United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
Commission File Number 000-27699
ePHONE Telecom, Inc.
(Name of small business issuer as specified in its charter)
Florida 98-020-4749
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1145 Herndon Parkway
Herndon, Virginia 20170-5535
(Address of principal executive offices)
(703) 787-7000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. |X|Yes |_| No
As of March 31, 2002 there were 34,622,902 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one): |_| Yes |X| No
ePHONE Telecom, INC.
FORM 10-QSB
INDEX
Part I - Financial Information Page
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2002 and December 31, 2001............................1
Statements of Operations for the Three Months Ended
March 31, 2002 and 2001..........................................................2
Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001..........................................................3
Notes to Financial Statements........................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................7
Part II - Other Information
Item 1. Legal Proceedings...................................................................12
Item 2. Changes in Securities and Use of Proceeds...........................................12
Item 3. Defaults Upon Senior Securities.....................................................12
Item 4. Submission of Matters to a Vote of Security Holders.................................12
Item 5. Other Information...................................................................12
Item 6. Exhibits and Reports on Form 8-K....................................................12
Signatures .................................................................................13
ePHONE Telecom, Inc.
Balance Sheets
(unaudited)
March 31, December 31,
2002 2001
------------------------------------
Current Assets:
Cash and cash equivalents $ 682,872 $ 35,970
Accounts receivable, net of allowance for returns
of $172,000 and $116,000 at March 31, 2002
and December 31, 2001, respectively 310,129 155,759
Inventory -- 16,500
Other receivables 37,612 65,481
------------------------------------
Total Current Assets 1,030,613 273,710
Property and equipment, net 1,349,051 1,296,561
Other assets 68,043 18,043
------------------------------------
Total Assets $ 2,447,707 $ 1,588,314
------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable $ 738,546 $ 850,179
Accrued liabilities 715,020 654,765
Deferred revenue 745,504 367,009
Capital lease obligation, current portion 30,914 22,663
------------------------------------
Total Current Liabilities 2,229,984 1,894,616
------------------------------------
Capital lease obligation, net of current portion 25,166 15,839
Other long term obligation, net of current portion 120,000 142,500
Commitments and Contingencies -- --
Stockholders' Equity (Deficit):
Common stock, par value $0.001:
150,000,000 shares authorized, 34,622,902 and
32,987,381 issued and outstanding at March 31, 2002
and December 31, 2001, respectively. 34,622 32,987
Common stock subscription receivable (388,394) --
Additional paid-in capital 22,554,062 21,843,199
Accumulated deficit (22,127,733) (22,340,827)
------------------------------------
Total Stockholders' Equity (Deficit) 72,557 (464,641)
------------------------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,447,707 $ 1,588,314
------------------------------------
See accompanying notes to financial statements
ePHONE Telecom, Inc.
Statements of Operations
(unaudited)
Three Months Ended March 31,
2002 2001
-----------------------------------
Service revenue $ 4,061,823 $ --
Product revenue -- 419,200
-----------------------------------
Total revenues 4,061,823 419,200
Operating expenses
Cost of service revenue 2,485,248 --
Cost of product revenue -- 272,392
Sales and marketing 200,408 682,551
General and administrative, including non-cash compensation of $37,715
and $122,500 as of March 31, 2002 and 2001, respectively 1,153,655 1,844,323
-----------------------------------
-----------------------------------
Total operating expenses 3,839,311 2,799,266
-----------------------------------
Income (loss) from operations 222,512 (2,380,066)
Interest and other expense (income), net 9,418 (96,599)
-----------------------------------
Income (loss) before taxes 213,094 (2,283,467)
Income tax expense -- --
-----------------------------------
Net income (loss) $ 213,094 $ (2,283,467)
Earnings (loss) per share--(basic and diluted) $ 0.01 $ (0.13)
-----------------------------------
Weighted average number of common
shares outstanding 33,022,298 17,489,404
-----------------------------------
See accompanying notes to financial statements
ePHONE Telecom, Inc.
Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
2002 2001
------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 213,094 $ (2,283,467)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization 72,622 242,097
Stock issued for services rendered 37,715 122,500
Allowance for returns 56,000 --
Deferred royalty expense -- 136,667
Realized gain -- (33,757)
Changes in operating assets and liabilities:
Accounts receivable and other receivables (891) (84,271)
Inventory 16,500 20,171
Other assets (50,000) (20,000)
Accounts payable (111,633) (30,298)
Accrued liabilities 52,755 (424,482)
Deferred revenue 196,885 --
------------------------------------
Net cash flows provided by (used in) operating activities 483,047 (2,354,840)
------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (102,347) (104,408)
Redemption of marketable securities -- 822,982
Deposit to restricted cash, net -- 579,435
------------------------------------
Net cash flows (used in) provided by investing activities (102,347) 1,298,009
Cash flows provided by financing activities:
Proceeds from exercise of warrants 301,389 --
Repayments on long-term obligation (15,000) --
Repayment to related party (15,000) --
Repayments on capital lease (5,187) --
------------------------------------
Net cash flows provided by financing activities 266,202 --
------------------------------------
Net increase (decrease) in cash and cash equivalents 646,902 (1,056,831)
Cash and cash equivalents, beginning of year 35,970 1,525,978
------------------------------------
Cash and cash equivalents, end of year $ 682,872 $ 469,147
------------------------------------
See accompanying notes to financial statements
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
ePHONE Telecom, Inc. ("ePHONE") was incorporated in 1996 under the laws of the
State of Florida, and is traded on the OTC Electronic Bulletin Board operated by
the National Association of Securities Dealers, Inc. under the trading symbol
"EPHO".
We provide telecommunication services to retail and wholesale customers. We are
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 and adaptable to legacy and
future technologies.
The Company has prepared the accompanying unaudited financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
These financial statements should be read together with the financial statements
and notes in the Company's 2001 Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The accompanying financial statements reflect all
adjustments and disclosures, which in our opinion are necessary for fair
presentation. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results of the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about amounts that affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
REVENUE RECOGNITION
In accordance with generally accepted accounting principles, we recognize
prepaid telecommunication services revenues over the period services are
provided. We bill monthly recurring telecommunications services in advance and
the majority of our customers prepay for their services. Therefore, any portion
of our services billed and collected but not yet provided is recorded as a
deferred revenue. Of the $745,000 in deferred revenue at March 31, 2002,
$693,000 will be fully earned during the month of April 2002. We establish an
allowance for doubtful accounts based upon factors, which include historical
trends and other information.
For the three months ended March 31, 2001, product sales were recognized upon
shipment. Typical terms of sale did not provide the customer with the right of
return except for defective products, which were covered by the warranty of the
original equipment manufacturer. The Company also generated revenues from
product licenses and services. Product license revenues were generally
recognized upon product shipment provided that no significant post-delivery
obligations existed and payment was due within one year. Advance payments of
product licenses and services were reported as unearned revenue until all
conditions for revenue recognition were met.
INCOME TAXES
We had no income tax expense during the three months ended March 31, 2002 due to
the availability of net operating losses for U.S. income tax purposes. There can
be no assurance that we will continue to realize the benefit of the net
operating loss carryforward.
NET EARNINGS (LOSS) PER SHARE
We report basic and diluted loss per share. Basic loss per share is computed by
dividing net loss by the weighted average number of outstanding shares of common
stock. Diluted earnings per share is computed by dividing net loss by the
weighted average number of shares adjusted for the potential dilution that could
occur if stock options, warrants and other convertible securities were exercised
or converted into common stock.
For the three months ended March 31, 2002, options and warrants to purchase
8,387,000 shares of common stock were outstanding but were not included in the
computation of diluted earnings per share because the excercise price of all
outstanding options and warrants exceed the average market price of our stock
during this period.
NOTE 2 - OPERATIONS
As shown in the accompanying unaudited financial statements, net income for the
three months ended March 31, 2002 of $214,000 represents the first profitable
fiscal quarter in our operating history. Also, of $745,000 recorded as deferred
revenue at March 31, 2002, $693,000 will be fully earned during April 2002. Our
continued success is dependent upon our ability to maintain profitable
operations and successfully introduce our products to market. As described in
Note 5, in March 2002, existing investors in the Company exercised outstanding
warrants, purchasing 3,448,913 shares of the Company's common stock for
$690,000. Since inception we have an accumulated deficit of $22,128,000 which
will be used to offset income taxes related to our current and future earnings.
