UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 1
[ X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 000-27669
ePHONE Telecom, Inc.
(formerly IFB Corp.)
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(Name of Small Business Issuer in its charter)
Florida 98-0204749
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Suite 1000, 355 Burrard Street Vancouver, B.C., Canada V6C 2G8
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (604) 482-6166
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Common shares $0.001 par value None
Securities to be registered under Section 12 (g) of the Act:
(Title of Class) Name of each exchange on which registered
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None None
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 requirements for the past 90 days. [X ] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer did not have revenues for its most recent fiscal year.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $10,560,000 as of December 31, 1999 (based on
the average bid and asked price of such common equity).
The issuer has not been involved in a bankruptcy proceeding during the past five
years.
As of December 31, 1999 there were 12,000,000 shares of the registrant's common
stock, par value .001 per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
Transitional Small Business Disclosure Format (Check one): Yes ____; No _X_
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Table of Contents
PART I.........................................................................3
Item 1. DESCRIPTION OF BUSINESS...........................................3
Item 2. DESCRIPTION OF PROPERTY..........................................16
Item 3. LEGAL PROCEEDINGS................................................16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............16
PART II.......................................................................16
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.........16
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........18
Item 7. FINANCIAL STATEMENTS.............................................20
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................21
PART III......................................................................21
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..21
Item 10. EXECUTIVE COMPENSATION...........................................23
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...24
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................25
Item 13. EXHIBITS AND REPORTS ON FORM 8K..................................27
SIGNATURES....................................................................28
Supplemental information to be furnished With Reports Filed
Pursuant to Section 15(d) of the Exchange Act by Non-reporting Issuers........29
EPhone Telecom Inc. - Financial Statements as of December 31, 1999............30
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Outlook and Uncertainties
Certain information in this Report contains "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
All statements other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any projections of
earnings, revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of
the foregoing. In some cases, forward-looking statements can be identified by
the use of terminology such as "may", "will", "expects", "plans", "anticipates",
"estimates", "potential", or "continue", or the negative thereof or other
comparable terminology. Although ePhone Telecom, Inc. believes that the
expectations reflected in its forward-looking statements are reasonable, it can
give no assurance that such expectations or any of its forward-looking
statements will prove to be correct, and actual results could differ materially
from those projected or assumed in these forward-looking statements.
PART I
Item 1. DESCRIPTION OF BUSINESS
A. Business Development
ePHONE Telecom, Inc. (the "Company") has not been in business for 3 years. The
development of the business of the Company as described below was essentially
commenced as of November, 1998. From the date of the Company's incorporation
until November, 1998 the Company did no business and made no attempt to develop
any business. From November, 1998 until December 31, 1999, the Company has not
been in business and has focused its efforts on the review of business
opportunities and, ultimately, the development of the business described below.
The Company does not have a predecessor nor has there been any material
reclassification of its business or any purchase of any assets not in the
ordinary course of business.
The Company was incorporated pursuant to the laws of the State of Florida,
U.S.A., effective May 3, 1996, as IRA Fund Brokers Corp., and changed its name
to IFB Corp. on April 6, 1998. On March 22, 1999, IFB Corp. changed its name to
ePHONE Telecom Inc.
B. Business of the Company
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.
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The Company believes that the combination of its CPE device, gateways and
guaranteed bandwidth network could represent a significant competitive
advantage. The Company's service does not require two-step dialing or require
that the other party have a CPE device. The Company's UUNET IP network should
guarantee the necessary bandwidth to provide the contemplated telecommunications
services and enhance the quality of these services. Customer testing conducted
with potential distributors indicates that the CPE device, working together with
the gateways and IP network, represents a very attractive solution. Furthermore,
the CPE device is priced very competitively and the cost will go down as volume
increases. The Company intends to make the CPE devices available free to all
qualified customers, further enhancing the Company's competitive advantage.
On October 22, 1999 the Company signed an Agreement in Principle with Saigon
Post & Telecommunications Corporation ("SPT"), of Ho Chi Minh City (formerly
Saigon), Vietnam. The Agreement in Principle provides for the Company and SPT to
jointly develop and operate a series of WLL networks in the region of Ho Chi
Minh City. The Company and SPT agreed to conduct a technical and financial
feasibility study for the Project. Further, if the outcome of the feasibility
study is positive a Business Cooperation Contract is to be negotiated and signed
between the parties - to effectively create a joint venture between them for the
management and operation of the Project. While the Agreement in Principle is
still in effect the Company is not actively working on the feasibility study at
this point - and would not expect to do so in any event until further funding is
received from which the costs of the study could be paid. Management of the
Company is unsure at this date as to whether or not it will proceed with the
Agreement in Principle.
C. Approach - Network, Services and Access
The development of IP telephony as a viable technology for providing
telecommunications services is significant not only because of the reduction in
costs that it allows, but also because of the enhanced services that it
facilitates. Unlike legacy telecommunication systems, which are currently used
by most providers of telecommunications services, IP telephony systems are open,
allowing the integration of numerous services on a single platform.
The Company plans to offer a wide range of telecommunications services to end
users throughout the world. The fundamental service that the Company will
provide is the ability to reduce telecommunications costs through the use of IP
telephony technology. In order to provide such services economically, the
Company is required to deploy a worldwide IP network that will be used to handle
calls. The Company network will handle long distance traffic, both for calls
between customers using the Company's network, and for calls between the
Company's customers and the larger population connected to the public switched
telephone network (PSTN).
Companies such as ITXC, iBasis, and Net2Phone have demonstrated the viability of
selling long distance telephone service carried using IP telephony technology.
However, the Company's plans to offer significantly differentiated products and
services. There are two broad categories in which the Company will innovate to
deliver services that are more compelling than the straightforward long distance
calling services being offered currently by IP telephony carriers. These
categories are:
1. Enhanced services. Through integration of IP Telephony products based
on open standards, as well as through integration of the Company-owned
technology and expertise with such products, the Company will provide a
significantly greater depth of services beyond simple long distance
calling. Furthermore, enhanced services such as toll free, remote
exchange number, online billing and verification, and others will be
provided by the Company from the flexible switches that make up the
Company's network.
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2. Access technology. At present, the only means provided by IP telephony
carriers to access their networks, is an access number that must be
manually dialed. While companies using IP telephony products enjoy
one-stage dialing, they are required to deploy their own networks in
order to do so, and as a result, can typically only call between areas
where they have physical offices. The Company, in conjunction with its
partners, has arranged for several access devices to be used in
addition to the normal PSTN-based access methods. These devices should
allow the Company to deliver services targeted specifically at certain
sizes of business, in a manner that is effective and efficient both for
the Company and for the Company's customers.
The Company's approach has three components:
o Build a flexible and reliable IP telephony based network;
o Deliver a range of innovative services using that network; and
o Provide a wide range of access devices for interaction with those
services, scaling from home users with a single telephone line to
corporations with sophisticated PBXs.
Each one of these three major components of the Company's plan is elaborated
upon in the sections that follow. Each section explains the key aspects of the
component, the specific capabilities that the component will provide, and the
technology that the Company expects will be involved in creating that component.
C.1 The Company's Network
Central to the Company's ability to provide products and services to end-users
will be the network that will enable service to be provided. The Company's
network will be deployed worldwide, and will consist of the following main
elements:
1. A high quality IP backbone used to carry telecommunications
traffic, and to link nodes in the Company's network.
2. Nodes in the Company's network that interface with end-users
and provide the actual services to be offered by the Company.
These nodes will be referred to as the Company's switches.
3. The Company's network operations center (NOC). From this
centralized point of command, the Company's technical staff
will use their best efforts to ensure uninterrupted operation
of the Company's network and services. The Company's NOC will
also serve as a collection point for billing information used
in invoicing for services rendered.
4. Access devices used by the Company's users to interface with
the Company's network.
Since access devices are a key element of the Company's plan, they will be
discussed in a separate section below. The remainder of this section describes
each of the other components of the Company's network.
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C.1.1 The Company's IP Backbone
In order to deliver high quality voice services with quality that is comparable
to traditional public telephone services, the Company requires a high quality IP
backbone to carry traffic between the Company switches.
Because of the necessary level of capital involved, it is not practical for the
Company to deploy its own high quality IP backbone. At the same time, quality
requirements dictate that the public Internet cannot be used directly. To
address this, the Company has entered into a relationship with UUNET
Technologies Inc. (UUNET) as the backbone provider for its worldwide IP network.
UUNET will provide guarantees on the level of performance required by the
Company in delivering its services successfully. Since this relationship
leverages UUNET's high quality worldwide IP network used in providing UUNET's
Internet service, but without using public unmanaged Internet routers to carry
traffic, the result is expected to be a dependable level of quality at
reasonable cost.
Because of the structure of the Company's switches, it is possible for the
Company to add a dedicated point-to-point connection between two major hubs if
the volume of traffic demands greater bandwidth than UUNET is capable of
providing. This strategy also should allow the Company to deploy points of
presence (POPs) into areas in which UUNET is not able to provide the requisite
level of service.
C.1.2 The Company's Switches
In each region where the Company's establishes a presence, a Company switch will
be deployed. Each switch will interface to the IP Backbone in order to provide
the numerous services that the Company intends to offer. The key components of
each the Company's switches will be the following:
1. Network routers used to connect the switch as a whole to the
IP backbone. These routers will allow access to the Company's
IP backbone by any device that is part of the Company's
switch. Such devices include gateways, uninterruptible power
supplies ("UPSs"), and other sub-components of the Company's
switch.
