase 889,251 shares of common stock at $1.10 per share and 250,000 options
to purchase shares of common stock at $0.60 per share. The warrants and options
expire on March 31, 2002.
6
<PAGE>
In the event that (i) a receipt has not issued by each of the regulatory
authorities in the jurisdictions in respect to the final prospectus qualifying
the securities for distribution in the jurisdiction, and (ii) the securities
have not been registered under the Securities Act on or before the date which is
180 days following the initial closing of the offering (March 31, 2000) each
investor in the offering may elect to have returned to them, out of the escrowed
funds, 12.5% of their original investment in exchange for 12.5% of the units
they previously acquired. In the event that the Final Prospectus is not received
on or before 150 days after the closing date, any Special Warrant that has not
been exercised shall be entitled to receive 1.1 units on the exercise of each
such Special Warrant for no additional consideration. The Company has recorded
these escrowed funds as restricted cash in the balance sheet.
The Company filed a registration statement of Form SB-2 with the Securities and
Exchange Commission for the registration of 35,984,758 shares of its common
stock on August 9, 2000.
As partial consideration for services rendered under a consulting agreement
entered into on May 24, 2000, pursuant to Regulation S under the Securities Act,
the Company granted Sobois-Livert Investment Corporation warrants to purchase
488,833 shares of common stock at $1.10 per share and warrants to purchase
250,000 shares of common stock at $0.60 per share. These warrants expire on May
24, 2002.
On May 9, 2000, the Company granted 345,000 shares of common stock to Cornwall
Management Ltd. as partial consideration for services to be rendered under a
consulting agreement.
On July 12, 2000, the Company's Board of Directors voted to rescind a
performance share plan previously adopted in 1999 pursuant to which up to
15,000,000 shares of our common stock would have been issued for no additional
consideration if ePHONE were to meet certain performance objectives by the end
of fiscal year 2002. The performance share plan was rescinded because of changes
in the Company's business plan since the adoption of the performance share plan.
Concurrently with rescinding the performance share plan, the Board of Directors
agreed to grant for no additional consideration a total of 3,666,447 shares of
Company common stock in consideration to four individuals who are former
executive officers of, or consultants to, ePHONE who would have been eligible to
receive shares of common stock under the performance share plan, subject to the
stockholder of ePHONE approving an amendment to our Articles of Incorporation
increasing the authorized number of shares of Company common stock. The shares
were granted in consideration for services rendered to ePHONE during the period
from the fourth quarter of 1998 through the first quarter of 2000.
As of the date of this report, The Company does not have a sufficient number of
authorized shares of common stock to allow for the exercise of all of the issues
and outstanding options and warrants. The holders of these options and warrants
have agreed not to exercise their options and warrants until the Company's
shareholders have approved an amendment to its Articles of Incorporation to
increase the number of its authorized shares of common stock from 50,000,000 to
150,000,000. In addition, the shares of common stock granted to certain
individuals in lieu of participation in the performance share plan may not be
issued unless and until the Company's stockholders approve such an increase. The
Company's shareholders will vote on a proposal to authorize an increase in the
number of its authorized shares of common stock to 150,000,000 at the Annual
Meeting of Stockholders on August 23, 2000.
5. Related party transactions.
During the six months ended June 30, 2000 the Company incurred costs for
management services provided by companies in which certain directors of the
Company have a controlling interest and incurred consulting fees to certain
directors of the Company totaling $110,153.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Certain statements made by our management may be considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate" and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement is made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from this described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
Overview
The development of our current business plan was essentially commenced as of
November 1998. From the date of our incorporation until November 1998 we did no
business and made no attempt to develop any business. From November 1998 until
December 31, 1999, we focused our efforts on the review of business
opportunities and, ultimately, the development of our current business.
We were incorporated pursuant to the laws of the State of Florida, effective May
3, 1996, as IRA Fund Brokers Corp., and changed our name to IFB Corp. on April
6, 1998. On March 22, 1999, IFB Corp. changed its name to ePHONE Telecom, Inc.