Management believes that together with our cash on hand, proceeds from the
warrants exercised in 2002, and cash flow from our planned level of 2002
operations that we have sufficient resources to enable us to sustain our current
and planned level of operations for at least the next 12 months without the need
for additional investment capital.
During the three months ended March 31, 2002, we generated net revenues of
$4,062,000 with a gross margin of $1,577,000 (39%).
NOTE 3 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2002 and 2001 we incurred costs for
management services provided by companies in which certain directors of ours
have a controlling interest and incurred consulting fees to certain directors of
ours totaling $15,000 and $39,000, respectively. The 2002 expense represents the
fair value of 66,668 shares of our common stock issued in lieu of cash payments
as further described under Stockholders' Equity.
During the three months ended March 31, 2002, we repaid a $15,000 amount that
was advanced to us during 2001 by our Chairman of the Board, Mr. Robert Clarke.
During the three months ended March 31, 2001, the Company paid $180,000 to
ePHONE Technologies, Inc., a related party, for consulting services.
NOTE 4 - ACCRUED LIABILITIES
Accrued expenses consist of the following:
March 31, 2002 December 31, 2001
............................................---------------- ---------------------
Accrued vacation.......................... $ 46,854 $ 32,411
Accrued compensation...................... 73,932 35,443
Accrued legal fees........................ 130,300 147,300
Other obligation, current portion......... 90,000 82,500
Comdial obligation........................ 230,951 225,576
Other..................................... 142,983 131,535
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$ 715,020 $ 654,765
=========== ===========
NOTE 5 - STOCKHOLDERS' EQUITY
In late March and early April 2002, we received approximately $690,000 for the
exercise of warrants for the purchase of 3,448,913 shares of common stock which
had been issued in connection with the sale of Special Warrants originally
issued in early 2000. The portion of proceeds received in April was $388,000 and
is recorded as a subscription receivable in the accompanying balance sheet at
March 31, 2002. On March 31, 2002, the remaining warrants for the purchase of
9,115,000 shares of common stock expired unexercised.
During March 2002, we issued 171,431 shares to two consultants and two members
of our Board of Directors. The fair value of the shares totaled $38,000 and was
recorded based upon the market price of the stock on the date of issuance.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
During the third quarter of 2001, we filed for arbitration against Comdial
seeking rescission of the Array Telecom License Agreement, return of the $2.65
million paid to Comdial, and compensatory and punitive damages of $10,000,000
due to what we believe to have been violations by Comdial of the Array Telecom
License Agreement. Comdial initially responded to our arbitration demand with a
counterclaim seeking relief from all of our claims and the payment of $215,000
in accrued royalties plus interest. Subsequently, Comdial has also added an
additional counterclaim alleging that the agreement is still valid and is
seeking the value of the future royalty payments which were to be made under the
agreement. We have given back the licensed products to Comdial, and
consequently, do not believe that we have an obligation for any additional
future royalties based upon the use of the licensed products. We believe the
$215,000 plus accrued interest of approximately $16,000 is our maximum exposure
in the event of an unfavorable outcome and have recorded these amounts as
accrued liabilities at December 31, 2001. Arbitration is scheduled to occur in
Washington D.C. beginning on May 29, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Our core strategy is to become a next generation global facilities based
marketing and sales oriented telecommunications carrier providing a full
complement of telecommunications and data services utilizing the efficiency and
reliability of new generation VOIP based telecommunication technologies.
This entails operating as a wholesale carrier, interexchange carrier and as a
retail services provider. Using a private Internet Protocol ("IP") network, the
public Internet and the public switched telephone network ("PSTN"), we have
developed the capability to provide voice and data transmission and other
telephony features at high quality and low cost. Our role as an Interexchange
Carrier allows us to capitalize on inexpensive wholesale termination rates,
which are further leveraged into retail products in order to increase overall
margins.
Since we commenced commercial operations utilizing our new strategy based upon a
Cisco-based network in August of 2001 we have generated service revenue of over
$7,000,000 and are continuing to increase service revenue every month. The
success of our retail programs and increasing wholesale business has enabled us
to attain profitability during the first quarter.