2. PSTN/IP gateway that serves as the interface between the local
PSTN (or other traditional telecommunications provider) and
the Company's IP backbone. This VOIP gateway is the bridge
between the Company's network and the existing public
telephone network.
3. Application servers used to deliver actual services to the end
user. Much like a web server, application servers will be used
to host the applications that end-users interact with. Since
VOIP gateways may be embedded devices with limited
capabilities in terms of providing sophisticated services, it
is necessary to deliver the applications through PC-based
application servers.
4. Uninterruptible Power Supplies (UPSs). It is intended that the
Company's switches will have sufficient UPS capacity to ensure
that brownouts and other short-term power disruptions do not
affect the operation of the Company's network. In the event of
a long-term failure, the UPS will allow the failure to be
notified to the Company's NOC (described below), so that
traffic can be routed around the affected area if necessary.
The Company proposes to deploy 300 POPs throughout the world over the next three
years. These switches will be strategically located, and deployed initially to
key telecommunications hubs. It is expected that with a relatively small number
of the Company's switches in these key areas, the Company will be able to
provide competitive rates worldwide by terminating each call partially over the
Company's network, with the final portion of a call occurring on the PSTN.
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C.1.3 The Company's Network Operations Center (NOC)
The NOC will be the centralized command center from which the Company's
technical staff will manage the various components of the Company's network, as
well as the services being provided. The NOC will be staffed 24 hours a day, 7
days a week. The NOC, which will be connected to the Company's network via a
high-speed dedicated IP connection, will provide the following services:
1. Real-time collection of call detail record (CDR) information
from all the Company's switches.
2. Consolidation of all billing information collected by the
Company's switches located throughout the network.
3. Back office functions such as account setup, management,
termination, billing.
4. IP network monitoring, to ensure, to the extent possible, that
the IP backbone delivers consistently high quality performance
and results.
5. Monitoring of each switch in the Company's network to ensure
availability. Such monitoring will not be limited to
monitoring on the IP network; additional steps may be taken to
ensure PSTN availability of a given the Company's switch.
6. Deployment of new services to the Company's switches.
7. Bandwidth monitoring and planning activities to determine the
appropriate timing and structure of improvements to the
Company's network infrastructure.
8. Co-ordination of the deployment of new Company switches, and
extensions of the Company's IP backbone to include new
regions.
It is likely that several other services will be required of the Company's NOC
with regards to specific services being offered by the Company. For example, a
toll free service might require the NOC to interface with PSTN providers to
ensure the correct toll free setup. The proposed location of the NOC is in the
State of Virginia.
C.2 Services Planned to be Offered by the Company
C.2.1 One-Stage Calling
The fundamental service that ePHONE will offer through the Company network is a
one-stage calling service. This service will allow businesses and individuals to
direct their long-distance traffic via the Company's network. Initially, the
Company will provide one-stage calling through access devices such as dialers.
The one-stage calling service offered by the Company will differ significantly
from offerings from other providers. First, by providing a wide range of access
devices (described below), the Company will be able to offer its services to the
following markets.
o Large businesses with pre-existing PBXs, which require many
lines of long distance connectivity and have dedicated
Internet access;
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o Small and medium business that may or may not have a PBX, and
may require one to four lines of long distance connectivity;
o Small businesses and home offices that require only one or two
lines of connectivity, and which may not have Internet access
of any sort.
Secondly, the Company will offer innovative pricing plans for this product. The
one-stage calling service will support multiple pricing models so that different
pricing models can be used in different areas, and so that future pricing models
can be added later without disrupting existing pricing models. This allows for
one-time promotional offers, better pricing plans for early users of the system,
and so forth.
Pricing for the one-stage calling plan will be characterized by an ability to
offer differentiated pricing for on-net calls (which originate and terminate on
the Company's network) and off-net calls (which are originated by the Company's
customers but are made to non- Company's customers). The ability to offer such
differentiated pricing plans is an important part of the one-stage calling
service.
C.2.2 Toll Free
Toll Free services provided by traditional carriers allows an organization to
have calls to its toll free number directed to the service center closest to the
person making the call. With such toll free services, the organization is
responsible for paying both the fee for having the toll free number, and the
long distance portion of every call placed to that long distance number.
With the Company's network nodes located at strategic communication hubs, the
Company will be able to lower the cost of toll free services to the end user. By
directing toll free traffic to a customer's toll free number to the nearest
Company switch, and carrying the long distance portion of the call over the
Company's network, the long distance portion of toll free charges will be
reduced significantly. By taking advantage of intelligent routing capabilities
on the Company's switches, such toll free services can be provided without any
additional hardware or infrastructure investments. Calls to a customer's toll
free numbers would be recognized by the Company's switches and forwarded
directly to the customer office. This routing of calls can additionally be based
on time of day, allowing calls at different times to be directed to different
service centers.
C.2.3 Prepaid Calling Cards
Prepaid calling card services represent a significant opportunity for the
Company's network. By leveraging the intelligence in each switch, it is possible
for the Company to offer a full-prepaid calling card service, with prepaid calls
terminated by the Company's network. Since each Company switch is capable of
providing interactive voice response ("IVR"), balance announcements, real-time
billing with automatic cutoff and other key features, no additional investments
are required in order to use the Company's network to provide prepaid calling
card services.
C.2.4 Customized Online Billing
Because the Company's network is built on Internet Protocol (IP) technology, it
is able to deliver transactional and e-commerce applications identical to those
used by Web-based retailers. Since all the Company's switches collect billing
information in real-time, with immediate transmission of billing information to
the NOC, the Company will be able to provide online services allowing a customer
to review their bills, sign up for new plans and services, or make changes to
existing services. The ability to offer up to date information at all times is
an enhanced service, that the Company believes is not presently offered by
existing telecommunications service providers. This service will also provide
immediate feedback to end users of the benefits and savings they enjoy through
the use of the Company's network.
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C.2.5 Foreign Exchange Numbers
The Company will have switches in a number of key calling areas. This will
permit the Company to obtain, at low cost, local telephone numbers in those
areas, and to have those telephone numbers directed at the Company's switches.
Because of the intelligent routing capability of the Company's switches, it is
then possible to forward calls to these numbers to alternate final destinations.
This allows the Company to offer its customers local telephone numbers in any
region covered by the Company's network. For example, the Company could provide
a customer located in Paris with a local telephone number in New York. As with
toll free and prepaid calling card services, this can be accomplished without
any additional investment in equipment and infrastructure. Furthermore, the
Company can combine this service with the toll free service to offer
international customers a North America wide toll free number that directs calls
to their international offices.
C.3 Access Methods
The Company believes that another key to the success of the Company's network
will be the ability to provide access to the network in a convenient and
efficient way. Many IP telephony operators today restrict access to their
services to two-stage PSTN access, effectively creating a situation where only
certain home consumers will be willing to use their services. In order to target
a broader market, the Company will support a range of access methods to the
network. The initial access methods are listed below. Access methods that may be
added a later time (such as 1010XXX, 1+ access) are not described.
C.3.1 PSTN Access
Traditional PSTN access methods, which involve calling an access number and
entering information such as a personal identification number and a number to
call will be supported by the Company's switches. This access method is widely
used, particularly for prepaid calling cards, and requires no investment in
order to provide a particular customer with service. Since all the Company's
switches will support this capability inherently, there is no cost associated
with supporting PSTN access.
C.3.2 CPE Gateway - Embedded
The embedded customer premises equipment (CPE) Gateway model focuses on
delivering direct IP-based access to the Company's network, allowing lower costs
(since only one Company switch is required, instead of two for PSTN access) that
can be passed on to the user. The model being used successfully by Net2Phone
involves this type of access; however, in the case of Net2Phone, a PC with
speakers and a microphone must be used to make a call. By comparison, the
Company's embedded CPE gateways will allow one-stage dialing from a traditional
analog telephone, or from a PBX, by acting as a trunk line for the outbound PBX.
Where a customer does not have a PBX, or does not wish to make use of the
services of the Company's network from behind a PBX, the customer connects the
embedded CPE gateway to the Internet on one side, and to a regular analog
telephone on the other. Two versions of Internet connectivity are planned, an
Ethernet version, in which the customer makes use of their existing LAN
connection to the Internet, and a dialup version, in which the embedded CPE
gateway manages a direct connection to the Internet. In the dialup version, the
embedded CPE gateway can establish and terminate the connection to the Internet
as is required. Furthermore, the embedded CPE gateway allows calls to be
received over the Internet from the Company's network, and for those calls to
ring the attached phones. This capability allows calls to be received from other
the Company's customers or from remote exchange numbers / toll free numbers
being provided by the Company's network.
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Where a customer does have a PBX, the Company's embedded CPE gateways integrate
on the line side of the PBX, emulating one or more analog trunks. Through least
cost routing (LCR) functions and line grouping functions found in all modern
PBXs, it is possible for the customer to direct their long distance traffic to
the Company's network. In order to do this, the PBX is programmed to route some
or all calls to the group of lines attached to the embedded CPE gateway. This
configuration also facilitates inbound calls, as the PBX will handle them in the
same way as calls received directly over the PSTN.
