Nevada
|
7389
|
11-3618510
|
(State
of Incorporation)
|
(Primary
Standard Industrial Classification Code Number)
|
(I.R.S.
Employer Identification Number)
|
Title
of each class of securities
to
be registered
|
Amount
to be registered
|
Proposed
maximum offering price per share
|
Proposed
maximum aggregate offering price
|
Amount
of
registration
fee
|
Common
Stock, $.001 par value (1)
|
1,199,150
|
$
2.85(1)
|
$3,417,577.5
|
$402.24
|
Common
Stock, $.001 par value
underlying
A Warrants (2) to Purchase
Common
Stock
|
287,625
|
$3.00
|
$862,875
|
$101.56
|
Common
Stock, $.001 par value
underlying
B Warrants (3) to
Purchase
Common Stock
|
287,625
|
$3.25
|
$934,781.3
|
$110
|
Common
Stock, $.001 par value
underlying
C (4) Warrants to
Purchase
Common Stock
|
245,000
|
$3.15
|
$771,750
|
$90.83
|
Common
Stock, $.001 par value
underlying
D (5) Warrants to
Purchase
Common Stock
|
10,370
|
$3.50
|
$36,295
|
$4.27
|
Group,
LLC Common Stock, $.001 par value
underlying
E (6) Warrants to
Purchase
Common Stock
|
32,500
|
$5.10
|
$165,750
|
$19.50
|
Common
Stock, $.001 par value
underlying
F (7) Warrants to
Purchase
Common Stock
|
32,500
|
$6.80
|
$221,000
|
$26
|
Common
Stock, $.001 par value
underlying
G Warrants (8) to
Purchase
Common Stock
|
157,500
|
$3.80
|
$598,500
|
$70.44
|
Common
Stock, $.001 par value
underlying
options (9) to
Purchase
Common Stock
|
1,282,500
|
$3.50
|
$4,488,750
|
$528.32
|
Convertible
Term Note
To
purchase Common Stock, $.001 par value(10)
|
574,713
|
$3.48
|
$2,000,000
|
$235.40
|
Total
|
4,109,483
|
|
|
$1,588.56
|
Prospectus
Summary
|
1
|
Xfone
Inc
|
|
The
Offering
|
3
|
Summary
Financial Information
|
5
|
Risk
Factors
|
7
|
Special
Note Regarding Forward-Looking Statements
|
12
|
Use
of Proceeds
|
12
|
Market
for Our Shares
|
13
|
Holders
|
14
|
Dividend
Policy
|
14
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
Business
|
30
|
Description
of Property
|
37
|
Legal
Proceedings
|
38
|
Management
|
39
|
Executive
Compensation
|
42
|
Security
Ownership of Certain Beneficial Owners and Management
|
44
|
Certain
Relationships and Related Transactions
|
48
|
Description
of Securities
|
53
|
Shares
Eligible for Resale
|
53
|
Selling
Stockholders
|
53
|
Plan
of Distribution
|
60
|
Legal
Representation
|
62
|
Experts
|
62
|
Where
You Can find Additional Information
|
63
|
Index
to Financial Statements
|
F-1
|
· |
up
to *885,000 shares of our common stock which were issued in a private
placement completed on September 28, 2005, at $2.50 per share;
|
· |
up
to *221,250 shares of our common stock which may be issued upon the
exercise of A Warrants at $3.00 per share;
|
· |
up
to *221,250 shares of our common stock which may be issued upon the
exercise of B Warrants at $3.25 per share;
|
· |
up
to 245,000 shares of our common stock which may be issued upon the
exercise of C Warrants at $3.15 per
share;
|
· |
up
to 10,370 shares of our common stock which may be issued upon the
exercise
of D Warrants at $3.50 per share;
|
· |
up
to 32,500 shares of our common stock which may be issued upon the
exercise
of E Warrants at $5.10 per share;
|
· |
up
to 32,500 shares of our common stock which may be issued upon the
exercise
of F Warrants at $6.80 per share;
|
· |
up
to 157,500 shares of our common stock which may be issued upon
the
exercise of G Warrants at $3.80 per share in connection with our
Stock
Purchase agreement September 27
2005;
|
· |
up
to 3,150 shares of our common stock which were issued to Shimon Langbart;
|
· |
up
to **45,500 shares of our common stock which are to be issued to
Oberon
Securities LLC upon effectiveness of this Registration
Statement.