We believe our aggressive approach to marketing and sales is as important as the
technologies being employed. We are committed to staying at the leading edge of
telecommunications and information technologies but believe our real competitive
advantage will be sustained through a creative and innovative approach to
acquiring and maintaining customers and channel distribution partners
For example, we plan to introduce a new product in early Q2 of 2002 named
eTRANSPORT ("eTRANSPORT"). The eTRANSPORT is a piece of equipment that is
installed between the phone and the incoming phone line at the customer
premises. Our service to the customer is virtually the same as the 1+ long
distance service, however it is prepaid with the added benefit of portability.
We have worked closely with the designer and manufacturer of eTRANSPORT and have
integrated the device with our network. We have secured the exclusive rights to
the version of the device that works with our network, which provides features
and the functionalities that customers desire. We are also working with
marketing entities to introduce the product to market through home shopping TV
channels and large retail chains that are the after market distribution channels
for products marketed "As Seen on TV"..
Results of Operations - Three months ended March 31, 2002 and 2001
Our net income (loss) and net income (loss) per share were $214,000 and $0.01
and ($2,283,000) and ($0.13) for the three months ended March 31, 2002 and 2001,
respectively.
During the three months ended March 31, 2002, increasing business from our
retail and wholesale programs that were introduced in Q3 of FY 2001, coupled
with the significant reduction of general and administrative and selling and
marketing costs were the primary reasons for the overall improvement in
operations.
Revenues
Revenues increased from $419,000 for the three months ended March 31, 2001 to
$4,062,000 for the same period in 2002. The majority of the increase is
attributed to the Company's "Unlimited Calling" Program. Prepaid calling card
programs and our wholesale strategy also contributed to the increase. These
programs accounted for all of ePHONE's revenue for the three months ended March
31, 2002 and did not account for any revenue during the same period in 2001.
During March 2002, cash collections of $745,000 were considered pre-paid and are
reflected in the Current Liability section of the Balance Sheet as "Deferred
Revenue". Of this amount, $693,000 will be earned by us during April 2002. As
ePHONE continues to focus on retail and wholesale offerings, sales of equipment
are not expected to be significant in the future. The $419,000 of revenue from
the sales of equipment in Q1 of 2001 is not likely to reoccur.
Cost of Revenues
Cost of Revenues increased from $274,000 for the three months ended March 31,
2001 to $2,485,000 for the same period in 2002. For the three months ended March
31, 2002, cost of goods sold represented commissions, activation fees and
processing charges related to our telecommunications services programs. For the
three months ended March 31, 2001, cost of goods sold was related to
telecommunications equipment sales. Gross margin for the three months ended
March 31, 2002 and 2001 was 39% and 35%, respectively. Our gross margin
percentage will likely be much higher in the future due to increases in sales
volume and sales mix.
Sales and marketing
Sales and marketing expense decreased from $683,000 for the three months ended
March 31, 2001 to $200,000 for the same period in 2002. During 2001, our sales
and marketing expenses included compensation paid to consultants for market
studies and competitive intelligence of the Internet telephony market place in
several countries where we were deploying our network. There were no similar
expenditures incurred during the three months ended March 31, 2002. Currently,
sales and marketing expense consists primarily of marketing commissions and
salaries.
General and administrative
General and administrative expense decreased from $1,844,000 for the three
months ended March 31, 2001 to $1,154,000 for the same period in 2002.
General and administrative expense included non-cash compensation of $38,000 and
$123,000 for the three months ended March 31, 2002 and 2001, respectively. The
2002 expense represented the fair value of 171,000 shares of our common stock
issued for consulting services to two consultants and to two members of our
Board of Directors. A portion of the 2001 non-cash compensation was incurred in
connection with a settlement between us and a former officer under which 400,000
shares of common stock with a fair value of $80,000 were issued to this former
officer. The remaining $43,000 of non-cash compensation in 2001 represents the
fair value of 250,000 stock options issued to a consultant in exchange for
services rendered. We expect general and administrative expenses to increase in
the future in direct proportion to the increase in sales.
Income taxes
There was no provision for federal or state income taxes for the three months
ended March 31, 2001 due to the availability of a net operating loss (NOL) for
income tax purposes. This NOL was generated from previous operating losses
incurred since inception. A valuation allowance has been established and,
accordingly, no asset has been recorded for our net operating losses and other
deferred tax assets.