C.3.3 CPE Gateway - Complete
While significant functionality can be provided by embedded CPE gateways, there
are some restrictions to the applications and scale that can be effectively
handled with an embedded solution. Typically, embedded gateways do not provide
the ability to deploy applications, and as such, all traffic must be routed to
alternate locations for services such as IVR and routing. The embedded CPE
gateways selected by the Company have these restrictions, and are justified
given that the Company's goal with the embedded CPE gateways is to have a
simple, small, inexpensive solution that does not require significant
investment.
However, some customers are expected to require larger systems, digital
connectivity, integrated applications, and other such capabilities. For example,
a large corporation with multiple offices may want to use their existing WAN to
carry traffic between nodes, but to have all long distance traffic handled by
the Company network. It might additionally want to provide a service to its
employees to be able to dial in remotely and originate calls using the Company
network at reduced prices. Such applications demand a complete IP gateway
solution. Although complete IP gateway solutions may be available through
embedded devices, providing such services normally is challenging for a purely
embedded device. To meet the needs of sophisticated customers, the Company
intends to use a combination of embedded technology and PC servers, deployed at
the customer site.
These complete gateways will provide to the customer all of the benefits
described for the embedded CPE gateway. In addition, such gateways will be
capable of managing restrictions on individual users of the system, flexible
routing, and will support other applications that the Company may wish to offer
to the customer in the future. Complete Company CPE gateways will be capable of
handling up to 120 ports of connectivity to the Company's network, ensuring that
the requirements of even the largest customers can be handled successfully.
C.3.4 Automated Dialers
In many cases, the target companies for the Company's network may not even have
an IP network connection, nor may they be inclined to obtain one. While such
customers can use PSTN access numbers to access the services provided by the
Company's network, the Company's will provide automated dialers, also referred
to as autodialers, to provide one-stage access to the Company's network and
services.
The autodialer will provide the user with a dial tone, and is pre-programmed
with access numbers, user IDs, and other information that is necessary to access
the Company's services. During the dialing process, the autodialer will connect
to the nearest Company switch, and supply the necessary information for the
Company's switch to deliver the desired service to the end user. The autodialer
may even be capable of routing around the Company's switches that are
experiencing problems, guaranteeing a prospective Company's customer that no
service disruption will be possible.
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Since autodialers are relatively inexpensive, this approach allows the Company
to provide the benefits of one-stage access to smaller organizations whose
traffic does not justify the cost involved in deploying either an embedded or
complete CPE gateway.
D. Suppliers
A significant amount of technology will be required to create the network and
deliver services to end-users. Although the Company will have to have the
technical expertise to create some systems, the Company's strategy is to partner
with other companies that provide the required technology and can meet the
Company's requirements. A list of the partners and suppliers that the Company
intends to use are listed as follows.
D.1 Array Telecom Corp. of Herndon, Virginia, U.S.A.
Array Telecom Corp (Array) has been selected as the provider of both the IP
gateway and application technology used to operate the Company switches, as well
as the provider of complete CPE-based gateways. Array will supply the initial
equipment required to build the Company network. To date, the Company has
ordered the billing software and server, and the first 3 gateways, to be located
respectively in Rotterdam, The Netherlands, Herndon, Virginia, and Hong Kong,
during the first quarter of 2000. The Company has also ordered two low-density
gateways for testing purposes.
Array products are built on standard off-the-shelf PC hardware technology. This
is significant since alternate PC hardware can be selected in the case where the
default hardware platform provided by Array is not certified for use in a
particular environment.
D.2 Infozech
Infozech, based in India, provides a billing system for IP gateways. The
Infozech system was found to provide sufficient capabilities to meet the
Company's requirements. Additionally, it has been determined that Infozech is
willing to customize its products in order to meet specific requirements. The
main reason for the selection of Infozech as a provider of billing software is
that Infozech has integrated their billing software with Array's Series 3000
products. The Company does not have an agreement with Infozech and proposes to
purchase software programs as it needs them at prices to be negotiated from time
to time.
D.3 TEK DigiTel
TEK DigiTel has been selected as the manufacturer of embedded CPE gateway
devices. TEK DigiTel manufactures a product named the V-Server iGate. This
product is a two-port embedded gateway, with support for H.323 and proprietary
network protocols. On the telephony side, the TEK DigiTel product supports both
analog trunk and analog station interfaces, and provides two ports (both of
which can either be a station port or a trunk port, simply by connecting to the
appropriate port). TEK DigiTel indicates that larger capacity boxes are
currently being developed and tested.
For the connection to the IP network, TEK DigiTel provides two options: an
Ethernet + ISDN BRI interface which allows the TEK DigiTel box to act as a
router of traffic between the Internet and local LAN, as well as a Dual Ethernet
version. The V-Server iGate is priced reasonably and provides the capabilities
not found in many of the competing products.
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The Company has contracted Array to perform interoperability and functional
testing on the TEK DigiTel V-Server iGate products. The testing revolves around
interoperability of the 2 port CPE devices with the Array gateways, Array large
CPE devices, and with the Infozech billing software. The results of these tests
indicate that the above technologies are interoperable with one another, as well
as with the Company's billing software. Further testing is underway to verify
the ISDN wakeup features described above.
D.4 UUNET Technologies Inc.
A high quality IP data network is critical for the Company. UUNET Technologies
has been selected as the provider of this IP data network. The Company intends
to install its switches at UUNET facilities around the world. This allows the
Company to rapidly deploy nodes in its network without having to arrange for
physical facilities to house the equipment. A 30-port Company switch was
installed in UUNET's site in Rotterdam, The Netherlands in February 2000.
D.5 Lampus Inc.
Lampus, a Korean company, is a manufacturer of automated dialers, and has been
selected by the Company to supply the dialers used to access the Company's
network services. The reason for the selection is that interoperability between
Lampus dialers and the Series 3000 software has previously been established.
Other Array customers are currently using the Lampus dialers successfully. An
adapter-powered model and its configuration are shown below.
D.6 Other Suppliers
The above sections described the suppliers of key pieces of equipment in the
Company's network, and did not deal with commodity items such as monitors,
keyboards, etc. However, the Company expects to use the following additional
suppliers. No specific agreements have been negotiated with these suppliers as
of yet.
Cisco Systems - Routers interconnecting the Company's switches and UUNET IP
network. This may only be necessary in nodes where co-location is not possible.
American Power Conversion Corp - Uninterrupted power supply manufacturer.
E Main Competitors
We expect to face competition from larger international telecommunications
carriers such as AT&T Corp. and Internet service providers (ISPs) and other
Internet companies such as America Online, Inc. and Yahoo, Inc. Many of these
potential competitors have substantially greater financial and other resources
than we do. In addition, consolidation of telecommunications companies and the
formation of strategic alliances within the telecommunications industry will
give rise to significant new competitors.
For the present, the following are the main competitors known to the Company:
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E.1 The Internet Telephone eXchange Carrier (ITXC)
ITXC will be a major competitor. ITXC is a clearinghouse for Internet telephony
service providers and operates ITXC.net. Since April of 1998, ITXC has been used
to provide traditional carriers international call completion with quality good
enough for these carriers to serve their phone-to-phone customers. ITXC has, as
of January 2000, reportedly installed 167 POPs in 45 countries, and 101 cities.
The company adds between 5-9 POPs a month.
E.2 iBasis
iBasis, Inc. was founded in 1996 to provide Internet Protocol (IP) telephony
service to telecommunication carriers around the globe. The company has POPs
across Asia, Europe, the Middle East, and the Americas. iBasis is in wholesale
Internet telephony service.
E.3 Glocalnet.
Glocalnet is a next-generation telecommunications group headquartered in
Stockholm, Sweden.
E.4 Net2Phone
Net2Phone began as a subsidiary of IDT Corporation, and is a provider of voice
over public Internet communications services. Net2Phone enables its customers to
place telephone calls from their computers, telephones, or fax machines to any
telephone or fax machine in the world. By routing calls via the public Internet,
Net2Phone enables users to save money on their international phone rates.
Net2Phone develops its own Gateway technology for IP voice services offered by
the company.
Recognized as the company who first bridged the Internet with the public
switched telephone network, Net2Phone routes millions of minutes monthly over
the public Internet. According to a recent study by Frost & Sullivan, Net2Phone
leads the Internet telephony services industry with 30% market share.
Net2Phone's product offerings include PC-to-phone service, IP telephony service
for phone or fax and Real-time PC-to-fax solution. Its network currently reaches
30 countries and expects to be operational in 25 additional countries by the end
of 2000.
E.5 DeltaThree.com
Founded in 1996, DeltaThree.com manages a network dedicated to the transmission
of voice over IP. Its services include PC-to-phone, unified messaging, global
access calling cards, voice greetings accessible from the company's
communications portal. Deltathree.com currently operates a network of 37
international POPs. DeltaThree.com is a subsidiary of RSL Communications Ltd.,
an international facilities-based carrier.
Deltathree.com operates a managed network. According to Frost and Sullivan's
recent study, Deltathree.com routes 17% of all Internet telephony traffic
worldwide.