|
· |
up
to 574,713 shares of our common stock issued upon conversion of a
$2,000,000 Secured Convertible Term Note dated September 27, 2005,
which
is convertible at $3.47 per share; and
|
· |
up
to 1,282,500 shares of our common stock underlying 1,282,500 options
under
our 2004 stock option plan.
|
IN
POUNDS:
|
2004
Audited
|
2003
Audited
|
2002
Audited
|
2001
Audited
|
2000
Audited
|
REVENUES
|
11,330,116
|
7,282,181
|
3,741,436
|
2,658,905
|
1,354,746
|
OPERATING
PROFIT
|
112,782
|
666,367
|
315,602
|
235,336
|
97,687
|
NET
INCOME
|
39,874
|
421,445
|
240,981
|
145,606
|
69,559
|
BASIC
EPS
|
0.007
|
0.08
|
0.05
|
0.03
|
0.02
|
TOTAL
ASSETS
|
5,343,284
|
3,290,227
|
2,169,816
|
1,569,336
|
968,544
|
LONG
TERM LIABILITY
|
651,863
|
125,838
|
66,193
|
50,488
|
40,676
|
STATEMENTS
OF OPERATIONS
|
|||||||||
Nine
months Ended
|
|||||||||
September
30,
|
|||||||||
2005
|
2004
|
||||||||
Unaudited
|
Unaudited
|
||||||||
Revenues
|
|
£9,912,515
|
|
£7,244,644
|
|||||
Cost
of revenues
|
(6,662,272)
|
|
(5,181,121)
|
|
|||||
|
|||||||||
Gross
profit
|
3,250,243
|
2,063,523
|
|||||||
Operating
expenses:
|
|||||||||
Research
and development
|
(15,625)
|
|
(33,890)
|
|
|||||
Marketing
and selling
|
(991,802)
|
|
(1,114,656)
|
|
|||||
General
and administrative
|
(2,098,173)
|
|
(786,188)
|
|
|||||
|
|||||||||
Total
operating expenses
|
(3,105,600)
|
|
(1,934,734)
|
|
|||||
|
|||||||||
Operating
profit (loss)
|
144,643
|
128,789
|
|||||||
Financing
expenses - net
|
(68,203)
|
|
(26,368)
|
|
|||||
Equity
in income of affiliated company
|
43,843
|
-
|
|||||||
Loss
from hurricane Katrina
|
(181,055)
|
|
-
|
||||||
Other
income
|
17,452
|
48,459
|
|||||||
Income
before minority interest and taxes
|
(43,320)
|
|
150,880
|
||||||
Minority
Interest
|
59,584
|
-
|
|||||||
|
|
||||||||
Income
Before taxes
|
16,265
|
150,880
|
|||||||
Taxes
on income
|
(31,734)
|
|
(49,831)
|
|
|||||
Net
(loss) income
|
|
£(15,469)
|
|
|
£101,049
|
||||
(Loss)
Earnings Per Share:
|
|||||||||
Basic
|
|
£-0.002
|
|
£0.020
|
|||||
Diluted
|
|
£-0.002
|
|
£0.010
|
September
30,
|
|
December
31,
|
|
September
30,
|
|
|||||
|
2005
|
|
2004
|
|
2005
|
|
||||
|
Unaudited
|
|
Audited
|
|
Unaudited
|
|
||||
|
|
|
|
|
Convenience
translation into U.S.$
|
|
||||
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
£1,598,897
|
|
|
£797,097
|
|
|
$2,811,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
3,113,272
|
|
|
2,271,448
|
|
|
5,474,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other receivables
|
|
959,143
|
|
|
693,524
|
|
|
1,686,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
to shareholder
|
|
123,965
|
|
|
123,965
|
|
|
217,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
£5,795,277
|
|
|
£3,886,034
|
|
|
$10,190,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
to shareholder
|
|
123,966
|
|
|
123,966
|
|
|
217,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
64,728
|
|
|
20,885
|