Liquidity And Capital Resources
During the three months ended March 31, 2002, we received $302,000 of the
$690,000 raised from the exercise of warrants we had issued in connection with
the sale of special warrants in 2000 for the purchase of 3,448,913 shares of our
common stock. On March 30, 2002, the warrants for the purchase of 9,115,161
shares of our common stock expired unexercised. The proceeds from the exercise
of these warrants, along with cash generated from our operations during the
first quarter 2002 increased our cash from $36,000 at December 31, 2001 to
$683,000 at March 31, 2002. We received the remaining $388,000 from the exercise
of warrants in early April 2002 and have recorded this amount as a subscription
receivable in the balance sheet at March 31, 2002.
For the three months ended March 31, 2002, utilizing our new strategy based upon
a Cisco-based network we have generated service revenue of over $ 4,000,000. Our
liquidity continues to improve and as of May 14, 2002 we had a total of
$1,500,000 of cash in the bank. We plan to expand our current products and
services in 2002 and introduce new products and services. We have been
successful in generating net income from operations since we deployed our new
Cisco-based network in August 2001. Our anticipated future cash flows from
operations is largely dependent upon our ability to achieve our revenue and
gross profit objectives from our current products and services and introduction
of new products we plan to launch in 2002. We believe that based on our current
level of operations, the cash flows we are generating from operations together
with the $690,000 we received from the exercise of warrants described above is
sufficient for our current operations.
It is important to point out that since our inception, we have accumulated a
deficit of $22,128,000, and that we funded our operations, prior to our
generating service revenues beginning in August 2001, primarily with the
proceeds we raised in our special warrant offering in 2000, from the exercise of
warrants during 2001 of $305,000, and from limited equipment sales. We do
not currently have a line of credit or any other credit facility available to
us.
While our service revenue sales continues to increase during the first two
quarters of 2002, and while management anticipates that growth in service
revenue will continue throughout the remainder of 2002, we cannot assure you
that this will happen. Future prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in the
telecommunications industry. To address these risks and achieve profitability
and increased sales levels, we must, among other things, continue to establish
and increase market acceptance of our products, respond effectively to
competitive pressures, offer high quality customer service and support, and
successfully introduce, on a timely basis, new products and enhancements of our
existing products.
We anticipate, based on our present plans and assumptions, that our current cash
balances and projected level of 2002 operations will be sufficient to enable us
to sustain our current and planned operations for at least the next 12 months,
and will not need to raise additional funding. However, we cannot assure you
that this will hold true.
For the three months ended March 31, 2002, we generated $483,000 of cash from
our operating activities. The amount of cash provided by operations for the
three months ended March 31, 2002 in excess of the $214,000 net income for that
same period is attributed to increases in our deferred revenue balances and
depreciation expense partially offset by decreases in our accounts payable
balances.
Investing activities used $102,000 of cash for the purchase of fixed assets and
financing activities provided $266,000 which consisted of $302,000 received from
the exercise of warrants offset by payments on obligations for the three months
ended March 31, 2002.
We have two equipment commitments totaling $56,000 for two Sun Microsystems
servers which expire in 2003 and 2004.
On April 20, 2000, we closed an offering of Special Warrants, receiving net
proceeds of approximately $12,205,000. The total number of Special Warrants we
sold in that offering was 13,780,837. The special warrant agreements contained
certain penalties in the event that we did not meet the prescribed deadlines for
registration of common stock to be issued on the exercise of the special
warrants in both Canada and the United States. We failed to meet these
deadlines, and consequently each special warrant holder was entitled to exercise
their right to have 12.5% of their original investment returned to them and
reduce the number of special warrants they held by the same percentage
("Redemption Right"). In addition, each special warrant holder received an
additional 10% of their original investment in shares of our common stock upon
the exercise of the special warrants. As of March 31, 2001, all special warrant
holders exercised their Redemption Rights, and we returned $1,895,000 to these
investors. We completed the registration of our common stock in Canada, and our
investors exercised their special warrants causing us to issue 13,436,317 shares
of our common stock and warrants to purchase 13,436,317 shares of our common
stock for $1.60 per share.
During the year ended December 31, 2001, we raised $305,000 from the exercise of
warrants for the purchase of 848,243 shares of our common stock.