F Partnership Program
A key element in the Company's overall strategy is its Partnership Program. The
Company's Partnership Program is designed to facilitate the rapid deployment and
sales of the Company's services with a minimum of capital investment on the part
of the Company. There are three elements to the Company's Partnership Program:
13
<PAGE>
o Strategic Partner Program
o Sales Partner Program
o Technical Partner Program
Each one of these three programs is described in the sections below. The
consolidation of these programs makes up the overall Company's Partnership
Program.
F.1 Strategic Partner Program
The distribution partner program focuses on the rapid deployment of the
Company's network. The program is designed to allow interested parties to
participate in the deployment of the Company's network by providing capital used
to locate an the Company's switch in a given area (each "AP Area"). Once that
switch is deployed, the Company's Strategic Partner then performs marketing of
the Company's services in the AP Area, taking a share of any profits generated
by that the Company's switch.
The responsibilities of a Strategic Partner are as follows:
o Provide initial capital required in the creation of a Company POP for
the AP Area. Prior to approval, the Company will determine the
viability of the proposed location, and reserves the right to reject
any locations that are deemed unsuitable. It is currently estimated
that the required capital will be approximately US$50,000 per POP.
o Select one or more services offered by the Company, and sell those
services within the AP Area. The Company may establish certain
requirements on levels of performance, etc, in order for a Strategic
Partner to qualify to sell that service.
The benefits to Strategic Partners are the following:
o Deployment and maintenance of equipment is handled by the Company,
allowing a Strategic Partner to sell service without being
responsible for the deployment and maintenance of the actual
equipment used to provide services.
o Receive a percentage of the net operating profit from services sold
in the AP Area and from the operation of the switch installed in the
AP Area. Because individual Strategic Partners may elect various
services to sell, the portion of the net operating profit each
Strategic Partner will receive will be separately negotiated. It is
anticipated that the percentage may be as much as 50% for a Strategic
Partner which elects to sell all of the services offered by the
Company and reaches the maximum performance levels that may be
negotiated with that Strategic Partner.
The typical profiles of a Strategic Partner are expected to be:
o Resellers of carriers and existing phone companies
o ISPs that have either sales forces or advertising programs
o Sales organizations and network marketing organizations
F.2 Sales Partner Program
Under this program, the Company will recruit resellers who will make no capital
investment but will specialize in selling service within an existing area where
the Company has deployed a switch. Sales Partners will be required to commit to
targets for each of the Company services that they sell. However, Sales Partners
will be paid a commission based on sales.
14
<PAGE>
F.3 Technical Partners
The CPE model requires a significant number of actual installations (of embedded
gateways, complete gateways, or automated dialers) by the Company. Rather than
building a large organization of installers that travel around the world
installing such devices, the Company plans to enlist the services of Technical
Partners around the world to deploy the Company's CPE access devices. Technical
Partners will be paid a fee based on completing installations of the Company's
access devices. Technical Partners may have differing experience (such as having
experience with LAN environments, PBXs, or the combination of the two) and as
such, compensation arrangements will vary from one technical partner to another.
G. Government Approvals and Regulations
The Company will not attempt to enter into any market, which is subject to
regulation, without first determining that it can satisfy the regulatory
requirements.
In order to conduct telephony business in the United States, the Company will
have to prepare and file applications and associated tariffs for international
and interexchange telecommunications certification before the Federal
Communications Commission and State Commissions, respectively. The Company has
requested and received a proposal from a US consulting company, to prepare and
file the applications, but has not yet given approval to proceed. The Company
understands that the process will require several months to complete. No
specific time frames for securing approvals in any particular jurisdiction have
been established.
The Company's need for licenses in Europe and Asia will be a function of whether
the Company operates as a foreign company in those locations, or whether it
works with licensed local partners and no specific decisions or arrangements
have yet been made in this regard.
H. Patents, Trademarks and Royalty Agreements
The Company does not have any patents, trademarks, licenses or protective
agreements. The Company has trademarked its logo in Canada.
I. Research & Development Activities
The Company considers that it has, to the date hereof, spent on research and
development activities related to its above-described business approximately
$200,000. There is no specific allocation of any of those costs to the Company's
future customers - although it will be the Company's objective to charge for its
products and services in sufficient amounts to enable it to recover its research
and development costs.
J. Employees
At the date hereof, the Company has one employee, Charlie Yang. The Company
functions through the efforts of its officers, directors and contracted
consultants. As the Company's business and development efforts expand additional
personnel will be engaged - who may become employees or who may supply their
services under contract.
15
<PAGE>
Item 2. DESCRIPTION OF PROPERTY
As of December 31, 1999, the Company did not own or have any rights to purchase
any plants or other property.
Item 3. LEGAL PROCEEDINGS
Mr. Charles Yang joined the Company in July 1999, as President and Chief
Operating Officer. Part of the motivation for recruiting Mr. Yang were his
strong representations that he could bring to the Company extensive business
connections, and that those connections could be converted into sales for the
Company. The Board subsequently concluded that Mr. Yang did not have the
potential that they originally believed he had - which is part of the reason for
the breakdown of the relationship with Mr. Yang. For further information
regarding the Company's relationship with Mr. Yang, see Section B of Item 12
below.
Mr. Yang ceased providing services to the Company as of January 31, 2000. Mr.
Yang's positions as President and Chief Operating Office of the Company were
formally terminated March 9, 2000. His employment agreement is now in
arbitration and the Company does not believe itself to be bound by it. The
Company believes it will prevail in the arbitration. The Company does not
consider that repudiating the agreement with Mr. Yang will have any material
effect on its business.
Other than disclosed above, the Company is not involved in, nor has no knowledge
of, any threatened or pending legal proceedings against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to security holders
for their approval.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
A. Market Information
Until December 15, 1999, the common stock of the Company was traded on the
Over-The-Counter Electronic Bulletin Board under the symbol "EPHO". After
December 15, 1999, trades have been made on the National Quotation Bureau's
electronic "Pink Sheets" under the symbol "EPHO". The Company's shares do not
trade on any stock exchange or any other market.
The Company's shares were not publicly traded or quoted in 1997 or the first two
quarters of 1998. The following table sets forth the closing high and low bid
prices of the Common Stock for the periods indicated as reported by NASDAQ's
Trading and Market Services Division. The quotations reflect inter-dealer prices
and do not include retail mark-ups, mark-downs or commissions, and may not
represent actual transactions.
16
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1998 Bid 1999 Bid
----------------------------------------------------
High Low High Low
March 31 N/A N/A $ 0.63 $ 0.50
June 30 N/A N/A $ 2.13 $ 1.25
September 30 $ 0.50 $ 0.50 $ 3.13 $ 0.75
December 31 $ 0.50 $ 0.50 $ 1.65 $ 0.59
---------------------------------------------------------------------
B. Shares
The Company has an authorized capital of 50,000,000 voting common shares, par
value $.001. As of the December 31, 1999, 12,000,000 shares are issued and
outstanding. The issued and outstanding shares are held by 25 registered
shareholders. All of the common shares rank equally with each other, and none
have attached to them any dividend, pre-emptive or other rights or restrictions.
Each share has attached to it one (1) non-cumulative vote. Of the 12,000,000
shares issued, 9,300,000 shares are free trading, while 2,700,000 are subject to
control block restrictions.
Effective June 7, 1999, the Company granted share purchase incentive options to
12 directors, executive officers, non-executive officers and individuals
providing services to the Company, entitling them to purchase up to an aggregate
total of 3,500,000 shares of the Company, exercisable at $0.50 per share on or
before June 30, 2002. Charlie Yang was granted 500,000 options pursuant to the
agreement described in Part III-Item 12 "Certain Relationships and Related
Transactions". The holders of these options have agreed to defer exercise of any
option until the Articles of Incorporation of the Company are amended to
increase the authorized capital stock of the Company in exchange for the
revocation of the necessity of being employed by the Company at the time of
exercising the options.
On November 3, 1999, the Company agreed with certain private investors
(including some of the directors and officers) to make a $1,012,500 Regulation S
private placement of shares to them. In all, 1,350,000 shares will be issued at
$0.75 per share, plus 1,350,000 in warrants at $1.25 each. The proceeds from
this private placement were used to fund operations and equipment purchases in
1999.
From authorized capital, the Company has agreed to reserve in escrow 14,000,000
shares, which will be released in four tranches, conditional upon the Company's
operations reaching a series of performance targets. The holders of these
escrowed performance shares include directors, executive officers, non-executive
officers and individuals providing service to the Company. Reservation of these
shares and their release is dependent upon shareholder approval of an amendment
to the Company's Articles of Incorporation, in order to increase the number of
authorized common shares of the Company.
The Company is currently in negotiations with Charlie Yang, former President and
COO with respect to the terms of his departure from the company. Mr. Yang has
requested to proceed towards arbitration. The terms of the settlement may
involve the issuance of some shares to Mr. Yang.
17
<PAGE>
C. Holders
As of December 31,1999, there were 25 shareholders of record of the Company's
outstanding shares. One registered holder with 7,065,700 shares was the brokers'
nominee and clearing house Cede & Co., of New York City, New York, U.S.A. The
Company has no knowledge of who are the beneficial owners of the shares
registered in the name of Cede &Co.
D. Dividends
The Company has not paid any cash dividends to date and the company does not
anticipate that any cash dividends will be declared or paid on the common shares
in the foreseeable future. Payment of dividends is solely at the discretion of
the Board of Directors.