We have not commenced our proposed business operations on a commercial basis.
Thus, we have not received any significant revenues from operations since our
inception.
Our vision is to become a global telecommunications carrier providing a full
complement of telecommunications services, including phone-to-phone one-step
dialing, using Voice over Internet Protocol ("VoIP") technology. Using a call
origination approach that involves our own customer premise equipment ("CPE"),
and a combination of our own dedicated Internet Protocol ("IP") network, the
public Internet and the public switched telephone network ("PSTN"), we plan to
develop the capacity to provide voice and fax transmission and other telephony
features at high quality and low cost.
On March 31, 2000, we entered into a Strategic Alliance Agreement and License
Agreement with Comdial Corporation ("Comdial") and Array Telecom Corporation
("Array Telecom"), a wholly owed subsidiary of Comdial. In connection with these
agreements we acquired certain fixed assets from Array Telecom, with a book
value of approximately $443,000 and obtained an exclusive license for all Voice
over Internet Protocol technology that has been developed by Array Telecom for a
period of five years. This now enables us to produce the initial equipment and
technology required to build our network.
Plan of Operation
Our plan of operation for the next 12 months is to continue to build our network
and create a distribution network by entering into partnering relationships that
will enable us to offer a variety of services, using a number of different
products, to customers ranging from individuals to large corporations. In
regards to the establishment of a partner network we are currently in
discussions with various organizations in Europe and Southeast Asia to
accomplish this. We will be continuing our effort in identifying and attempting
to sign contracts with partners who would sell our products and services to the
end users. In markets where the association with such partners is not possible
or where it takes too long, we will be attempting to hire sales agencies that
could sell our products and services in return for a commission.
Our plan is to identify European markets where deregulation would enable us to
apply for and receive operating licenses on a cost-effective basis. As soon as
our licensing activity is complete, we plan to begin establishing our points of
presence (POP). Our plan would be to install as many POPs as possible pending
our ability to acquire the necessary licenses, and our financial ability to fund
the necessary equipment and its deployment.
This plan requires significant technical integration. Since we are neutral
towards the selection of the hardware platform, it is likely that changes to the
basic hardware systems deployed will occur continuously, as industry products,
capabilities, and protocols evolve. The ongoing requirement to integrate the
best products and technology available will require significant technical
expertise and management. Even deploying the initial network will require the
integration of internet protocol gateway technology, autodialers, embedded
customer premises equipment, public switched telephone network access ranging
from single analog lines to digital T-1/E-1 lines, IP routers and network
interfaces, billing systems, and much more. Integrating this variety of
technology is expected to be challenging.
8
<PAGE>
Our plan is to develop the capability to deliver a range of enhanced services.
In addition, our proposed network operations center will require the ability to
deploy these services and bill and monitor the services. It is likely that we
will need to grow our development team that will build the technology to supply
the services that cannot be purchased directly.
Experts in networking, Internet protocol telephony, and network design will be
required in order to advise on the design and construction of our network and
services. Often, such design involves the technical evaluation of candidate
products.
We have begun the development of our network in Europe. ePHONE, with its future
European partners, plans to install and test 30 regional gateways, or our
switches, in Europe during the year 2000, 80 gateways in the year 2001 and 190
gateways in the year 2002. These numbers could change due to licensing
requirements and our success in recruiting partners.
So far during fiscal year 2000, we have installed a Holland Regional Node in
Rotterdam, and we have installed POP's in Holland and Belgium. We are currently
searching for a strategic partner to begin sales of CPE's in Holland and
Belgium. We anticipate that we will formalize the necessary strategic
partnership and begin such sales during the third quarter of 2000. In addition,
we are also in the process of searching for a strategic partner to begin the
process of establishing our network in France.