During the third quarter of 2001, we decided to provide our warrant holders with
an enticement to exercise their warrants by reducing the exercise price of the
warrants we issued on the exercise of the special warrants and for all other
outstanding warrants from exercise prices ranging between $1.60 - $0.50 per
share to $0.35 per share. We further reduced the exercise price of the warrants
to $0.20 in 2002 to better reflect the market price of our common stock. As
noted above, during 2002 warrant holders exercised warrants for the purchase of
3,448,913 shares of our common stock for $690,000.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. This
statement is effective for all business combinations initiated after June 30,
2001.
In July 2001, the FASB issued SFAS No. 142, Goodwill And Other Intangible
Assets. This statement applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement goodwill as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized; instead these
assets will be reviewed for impairment on a periodic basis. This statement is
effective for the Company beginning January 1, 2002. The adoption of this
standard is not expected to have a material impact on our financial position or
results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes previous guidelines for financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to be
disposed of. The adoption of SFAS No. 144 on January 1, 2002 is not expected to
have a material impact on our financial position or results of operations.
Risk Factors
The risks and uncertainties described below are not the only ones facing the
company. Additional risks not presently known or that ePHONE currently considers
insignificant may also impair ePHONE's business operations in the future.
ePHONE's business, financial condition and plan of operations could be
materially adversely affected by any of the following risks. The trading price
of shares of ePHONE's common stock could decline due to any of these risks.
o The market for ePHONE's common stock is limited
There is currently only a limited trading market for ePHONE's common stock.
ePHONE common stock trades on the OTC Bulletin Board under the symbol "EPHO,"
which is a limited market in comparison to the NASDAQ National Market, the
American Stock Exchange and other national securities exchanges.
ePHONE cannot assure investors that the common stock will ever qualify for
inclusion on the NASDAQ National Market or that more than a limited market will
ever develop for the common stock.
o Penny stock rules limit the liquidity of ePHONE's common stock
ePHONE's common stock may now and in the future be subject to the penny stock
rules under the Securities Exchange Act of 1934, as amended (referred to herein
as the Exchange Act). These rules regulate broker-dealer practices for
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00. The penny stock rules require broker-dealers to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations and the
broker-dealer and salesperson compensation information must be given to the
customer orally or in writing prior to completing the transaction and must be
given to the customer in writing before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction, the
broker and/or dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These additional penny stock disclosure
requirements are burdensome and may reduce the trading activity in the market
for ePHONE's common stock. As long as the common stock is subject to the penny
stock rules, holders of such ePHONE common stock may find it more difficult to
sell their securities.
o An investment in ePHONE may be diluted
ePHONE may issue a substantial number of shares of ePHONE common stock without
investor approval. Any such issuance of ePHONE securities in the future could
reduce an investor's ownership percentage and voting rights in ePHONE and
further dilute the value of his or her investment.
In 2001 and 2000, ePHONE incurred net losses of approximately $7,021,129 and
$13,701,000, respectively. ePHONE's ability to achieve and sustain profitable
operations depends on many circumstances. If ePHONE does not achieve and sustain
profitability, its ability to respond effectively to market conditions, to make
capital expenditures and to take advantage of business opportunities could be
affected. In addition, ePHONE's prospects must be considered in light of the
risks encountered by companies like ours developing products and services in new
and rapidly evolving markets. ePHONE's failure to perform in these areas could
have a material adverse effect on the business, plan of operations and financial
condition.
o ePHONE's failure to acquire, integrate and operate new technology could
harm their competitive position
The telecommunications industry is characterized by rapid and significant
technological advancements and the related introduction of new products and
services. ePHONE does not possess significant intellectual property rights with
respect to the technologies we use, and we are dependent on third parties for
the development of and access to new technology. The effect of technological
changes on ePHONE's business plan cannot be predicted. In addition, it is
impossible for ePHONE to predict with any certainty whether demand for VoIP
services in the future markets will develop or will prove to be an economical
and efficient technology that is capable of attracting customer usage. Failure
by ePHONE to obtain and adapt to new technology in the future markets could have
a material adverse effect on their business and plan of operations.
o ePHONE does not presently intend to pay dividends on our common stock
ePHONE has never paid dividends on our common stock and does not presently
intend to pay cash dividends on our common stock. Any future decisions as to the
payment of dividends will be at the discretion of ePHONE's Board of Directors,
subject to applicable law. See "Dividend Policy."