On July 2, 1999, the Board of Directors unanimously approved a stock dividend of
2 shares for each 1 issued share, having the same effect as a 3 for 1 forward
split of the Company's common shares. The record date of the stock dividend was
the close of business on July 6, 1999 and the stock dividend was paid at the
close of business on July 16, 1999. The Company does not anticipate that there
will be any stock dividends paid by the Company in the foreseeable future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward Looking Statements. Some of the statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements.
Forward-looking statements include but are not limited to:
- our expectations and estimates as to completion dates of the
Network of Regional gateways we are installing and the
Network.
- our ability to implement successfully our operating strategy
as defined in the business plan of the Company.
- future financial performance as estimated in the Company's
financial projections.
The following factors, among others, could cause our actual results to differ
materially from those expressed in any forward-looking statements we make:
- inaccuracies in our forecasts of customer or market demand
- highly competitive market conditions
- changes in or developments under laws, regulations and
licensing requirements in regions the Company is installing
gateways
- changes in telecommunications technology
These factors should not be construed as exhaustive. We will not update or
revise any forward-looking statements.
18
<PAGE>
A. Overview
Array Telecom, Inc., a subsidiary of Comdial Corporation will supply the initial
equipment required to build the Company network. As of December 31, 1999, the
Company had ordered the billing software and server, and the first 3 gateways,
which were placed in Rotterdam, The Netherlands, Herndon, Virginia, and Hong
Kong, during the first quarter of 2000.
The Company also agreed with Array Telecom Inc., to provide ongoing technical
management services regarding the verification and testing of the TEK DigiTel
V-Server iGate product, other products, and provide the technical expertise in
the final design and implementation of the Company's network.
Subsequent discussions between the Company and Array revealed significant
synergy between the two organizations. Array owns the product and technologies
that are central to the success of the Company. The Company represented the
ideal customer for Array with its innovative marketing and sales strategies that
created applications for Array products that they did not independently have the
ability to provide.
The Company has not received any revenues from operations, in each of the last
two fiscal years, as it has not commenced its proposed business operations on a
commercial basis.
As of December 31, 1999, the Company had approximately $82,742 in cash and
$374,894 in current liabilities. The Fixed Assets increased to $144,026 with the
purchase of 3 gateways and software that are being installed in The Netherlands,
Herndon, Virginia and Hong Kong.
The Company, effective November 3, 1999 privately sold 1,350,000 shares, to
generate funding of $1,012,500. The proceeds from this private placement have
been used to fund operations and equipment purchases to date. The Company
anticipates that share purchase warrants attached to the shares will be
exercised, giving the Company further funding.
Previously, the Company required approximately $60,000 per month for salaries,
rent, marketing, general administration, and consulting and legal fees. These
working capital requirements, and equipment purchases, will continue to be
funded out of the above-noted private until March 31, 2000.
B. Plan of Operation
A key strength of the Company's plan of operation for the next 12 months is that
it proposes a variety of services, using a number of different products, to
customers ranging from individuals to large corporations. This plan requires
significant technical integration. Since the Company is 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 would require significant technical
expertise and management. Even deploying the initial network will require the
integration of IP gateway technology, autodialers, CPE devices, PSTN 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.
The plan calls for the Company to deliver a range of enhanced services. In
addition, the Company NOC will require the ability to deploy these services,
bill and monitor the services. It is likely that the Company will need to hire a
development team that will build the technology to supply the services that
cannot be purchased directly.
19
<PAGE>
Experts in networking, IP telephony, and network design will be required in
order to advise on the design and construction of the Company's network and
services. Often, such design involved the technical evaluation of candidate
products. The Company contracted Array Telecom Corp. to perform a significant
portion of this evaluation, design and testing work.
The Company has begun the development of its network in Europe. The Company,
with its European partners, plans to install and test 30 regional gateways, or
the Company's switches, in Europe during the year 2000, 80 gateways in the year
2001 and 190 gateways in the year 2002.
At the same time the Company recognizes the need to generate revenues from
operations. As regional gateways are tested and become operational, customers
will be added through the efforts of the Company's partners.
The Company's anticipated timetable for the rollout of the European network is
shown below.
February 20, 2000 o Install Holland Regional Node - achieved by
February 29, 2000 installation in Rotterdam prior to March 1, 2000
March 15, 2000 - o Confirm PSTN Providers - achieved by March 20, 2000
now projected for o Install 5 Holland and 4 Belgium locations (in process)
April 30, 2000 o Technician hiring process engaged (in process)
April 1, 2000 o 3 Technicians in Europe have been hired (in
now projected for o Credit Card Facility set-up and finalized (in process)
April 30, 2000
May 1, 2000 o Sell CPE in Holland & Belgium for Beta Test
June 1, 2000 o Full CPE Sale in Holland & Belgium
o Install 10 Regional Nodes in France
(Phase 1)
August 1, 2000 o Sell CPE in France for Beta September 1, 2000
o Full Sell of CPE in France (Phase 1)
o Deploy 10 more locations in France
Phase 2
December 1, 2000 o Full sale in France
The Company expects to hire full-time employees as it rolls out its plan of
operations in the latter half of 2000.
Item 7. FINANCIAL STATEMENTS
The information required hereunder in this report are set forth in the "ePhone
Telecom Inc. - Financial Statements" on page 30.
20
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Since May 1996, the Company has engaged Barry L. Friedman, P.C., of Las Vegas
Nevada, as its principal independent auditor. Barry L. Friedman, P.C.'s reports
for the fiscal years ended December 31, 1997 and 1998, six months ended June 30,
1999, did not contain an adverse opinion or disclaimer of opinion, and such
reports were not qualified as to uncertainty, audit scope or accounting
principles.
The reports of Mr. Friedman raised doubt with the respect to the Company's
ability to continue as a "going concern" since the Company "has no established
source of revenue". The Company has not had any disagreements with Barry L.
Friedman, P.C on any of his reports.
Because of the significant nature of the work involved in performing the
Company's 1999 audit and an unexpected illness, Mr. Friedman requested to be
relieved of his commitment. On March 14, 2000 the Company appointed Grant and
Thornton, LLP to perform the fiscal year 1999 audit.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
A. Directors and Officers
The Directors and Executive Officers of the Company, their ages and positions
held as of December 31, 1999 are listed below. Each director serves until the
next Annual General Meeting of the Shareholders or unless they resign earlier.
The Board of Directors elects officers and their terms of office are at the
discretion of the Board of Directors.
Name Age Position Held
---- --- -------------
Robert G. Clarke 55 President, Chief Executive Officer, Director
Charlie Yang 39 Director (President up to March 9, 2000)(see below)
John G. Fraser 53 Executive Vice President, Director
Charlie Rodriguez 55 Vice President-Corporate Affairs, Secretary
Benjamin Leboe 54 Chief Financial Officer
Hans van Yzeren 52 Director
Peter Francis 50 Director
The following describes the business experience during the past five years of
the Company's Directors and Executive Officers, including for each director,
other directorships held in reporting companies.
Robert G. Clarke, age 55, was appointed Director, President and Chief Executive
Officer on June 3, 1999. Effective August 9, 1999, he resigned as President and
was appointed Chairman of the Board. He is also deemed the promoter of the
Company. Mr. Clarke was re-appointed President March 9, 2000. During the last 5
years he has acted an independent business consultant -- principally in the area
of high tech start-ups -- providing advice with respect to public and private
financings, creating business plans, assembling management teams and business
opportunity assessments. He was a Director, President and Chief Executive of
Waverider Communications, Inc. (OTC BB Symbol "WAVC") from January, 1997 to
December, 1997. He was a Director of Global CT & T Telecommunications, Inc.
("GLC" - Vancouver Stock Exchange) from September 18, 1995 to October 17, 1996
and from February 11, 1998 to October 11, 1999. Mr. Clarke was also the
Corporate Secretary of Pacific Western Capital Corporation (traded on Vancouver
Stock Exchange) from August 15, 1995 to October 17, 1996.
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<PAGE>
Mr. Clarke holds the degrees of Bachelor of Commerce and Master of Business
Administration.
Charles Yang, age 39, was appointed Director, President and Chief Operating
Officer of the Company, on August 9, 1999. He was terminated from his position
on March 9, 2000. For further information regarding the Company's relationship
with Mr. Yang, see Section B of Item 12 below.
John G. Fraser, age 53, was appointed Director and Executive Vice-President of
the Company on June 3, 1999. He was with KPMG Canada, Chartered Accountants from
November 1976 until February 1998. His last position was as Vice-Chairman and
had national responsibility for KPMG Consulting. Mr. Fraser has a Masters in
Business Administration from University of Pittsburgh and a Bachelor of Commerce
and Administration from Victoria University, Wellington, New Zealand.