|
|
113,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
2,460,478
|
|
|
1,516,854
|
|
|
4,326,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
- accumulated depreciation
|
|
(446,574)
|
|
|
(261,561)
|
|
|
(785,300)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed assets, net
|
|
2,013,904
|
|
|
1,255,293
|
|
|
3,541,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets, net
|
|
2,523,958
|
|
|
57,106
|
|
|
4,438,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
£10,521,833
|
|
|
£5,343,284
|
|
|
$18,502,643
|
|
Use
of Funds
|
Funds
Received from Private Placements
and Exercise
of warrants/options
|
Working
capital* and/or investment
|
|
in
equipment** and/or acquisitions
|
|
and/or
business development***
|
$11,847,357.5
|
Period
|
Low
|
High
|
2005
|
||
Third
Quarter
|
$2.90
|
$3.40
|
Second
Quarter
|
$2.80
|
$3.30
|
First
Quarter
|
$2.50
|
$4.29
|
2004
|
||
Fourth
Quarter
|
$1.95
|
$3.35
|
Third
Quarter
|
$2.90
|
$3.75
|
Second
Quarter
|
$2.80
|
$3.90
|
First
Quarter
|
$3.35
|
$5.75
|
2003
|
||
Fourth
Quarter
|
$3.15
|
$6.25
|
Third
Quarter
|
$0.51
|
$3.60
|
Second
Quarter
|
$0.30
|
$0.64
|
First
Quarter
|
$0.30
|
$0.77
|
2002
|
||
Fourth
Quarter
|
$0.66
|
$1.45
|
Third
Quarter
|
$0.70
|
$1.33
|
Second
Quarter
|
$0.70
|
$3.65
|
First
Quarter
|
$0.00
|
$0.00
|
Year
ended December 31
|
|||||||||||||
2004
|
2003
|
2002
|
2001
|
||||||||||
Revenues
|
|
|
100.0
|
|
|
100.00
|
|
|
100.00
|
|
|
100.00
|
|
Cost
of Revenues
|
|
|
-70.53
|
|
|
-61.36
|
|
|
-58.66%
|
|
|
-61.29%
|
|
Gross
Profit
|
|
|
29.47%
|
|
|
38.64%
|
|
|
41.34
|
|
|
38.71
|
|
Operating
Expenses:
|
|
|
|||||||||||
Research
and Development
|
|
|
-0.23%
|
|
|
-0.61%
|
|
|
-0.86%
|
|
|
-1.16%
|
|
Marketing
and Selling
|
|
|
-14.35
|
|
|
-14.98%
|
|
|
-8.56%
|
|
|
-8.24%
|
|
General
and Administrative
|
|
|
-13.89
|
|
|
-13.89%
|
|
|
-23.48%
|
|
|
-20.46%
|
|
Total
Operating Expenses
|
|
|
-28.47
|
|
|
-29.49%
|
|
|
-32.90%
|
|
|
-29.86%
|
|
Income
before Taxes
|
|
|
0.63%
|
|
|
8.76%
|
|
|
8.39
|
|
|
7.72
|
|
Net
Income
|
|
|
0.35
|
|
|
5.79%
|
|
|
6.44
|
|
|
5.48
|
|
2004
|
2003
|
Telephone
and messaging services
|
5,930,541
|
3,996,732
|
Mobile
phones
|
480,451
|
503,475
|
Calling
Cards
|
4,919,124
|
2,781,924
|
Total
|
11,330,116
|
7,282,184
|
2004
|
2003
|
|
Regular
telephony voice service and others:
|
£5,861,345
|
£4,015,448
|
Story
Telecom
|
£4,778,564
|
£2,715,231
|
WorldNet
|
£698,832
|
£551,502
|
Total
Revenues
|
£11,330,116
|
£7,282,181
|
|
2004
|
2003
|
Regular
Telephony Services and others
|
2,398,938
|
1,603,774
|
Story
Telecom
|
4,508,079
|
2,561,320
|
Worldnet
|
384,358
|
303,326
|
Total:
|
£7,991,375
|
£4,468,420
|
Fiscal
year 2005
|
£164,079
|
Fiscal
year 2006
|
117,961
|
Fiscal
year 2007
|
33,674
|
|
•
|
Price
competition in telephone rates;
|
|
•
|
Demand
for our services;
|
|
•
|
Individual
economic conditions in our markets;
|
|
•
|
Our
ability to market our services.