o Telecommunications related stock prices have been especially volatile
and this volatility may depress ePHONE's stock price
The stock market has from time to time experienced significant price and volume
fluctuations which have particularly affected the market prices of the stocks of
high technology and Telecommunications-related companies, including companies
like ePHONE, and which may be unrelated or disproportionate to the operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimates by
analysts, market conditions in the industry, analysts' reports, announcements by
competitors, regulatory actions or other events or factors, including the risk
factors described in this annual report and general economic conditions may have
a significant effect on the market price of ePHONE's common stock. This broad
market and industry volatility may reduce the value of ePHONE's common stock,
regardless of ePHONE's operating performance. Due to this volatility, the value
of ePHONE's common stock could decrease.
o ePHONE's articles of incorporation provide their officers and directors
with certain indemnification.
ePHONE's Articles of Incorporation provide that our directors and officers will
not be personally liable to ePHONE or its shareholders for money damages for
breach of the fiduciary duty of care as a director or officer.
PART II - OTHER INFORMATION
Item 1. Legal proceedings -
During the third quarter of 2001, we filed for arbitration against
Comdial seeking rescission of the Array Telecom License Agreement,
return of the $2.65 million paid to Comdial, and compensatory and
punitive damages of $10,000,000 due to what we believe to have been
violations by Comdial of the Array Telecom License Agreement. Comdial
initially responded to our arbitration demand with a counterclaim
seeking relief from all of our claims and the payment of $215,000 in
accrued royalties plus interest. Subsequently, Comdial has also added
an additional counterclaim alleging that the agreement is still valid
and is seeking the value of the future royalty payments which were to
be made under the agreement. We have given back the licensed
products to Comdial, and consequently, do not believe that we have an
obligation for any additional future royalties based upon the use of
the licensed products. We believe the $215,000 plus accrued interest of
approximately $16,000 is our maximum exposure in the event of an
unfavorable outcome and have recorded these amounts as accrued
liabilities at December 31, 2001. Arbitration is scheduled to occur in
Washington D.C. beginning on May 29, 2002.
Item 2. Changes in securities and use of proceeds - None.
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of security holders - None.
Item 5. Other information - None.
Item 6. Exhibits and reports on Form 8-K
A. Exhibits
Exhibit No. Description
----------- -----------------------------------------------
3.1........ Articles of Incorporation (1)
3.2........ Amendment to Articles of Incorporation (1)
3.3........ Bylaws (1)
3.4........ Amended and Restated Articles of Incorporation (2)
24......... Powers of Attorney (filed herewith)
(1) Previously filed as an exhibit to ePHONE's Form 10-SB, filed with the
Securities and Exchange Commission on October 15, 1999.
(2) Previously filed as an exhibit to Amendment No. 2 to ePHONE's Form
10-SB, filed with the Securities and Exchange Commission on January 5,
2000.
B. Reports on Form 8-K: None
SIGNATURE PAGE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
ePHONE Telecom, Inc.
(Registrant)
By /s/Carmine Taglialatela, Jr.
-------------------------
(Carmine Taglialatela, Jr., CEO)
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.
Signature Date
By /s/ Carmine Taglialatela, Jr. May 14, 2002
- --------------------------------------------
(Carmine Taglialatela, Jr., CEO, Director)
(Principal Executive Officer)
By /s/ Charlie Rodriguez May 14, 2002
- --------------------------------------------
(Charlie Rodriguez, Chief Financial Officer)
(Principal Financial and Accounting Officer)
By /s/ Robert G. Clarke* May 14, 2002
- --------------------------------------------
(Robert G. Clarke, Chairman)
By /s/ John Fraser* May 14, 2002
- --------------------------------------------
(John Fraser, Director)
By /s/ Shelly Kamins* May 14, 2002
- --------------------------------------------
(Shelly Kamins, Director)
By /s/ Larry Codacovi* May 14, 2002
- --------------------------------------------
(Larry Codacovi, Director)
By /s/ Eugene A. Sekulow* May 14,2002
- --------------------------------------------
(Eugene A. Sekulow)
*By: Charlie Rodriguez
--------------------------------------
Attorney-In-Fact