Charlie Rodriguez, age 55, was appointed Vice-President of Corporate Affairs and
Corporate Secretary on June 3, 1999. He is also President of Management Services
of Arizona, a business consulting company specializing in mergers, acquisitions
and financing. Previously, he served as Chief Financial Officer for Zephyr
Technologies, Inc., Omaha, Nebraska, a biometrics and smartcard software
integration company. He was with WaveRider Communications, Inc., a wireless
communication company, (OTC B. B. symbol "WAVC"), Vancouver, Canada, formerly
named Channel I, Inc. serving as director from January to November 1997, and as
President and CEO from May 1995 to January 1997. During 1995 and 1996, he
resided in London, United Kingdom and was involved in the European business and
capital markets. During 1998, he was the lead consultant during the restructure
of the Hogan Clinics in Las Vegas, Nevada. From October 1994 to December 1996 he
was an in-house consultant for Advisory Services of Arizona, Inc., Scottsdale,
Arizona, an investment banking and consulting company specializing in public
companies. From November 1994 to March 1995, Mr. Rodriguez was the Treasurer and
Chief Financial Officer for Bullet-Cougar Golf Equipment Manufacturing Company
(a NASDAQ company), Irvine, California. Mr. Rodriguez has a Master in Business
Administration.
Benjamin Leboe, age 54, was appointed Chief Financial Officer of the Company on
June 3, 1999. From July 1995 to present, he is the Owner/Manager of Independent
Management Consultants of British Columbia.. From 1991 to June 1995, he was the
Vice-President and Chief Financial Officer of VECW Industries Ltd. Director and
President of CPT Pemberton Technologies Ltd. (Symbol "CPT" Vancouver Stock
Exchange). Mr. Leboe is a British Columbia Chartered Accountant and Certified
Consultant.
Peter Francis, age 50, was appointed as a Director on June 3, 1999. Mr. Francis
resides in Hong Kong. From 1984 to present he has operated his own investment
and corporate advisory company. During this time, he was a member of the Boards
of, or was a shareholder of, or advisor to 12 companies that were publicly
listed for trading on Asian markets. Mr. Francis has the responsibility for
development of the Company's business in Southeast Asia especially Vietnam and
China.
Hans van Yzeren, age 52, was appointed as a Director on June 3, 1999. From April
1999 to present he has been self-employed providing services to the Company in
its efforts to research and develop markets in Europe. During 1996 to April
1999, he was employed by Data Services NV, Belgium as a Partner/Managing
Director developing and establishing a brand name of computer peripherals and
computer monitors in the European market. From 1990 to 1996, G-Tel
Communications S.a.r.l., Luxembourg, employed him as a Partner/Director and was
involved in the development of a new style cordless telephone including R & D,
products design, manufacturing, cost reduction and marketing.
22
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B. Compliance with Section 16 (a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires officers and directors of a company with securities registered
pursuant to Section 12 of the 1934 Act, and persons who own more than 10% of the
registered class of such company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the subject company with copies of all Section
16(a) forms filed. In connection with the Company becoming a reporting Company
as of December 15, 1999, Form 3 was inadvertently not filed on behalf of the
Americana International Inc. of Hong Kong, whose owner is Gary Kenneth Urwin,
Chartered Accountant. These Forms are in the process of being prepared and will
be filed in short order.
Item 10.EXECUTIVE COMPENSATION
A. Cash Compensation
During the fiscal years ending December 31, 1999 the company paid the following
compensation to its Chief Executive Officer and President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Securities
Underlying, Stock
Name and Principal Position Year Compensation Options
--------------------------- ---- ------------ -----------------
<S> <C> <C> <C>
Robert Clarke, CEO, President 1999 $ 48,000 1,000,000
Charles Yang, Director, Former President and 1999 $ 55,000 500,000
COO (1)
</TABLE>
1. Mr. Yang ceased providing services to the Company by January 31, 2000.
Mr. Yang's positions as President and Chief Operating Office of the
Company were formally terminated March 9, 2000. Details are provided in
Part III-Item 12 "Certain Relationships and Related Transactions".
--------------------------------------------------------------------------
Other than Charlie Yang, no directors or executive officers are presently under
any employment agreement pursuant to which they are guaranteed a salary or other
direct compensation. For further information regarding the Company's
relationship with Mr. Yang, see Section B of Item 12 below. During 1999, certain
directors and executive officers were paid $232,000 to perform functions for the
Company on a consulting basis. These officers and directors were paid for their
services rendered from time to time on such basis as was negotiated by the Chief
Executive Officer, Mr. Clarke.
During 1999, consulting fees were paid to Messrs. John Fraser ($38,000), Hans
van Yzeren ($32,000), Charlie Rodriguez ($45,000), and Ben Leboe ($14,000).
23
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B. Option Grants
No options were granted by the Company during any period prior to December 31,
1998. The Company does not have a stock option plan. The Company granted,
effective June 7, 1999, share purchase incentive options to 12 directors,
executive officers, non-executive officers and individuals providing services to
the Company entitling them to purchase up to an aggregate total of 3,500,000
shares of the Company exercisable at $0.50 per share on or before June 30, 2002.
The options granted to any individual will terminate within 30 days after the
individual ceases to perform services for the Company or within 6 months after
the date of the death of such individual. Charles Yang was granted options on
500,000 shares in the agreement with him described below in Part III-Item 12
"Certain Relationships and Related Transactions". The numbers of shares optioned
to each of the Company's Directors and Executive Officers is shown in Item 11
below.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table contains information with respect to beneficial ownership of
the outstanding common shares of the Company as of December 31, 1999 for: (i)
each shareholder known to be the beneficial owner of 5% or more of the
outstanding common shares; (ii) each of the Company's executive officers and
directors; and (iii) all executive officers and directors of the Company as a
group. In general, a person is deemed to be a "beneficial owner" of a security
if that person has or shares the power to vote or direct the voting of such
security, or has the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60 days.
At December 31, 1999 the Company had 12,000,000 shares issued and outstanding
and has agreed to issue 1,350,000 shares pursuant to the private placement
described above, and had outstanding options entitling the purchase, within 60
days, of 4,000,000 shares. The following information as to percentage of
beneficial ownership is therefore of the total shares issued or under option,
being 17,350,000.
<TABLE>
<CAPTION>
Name and Address Number of Common Shares Percent of
or Identity of Individual Beneficially Owned Beneficial
or Group or Deemed Beneficially Owned Ownership
------------------------- ---------------------------- ----------
<S> <C> <C>
Robert G. Clarke
West Vancouver, B.C. Nil shares
Director, Chairman, President 1,000,000 options 5.76%
and Chief Executive Officer and
Promoter
Charles Yang
39767 Paseo Padre Parkway
Suite E, Nil shares
Fremont, California, 94538 500,000 options 2.88%
Director
Peter Francis
Suite 3C, Tung Shan Terrace, Nil shares
Stubbs Road, 250,000 options 1.44%
Hong Kong
Director
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Willem Johan Henri ("Hans")
van Ijzeren
Gorzendreef 12 Nil shares
2360 Oud-Turnhout 250,000 options 1.44%
Belgium
Director
Charlie Rodriguez
162 West Petunia Place Nil shares
Tucson, Arizona 250,000 options 1.44%
U.S.A. 85737
Secretary and Vice-President
John Fraser
104 Elm Avenue Nil shares
Toronto, Ontario 250,000 options 1.44%
M4W 1P2
Director and Executive Vice-President
Ben Leboe
16730 Carrs Landing Rd. Nil shares
Lake Country, B.C. 250,000 options 1.44%
V4V 1B2
Chief Financial Officer
Executive Officers and Directors Nil shares
as a group of seven (7) persons 2,750,000 options 15.85%
Americana International Inc.*
Hong Kong 2,550,000 shares 14.7%
Holder of more than 5%
</TABLE>
* Management is advised that the owner of 100% of the issued shares of Americana
International Inc. is Gary Kenneth Urwin, Chartered Accountant, of 27 Hamilton
Parade, Pymble, Sydney, Australia. Mr. Urwin has no other relationship to the
Company.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Founding Shares
On May 8, 1996, immediately following the incorporation of the Company, the
Company issued 1,000,000 common shares for services rendered to the Company for
a deemed price of $0.001 per share for a total of $1,000. Of these 975,000
shares were issued by the Company to Ira Schwartz, the Company's sole director
and officer at the time.
25
<PAGE>
B. Charlie Yang
By an Agreement, dated July 8, 1999, which is now in dispute, the Company
engaged Charles Yang to provide his services on a full-time basis as the
President and Chief Operating Officer of the Company for a basic term of 4
years. The Agreement provides for the payment to Mr. Yang of a fee of $7,500 per
month initially, escalating to $17,500 per month for the period April 1 - June
30, 2000. For the second, third and fourth years of Mr. Yang's engagement, his
compensation would be reviewed but would have increased by a minimum of, not
less than 15% over the amount paid to him in the preceding year.
The Agreement also provided for Mr. Yang to be granted options and, pursuant
thereto, Mr. Yang was granted option to purchase 500,000 common shares of the
Company exercisable at $0.50 per share, during the term of his Engagement
Agreement, the options vesting on the following schedule:
(a) 100,000 shares on execution of the Agreement
(b) 200,000 shares October 1, 1999
(c) 200,000 shares January 1, 2000
In the Agreement, the Company also agreed to acquire from Mr. Yang 100% of the
issued shares of a company owned by him, General-Tel Inc., in exchange for
1,500,000 voting common shares of the Company. The Agreement provides that the
Company must, within 6 months of the closing of the acquisition of General-Tel,
raise funding for itself (and possibly to be used by General-Tel) of not less
than $1,100,000, and if such financing is not raised within the said deadline
Mr. Yang will be entitled to cancel the negotiations or the acquisition
agreement and have 100% of the shares of General-Tel transferred back to him. In
consideration, he must return 1,350,000 of the Company's shares. As part of the
dispute with Mr. Yang, the Company will not purchase the shares of General-Tel.