|
|
•
|
Residential
- including customers who must dial a special code to access our
switch or
acquire a box that dials automatically.
|
|
•
|
Commercial
- Smaller business are treated the same as residential customers.
Larger
businesses’ PBX (Telephony system) units are programmed to dial the
special code automatically or connect directly through a T1 (24 telephone
channels / lines).
|
|
•
|
Governmental
agencies - Including the United Nations World Economic Forum, the
Argentine Embassy, the Spanish Embassy and the Israeli Embassy.
|
|
•
|
Resellers
- We provide them with our telephone and messaging services for a
wholesale price. For WorldNet, our largest reseller, we also provide
the
billing system.
|
|
|
For
the 9 months
|
For
the 9 months
|
||||||
|
|
Period
Ended
|
Period
Ended
|
||||||
|
|
September
30, 2005
|
September
30, 2004
|
||||||
|
|
Unaudited
|
Unaudited
|
||||||
Telephone
minute billing plus data and messaging
|
|
||||||||
services,
including facsimile, nodal, and e-mail
|
|
|
|
|
|
||||
related
services
|
|
|
69
|
%
|
|
43
|
%
|
||
Mobile
phone services
|
|
|
3
|
%
|
|
5
|
%
|
||
Calling
cards
|
|
|
28
|
%
|
|
52
|
%
|
||
|
|
|
100
|
%
|
|
100
|
%
|
|
|
Nine months Ended
|
|
|||||||
|
|
September 30,
|
|
|||||||
|
|
2005
|
|
2004
|
|
|||||
|
|
Unaudited
|
|
Unaudited
|
|
|||||
Revenues
|
|
|
100
|
%
|
|
100
|
%
|
|||
Cost
of revenues
|
|
|
-67
|
%
|
|
-72
|
%
|
|||
|
|
|
|
|
|
|||||
Gross
profit
|
|
|
33
|
%
|
|
28
|
%
|
|||
Operating
expenses:
|
|
|
|
|
|
|||||
Research
and development
|
|
|
0
|
%
|
|
0
|
%
|
|||
Marketing
and selling
|
|
|
-10
|
%
|
|
-15
|
%
|
|||
General
and administrative
|
|
|
-21
|
%
|
|
-11
|
%
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||||
Total
operating expenses
|
|
|
-31
|
%
|
|
-26
|
%
|
|||
|
|
|
|
|
|
|||||
Operating
profit (loss)
|
|
|
2
|
%
|
|
2
|
%
|
|||
Loss
from Hurricane Katrina
|
|
|
-2
|
%
|
|
|
|
|||
Financing
expenses - net
|
|
|
-1
|
%
|
|
0
|
%
|
|||
Equity
in income of affiliated company
|
|
|
0
|
%
|
|
0
|
%
|
|||
Income
before minority interest and taxes
|
|
|
-1
|
%
|
|
2
|
%
|
|||
Minority
Interest
|
|
|
1
|
%
|
|
0
|
%
|
|||
Income
(loss) Before taxes
|
|
|
0
|
%
|
|
2
|
%
|
|||
Taxes
on income
|
|
|
-0
|
%
|
|
-1
|
%
|
|||
Net
income (loss)
|
|
|
0
|
%
|
|
1
|
%
|
|
|
|
For
the 9 months
Period
Ended
September
30, 2005
|
|
For
the 9 months
Period
Ended
September
30, 2004
|
|
|||
|
|
|
Unaudited
|
|
Unaudited
|
|
|||
R
evenues:
|
|
|
|
|
|
|
|||
Telephone
& Messaging
|
|
|
£
|
6,808,991
|
|
£
|
3,132,265
|
|
|
Mobile
|
|
|
|
312,653
|
|
|
378,759
|
|
|
Calling
cards
|
|
|
|
2,790,871
|
|
|
3,733,620
|
|
|
|
|
|
£
|
9,912,515
|
|
£
|
7,244,644
|
|
|
|
|
Nine
months Ended
|
|
|||||
|
|
|
September
30,
|
|
|||||
|
|
|
2005
|
|
2004
|
|
|||
|
|
|
Unaudited
|
|
Unaudited
|
|
|||
Regular
telephony voice service
|
|
|
|
|
|
|
|||
and
others:
|
|
|
£
|
6,873,394
|
|
£
|
3,387,111
|
|
|
Story
Telecom