In addition to the above, we are planning to install additional Regional
Gateways as well as POPs in Frankfurt, Germany and London, England.
Opportunities are being reviewed for Warsaw, Poland and Madrid, as we have an
opportunity to reach agreements with some potential partners in both countries.
We are planning to roll out our services in the above-mentioned cities before
expanding to other cities. However, if we are able to find partners we would
like to install more POPs as soon as possible.
At the same time ePHONE recognizes the need to generate revenues from
operations. As regional gateways are tested and become operational, customers
will be added through the efforts of our partners.
We have hired over 20 people since April 1, 2000 and we expect to hire up to
thirty additional full-time employees as we roll out our plan of operations in
the latter half of 2000 and the first half of 2001. Additional personnel are
needed to expand our human resources in the area of software development, system
design & configuration, installation, customer support, product marketing and
accounting.
Liquidity and Capital Resources
We have funded our operations through equity financing, and we have had no line
of credit or similar credit facility available to us.
We must rely on our ability to raise money through equity financing to set up
our global network, which is the vital part of our business plan. The majority
of funds raised will be allocated to the deployment of the technology, operating
costs and marketing activities.
In the first quarter of 2000, we offered special warrants at $1.10 per warrant
in a Regulation S private placement. Each special warrant (the "Special
Warrant") entitled the holder to receive one share of common stock and one share
purchase warrant exercisable at $1.60 within 24 months.
On April 7, 2000, the closing of the sale of a second portion of the Special
Warrants occurred, and on April 20, 2000, the closing of the sale of the final
portion of the Special Warrants occurred. The total net proceeds received by
ePHONE from the sale of Special Warrants was approximately $14,013,397. The
total number of Special Warrants sold by ePHONE was 13,780,837.
9
<PAGE>
We believe that our cash and cash equivalents will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures until
September 2001.
New Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or SFAS 133. SFAS 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in the other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for our fiscal year ending
December 31, 2001. We do not currently hold any derivatives and do not expect
this pronouncement to materially impact our results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The SAB
expresses the SEC's views on applying generally accepted accounting principles
to revenue recognition in financial statements. We do not expect the application
of the SAB to have a material impact on our financial statements, however,
certain SEC staff interpretations of the SAB have not been published and may
have an effect on the applicability of the SAB in relation to our consolidated
financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transaction Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". With the exception of
certain provisions that required earlier application, this interpretation is
effective for all applicable transactions beginning July 1, 2000. We do not
expect that the adoption of this interpretation will have a material impact on
our financial statements.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in an arbitration relating to the termination of our former
President and Chief Operating Officer, Charles Yang. A breakdown in the
relationship between ePhone and Mr. Yang developed in early 2000 and he ceased
providing services to the Company on January 31, 2000. Mr. Yang's positions as
President and Chief Operating Officer of ePhone were formally terminated on
March 9, 2000. Mr. Yang then gave notice to the Company that he required his
dispute with ePhone to be arbitrated. Management does not anticipate that the
outcome of such arbitration will have a material impact on our earnings or
financial position.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a)(1) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On April 17, 2000, the registrant filed with the Commission a current
report on Form 8-K which disclosed (i) a public announcement on April 5,
2000 of ePhone Telecom, Inc.'s strategic alliance with Comdial Corporation
and Array Telecom, Inc. and (ii) an agency agreement entered into with
Groomecapital.com for the placement of certain special warrants offered by
the registrant.
On May 16, 2000, the registrant filed with the Commission a current report
on Form 8-K which disclosed the net proceeds of the placement of certain
special warrants offered by the registrant in conjunction with
Groomecapital.com.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized, ePHONE Telecom Inc.
Date: August 14, 2000 Row J. Zadeh
/s/Row J. Zadeh
---------------------
Row J. Zadeh
President and Chief
Executive Officer
Bahram H. Ossivand
/s/Bahram H. Ossivand
----------------------
Bahram H. Ossivand
Chief Financial Officer
11