The Company has agreed to issue Mr. Yang 2,000,000 voting common shares (which
it has not yet done). The Company's Canadian lawyers will hold the certificates
for the shares in escrow, and 25% of such shares - i.e. 500,000 shares - will be
released to Mr. Yang upon the Company achieving the following performance
thresholds of up to $50,000,000 in sales.
The Agreement required that Mr. Yang bring to the company the benefit of all
negotiations and technical knowledge initiated or held by him to sell hardware
or services with respect to a technology referred to as Wireless Local Loop
("WLL"). The Company had agreed to issue Mr. Yang 1,000,000 voting common shares
if he succeeded in developing an agreement for the sale of WLL to one or more
purchasers brought to the Company - such shares to be issued on the following
schedule:
(a) 300,000 shares upon completion of negotiation and signing of Memorandum
of Understanding with the purchaser of WLL;
(b) 300,000 shares upon completion of signing of a formal contract for the
sale of WLL;
(c) 400,000 shares upon the receipt by the Company from the sale of WLL of
payments and revenues of not less than $500,000.
Further, Mr. Yang would have received 10% of the gross profits earned by the
Company from the sales of WLL.
26
<PAGE>
Mr. Yang was also, from the sale of the Company's products or services, to
receive royalties on the following basis:
(a) from sales of equipment or services in China, Vietnam or Taiwan, provided
the Company's gross profit margin is not less than 20% from such sales, Mr.
Yang will be paid 5% of the gross profits from such business; and
(b) for countries other than China, Vietnam or Taiwan where the Company would
pay sales commissions to representatives or agents in such other country,
Mr. Yang would have been paid monies equal to 1% of the amount of the gross
sales revenues from such countries;
(c) where sales to China, Vietnam or Taiwan produce gross profits of less than
20% then Mr. Yang would have, in lieu of the aforesaid 5%, receive
commissions equal to 1% of the gross sales revenues from such countries.
A breakdown in the relationship between the Company and Mr. Yang developed and
he ceased providing services to the Company by January 31, 2000. Mr. Yang's
positions as President and Chief Operating Officer of the Company were formally
terminated on March 9, 2000. Mr. Yang has given a notice that he requires his
dispute with the Company to be arbitrated. The Company believes that it has no
further liabilities or obligations to Mr. Yang. The Company believes that the
termination of the Agreement with Mr. Yang will not have a material effect on
the Company's business.
C. Loans from Officers
During 1999 the Company was loaned approximately $62,000, interest free, by its
Promoter and former Chief Executive Officer Robert Clarke as monies were needed
by the Company from time to time. No formal loan documentation was executed in
connection with these advances of funds, Mr. Clarke was not granted any security
interest in any assets of the Company and no date was fixed for the repayment of
these advances. These amounts were fully repaid to Mr. Clarke by the Company
prior to December 31, 1999, as the Company received proceeds from the sales of
securities discussed in Section B of Item 5 above.
Item 13. EXHIBITS AND REPORTS ON FORM 8K.
3.1 Articles of Incorporation (1)
3.2 First Amendment to Articles of Incorporation (1)
3.3 Bylaws (1)
4.1 Form of Option Incentive Agreement (1)
10.1 Engagement Agreement dated July 8, 1999 with Charles Yang (1)
10.2 Form of Option Incentive Agreement (1)
10.3 Agreement in Principle dated October 22, 1999 with Saigon Post and
Telecommunications Corp. (2)
27.1 Financial Data Schedule
(1)-Previously filed with Securities and Exchange Commission on
October 15,1999, Form 10SB
(2)-Previously filed on January 5,2000 as Amendment No. 2 to Form 10SB
REPORTS ON FORM 8K. None
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized. ePHONE Telecom, Inc.
(Registrant)
By:/s/Robert G. Clarke
----------------------
CEO
Date: June 5, 2000
--------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/Robert G. Clarke
----------------------------------
(Robert G. Clarke, CEO, Director )
Date: June 5, 2000
--------------------
By:/s/Ben Reboe
----------------------------------
(Ben Reboe, Chief Financial Officer)
Date: June 5, 2000
--------------------
By: /s/John Fraser
----------------------------------
(John Fraser, Director)
Date: June 5, 2000
--------------------
By:/s/Peter Francis
----------------------------------
(Peter Francis, Director)
Date: June 5, 2000
--------------------
28
<PAGE>
Supplemental information to be furnished With Reports Filed
Pursuant to Section 15(d) of the Exchange Act by Non-reporting Issuers
As of March 31, 2000, no annual report or proxy material has been sent to
security holders.
Proxy material is to be furnished to security holders subsequent to the filing
of this annual report for a shareholders meeting to be held no later than June
30, 2000. The Company intends to furnish copies of such material to the
Commission when it is sent to security holders.
29
<PAGE>
Contents
Page
Independent Auditor's Report on the Financial Statements F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Cash Flows F-4
Statement of Stockholders' Equity F-5
Notes to the Financial Statements F-6 - F-11
<PAGE>
Grant Thornton LLP
Chartered Accountants
Management Consultants
Canadian Member Firm of
Grant Thornton International
Independent Auditors' Report on the Financial Statements
To the Shareholders of
ePHONE Telecom, Inc.
We have audited the balance sheet of ePHONE Telecom, Inc. (formerly IFB
Corp.) (a Development Stage Company) as at December 31, 1999 and the
statements of operations, cash flows and stockholders' equity for the
year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion
In our opinion, these financial statements present fairly, in all
material respects, the financial position of ePHONE Telecom, Inc. as at
December 31, 1999 and the results of its operations and its cash flows
for the year then ended in accordance with generally accepted
accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has no established source of revenue
and is dependent on its ability to raise substantial amounts of equity
funds. This raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The financial statements as at December 31, 1998 and for the period
from inception to December 31, 1998 were audited by a certified public
accountant who expressed an opinion on those statements in his report
dated July 16, 1999 which included an emphasis paragraph with respect
to issues raising substantial doubt about the Company's ability to
continue as a going concern.
Kelowna, Canada
April 11, 2000 Chartered Accountants
247 Lawrence Avenue
Kelowna
British Columbia
V1Y 6L2
Tel: (250) 762-4434
Fax: (250) 762-8896
F-1
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Balance Sheet
December 31 1999 1998
----------- -----------
Assets
Current
Cash ........................................... $ 82,747
Equipment purchase advances .................... 269,200
-----------
351,947
Capital assets (Note 4) ........................... 125,474 $ 4,875
----------- -----------
$ 477,421 $ 4,875
=========== ===========
Liabilities
Current
Accounts payable ............................... $ 282,899 $ 11,073
Accrued liabilities ............................ 332,000
Due to related parties ......................... 91,995 12,046
----------- -----------
706,894 23,119
----------- -----------
Stockholders' Equity
Capital stock (Note 5) ............................ 13,171 1,000
Authorized:
50,000,000 common shares of $0.001 par value
Issued:
12,000,000 shares (1998: 1,000,000)
Additional paid-in capital ........................ 499,125
Stock subscriptions for 1,170,667 shares .......... 876,829
Deficit accumulated during the development stage .. (1,618,598) (19,244)
----------- -----------
(229,473) (18,244)
----------- -----------
$ 477,421 $ 4,875
=========== ===========
Contingency (Note 7)
See accompanying notes to the financial statements.
F-2
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Statement of Operations
<TABLE>
<CAPTION>
For the For the For the
period from year period from
inception to ended inception to
December 31 December 31 December 31
1999 1999 1998
------------- ------------- ------------
<S> <C> <C> <C>
Bank charges $ 11,066 $ 8,550 $ 2,516
Communication 16,623 16,623
Consulting fees 542,625 542,625
Depreciation 32,072 31,530 542
Management services 383,000 383,000
Market development 211,879 210,889 990
Office 38,505 38,355 150
Professional fees 96,338 81,695 14,643
Regulatory costs 3,735 3,735
Rent 95,766 95,766
Travel 178,989 178,586 403
------------- ------------- ------------
Total expenses 1,610,589 1,591,354 19,244
------------- ------------- ------------
Net loss $ (1,610,598) $ (1,591,354) $ (19,244)
============= ============= ============
Weighted average number
of shares outstanding 5,198,646 11,027,473 1,000,000
============= ============= ============
Loss per share - basic and diluted $ (0.29) $ (0.14) $ (0.02)
============= ============= ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the For the For the
period from year period from
inception to ended inception to
December 31, December 31, December 31,
1999 1999 1998
------------- ------------- ------------
Cash flows derived from
Operating Activities
<S> <C> <C> <C>
Net loss $ (1,610,598) $ (1,591,354) $ (19,244)
Depreciation 32,072 31,530 542
Stock issued for services rendered 1,000 1,000
Stock option benefits charged
to operations 402,125 402,125
Changes in non-cash operating
working capital
Accounts payable 282,899 271,826 11,073
Accrued liabilities 332,000 332,000
------------- ------------- ------------
(560,502) (553,873) (6,629)
------------- ------------- ------------
Financing Activities
Capital stock issued for cash, net 100,000 100,000
Capital stock subscriptions received 878,000 878,000
Advances from related parties 91,995 79,949 12,046
------------- ------------- ------------
1,069,995 1,057,949 12,046
------------- ------------- ------------
Investing Activities
Capital assets (157,546) (152,129) (5,417)
Equipment purchase advances (269,200) (269,200)
------------- ------------- ------------
(426,746) (421,329) (5,417)
------------- ------------- ------------
Cash, end of period $ 82,747 $ 82,747 Nil
============= ============= ============
Non-cash activities not included in cash flows
Additional paid-in capital resulting from
stock option benefits charged to operations $ 402,125 $ 402,125
Stock issued for services rendered $ 1,000 $ 1,000
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Statement of Stockholders' Equity
From the date of incorporation to December 31, 1999
<TABLE>
<CAPTION>
Common Shares Additional
Paid-In
Shares Amount Capital Deficit Total
---------- ----------- ----------- ------------ -------------
Common stock
issued by offering
<S> <C> <C> <C> <C> <C>
at $0.001 per share 1,000,000 $ 1,000 $ 1,000
Net loss for the period
from inception to
December 31, 1998 $ (19,244) (19,244)
---------- ----------- ----------- ------------ -------------
Balance,
December 31, 1998 1,000,000 1,000 (19,244) (18,244)
Common stock
issued for cash 3,000,000 3,000 $ 97,000 100,000
Stock Dividend 8,000,000 8,000 (8,000) 0
Market value of
options issued
to non-employees 402,125 402,125
Net loss
for the year ended
December 31, 1999 (1,591,354) (1,591,354)
---------- ----------- ----------- ------------ -------------
Issued capital stock,
December 31, 1999 12,000,000 12,000 499,125 (1,618,598) (1,509,598)
Stock subscribed for
but not yet issued
at $0.75 per share 1,170,667 1,171 876,829 878,000
---------- ----------- ----------- ------------ -------------
Balance,
December 31, 1999 13,170,667 $ 13,171 $ 1,375,954 $ (1,618,598) $ (229,473)
========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1999
1. Operations and going concern
The Company was incorporated as IRA Fund Brokers Corp. under the laws of the
State of Florida on May 3, 1996 to engage in the business of global
telecommunications. On April 6, 1998, the Company changed its name to IFB Corp.
and to ePHONE Telecom, Inc. on March 22, 1999. The Company was inactive until
1998.
The Company has not yet commenced its planned principal operations and it has
not yet earned any revenue.
The Company's current operational focus is to build a world-wide Internet
Protocol (IP) network and to use that network to deliver a range of
telecommunications services to the end user. Management is devoting
substantially all the resources of the company to marketing and developing this
technology. This development and marketing will require cash significantly in
excess of its current resources. The ability of the Company to develop and
market this technology is dependent on the Company's ability to obtain adequate
financing, develop a commercial saleable technology and to achieve profitable
operation.
2. Summary of significant accounting policies
These financial statements are presented in U.S. dollars and in accordance with
accounting principles generally accepted in the United States.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Capital assets
Capital assets are recorded at cost less accumulated depreciation. Depreciation
is recorded on the straight line method at the following rates:
Computer hardware 3 years
Telecommunications equipment 2.5 years
F-6
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1999
2. Summary of significant accounting policies (Continued)
Financial instruments
The Company has various financial instruments that include cash, payables and
amounts due to related parties. It was not practicable to estimate the fair
value of the amounts due to related parties. The carrying values of other
financial instruments approximate their fair value.
Deferred income taxes
Deferred income taxes are provided for significant carryforwards and temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax assets or liabilities are determined by
applying presently enacted tax rates and laws. A valuation allowance is required
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
Equity transactions (or stock options)
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation cost
at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for employee
stock options and similar equity instruments under Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that
continue to account for stock options using APB Opinion 25 are required to make
pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied. The
Company's employee stock option plans are accounted for under APB Opinion 25.
3. Related party transactions
The Company had the following transactions, recorded at their exchange amount,
with related parties:
a) Incurred $383,000 (1998: Nil) for management services provided by companies
in which certain directors have a controlling interest.
b) Paid consulting fees of $117,000 (1998: Nil) to certain directors of the
Company.
F-7
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1999
3. Related party transactions (Continued)
At December 31, 1999 the following balances with companies controlled by certain
officers and/or directors were outstanding:
Due to Access International Capital Corporation $ 100
Due to AXON Management 74,670
Due to Independent Management Consultants of BC 3,225
Due to Fraser Leishman 6,000
Due to Management Services of Arizona 8,000
There are no fixed terms of repayment
<TABLE>
<CAPTION>
4. Capital assets 1999 1998
---- ----
Accumulated Net Net
Cost Depreciation Book Value Book Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computer hardware $ 19,820 $ 4,527 $ 15,293 $ 4,875
Telecommunications
equipment 137,726 27,545 110,181
------------ ------------ ------------ ------------
$ 157,546 $ 32,072 $ 125,474 $ 4,875
</TABLE>
5. Capital stock
Private placement
The Company has agreed to issue 1,350,000 shares at $0.75 per share to certain
private investors (including some of the directors and officers) pursuant to a
Regulation S private placement. These shares to be issued include a warrant to
purchase a further 1,350,000 shares at $1.25 per share. These shares are subject
to a one year hold. As at December 31, 1999, subscriptions had been received for
1,170,667 for $878,000. Subsequent to December 31, 1999, the remaining 179,333
shares were subscribed for $134,500.
Stock options
The Company has granted 2,250,000 options to purchase common stock at $0.50 per
share to directors and officers of the company.
F-8
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1999
5. Capital stock (Continued)
Had compensation cost for the plans been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123, the
Company's net loss and loss per share of common stock would have been reduced to
the pro forma amounts indicated below:
For the year ended
December 31, 1999
Net loss As reported $ (1,591,354)
Pro forma (2,315,179)
Loss per share of common stock As reported $ (0.14)
Pro forma (0.21)
The company has also granted 1,250,000 options to purchase common stock at $0.50
per share to consultants. The company recorded $402,125 in consulting expense
for the year ended December 31, 1999, which is equal to the fair value of the
options.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1999: dividend yield of 0%, expected
volatility of 98%, the risk free interest rate of 5.64% for 1999, and expected
lives of 3 years for the options.
<TABLE>
<CAPTION>
A summary as of December 31, 1999 is presented below:
Weighted Average
Shares Exercise Price
--------- ----------
Outstanding, beginning of year
<S> <C> <C>
Granted 3,500,000 $ 0.50
Exercised
Forfeited
--------- ----------
Outstanding, end of year 3,500,000 $ 0.50
--------- ----------
Options exercisable at year-end 3,500,000 $ 0.50
========= ==========
Weighted average fair value of
Options granted during year $ 0.32
==========
Weighted average remaining
contractual life (years) 2.50
==========
</TABLE>
F-9
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1999
5. Capital stock (Continued)
Reserved shares
The Company intends to issue in escrow 14,000,000 shares for no cash
consideration, which will be released in four tranches, conditional upon the
company's operations reaching a series of performance targets. The targets
envisioned pertain to achieving levels of operations defined by reference to the
degree of development of the operating network and cumulative net sales. The
recipients of these escrowed performance shares will include directors,
executive officers, non-executive officers and individuals providing services to
the company.
At December 31, 1999 no part of the network was operational and no revenues had
been generated, and as such no shares were issuable. Reservation of these shares
and their issue is dependent upon finalizing an agreement and receiving board
approval, and upon receiving shareholder approval of an amendment to the
Company's Articles of Incorporation in order to increase the number of
authorized common shares.
6. Income taxes
The potential tax benefits of the losses carried forward are offset by a
valuation allowance of the same amount as there is substantial uncertainty that
the losses carried forward will be utilized before their expiry.
7 Contingency
The Company is involved in arbitration relating to the termination of the former
President and Chief Operating Officer. The claim against the company is for the
issue of 1,500,000 common shares and 500,000 options to purchase common stock at
$0.50 per share. Management does not anticipate that the outcome will have a
material impact on earnings or financial position.
F-10
<PAGE>
ePHONE Telecom, Inc.
(Formerly IFB Corp.)
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1999
8. Subsequent events
1) Subsequent to December 31, 1999, the Company issued 7,851,239 Special
Warrants at $1.10 for total cash consideration of $8,636,363. The cash
consideration to be received will be reduced by an 8% agent's commission of
$690,909. Also 12.5% of the funds raised or $1,079,545 will be held in
trust until the Company meets its obligation to commence trading of shares.
In addition to the 8% commission the agent has been granted a 24 month
option to purchase 250,000 common shares exercisable at $1.60 per share.
Each Special Warrant is exchangeable for one share in the capital stock of
the Company and one additional warrant to purchase one further share of the
Company at $1.60 per share until March 31, 2002.
2) Subsequent to December 31, 1999, the Company formed a strategic alliance
with Array Telecom Corporation and Comdial Corporation. The Company paid
$2,650,000 for Array Telecom Corporation's capital assets and access to
technology and signed a license agreement to pay a further $2,180,000 for
technology over the next 5 years with $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 these further payments for technology. As part of the arrangement,
the company has agreed to pay compensation of $350,000 to employees of
Array Telecom Corporation as compensation for benefits forfeited by them as
a result of the creation of the strategic alliance.