|
|
|
|
2,622,294
|
|
|
3,351,620
|
|
|
WorldNet
|
|
|
|
416,827
|
|
|
505,913
|
|
|
|
|
|
£
|
9,912,515
|
|
£
|
7,244,644
|
|
|
|
Nine
months Ended
|
|||
|
|
September
30,
|
|||
|
|
2005
|
|
2004
|
|
|
|
Unaudited
|
|
Unaudited
|
|
Regular
telephony voice service
|
|
|
|
|
|
and
others:
|
|
£
3,851,634
|
|
£
1,628,452
|
|
Story
Telecom
|
|
2,473,862
|
|
3,161,906
|
|
WorldNet
|
|
336,776
|
|
390,763
|
|
Total
Cost of Revenues
|
|
£
6,662,272
|
|
£
5,181,121
|
|
Nine
months Ended
|
||||
|
|
September
30,
|
|||
|
|
2005
|
|
2004
|
|
|
|
Unaudited
|
|
Unaudited
|
|
Regular
telephony voice service
|
|
|
|
|
|
and
others:
|
|
56.0%
|
|
48.1%
|
|
Story
Telecom
|
|
94.3%
|
|
94.3%
|
|
WorldNet
|
|
80.8%
|
|
77.2%
|
Year
1
|
£ |
138,723
|
||
Year
2
|
£ |
66,793
|
•
|
Indirect
telephone service: Using a four digit access code, either manually
or
automatically, we resell telephone services provided by other carriers
or
through the use of our own platform. This four-digit access code
is used
so that that people in Great Britain can dial in order to reach certain
other carriers. This enables us to take calls originated by customers
and
route them to different
destinations.
|
•
|
PIN
access using 0800 free numbers: Using 0800 free numbers and PIN access
codes for client identification, our customers can call from almost
any
phone, including British Telecom pay phones, to access our platform
and
make calls to any destination.
|
•
|
Mobile
access using 0800 free numbers: This service is similar to our PIN
access
service but uses mobile telephone devices. The identification of
the
client is automatic and PIN identifier numbers are not required.
|
•
|
Email
to Facsimile service: Our Email2Fax service allows customers with
an
Internet Email account to send facsimiles at a discounted cost. The
email
arrives at our Internet server that we send via facsimile through
high-speed facsimile modems to the proper destination. We issue a
confirmation every 15 minutes indicating: (a) all successful or failed
facsimile transmissions; and (b) a complete list of transmissions,
including date and time of delivery, destination number, pages, duration,
subject, and answerback of the transmission. Email2Fax will send
a
facsimile based on a pre-defined table of retries. If a facsimile
does not
go through within the pre-defined time, Email2Fax will cancel the
facsimile and a report of the failed transmission will be included
in the
next status report.
|
•
|
Print
to Facsimile service: Similar to our Email2Fax service, anyone with
Windows 95 / XP and an Internet browser will be able to utilize our
Print2Fax service to send a facsimile through their printer driver,
usually at a discounted cost. Using any Windows application that
supports
printing, the user selects the printer driver to receive a dialog
box that
allows entry of: (a) the recipient name and fax number including
multiple
recipients, sent directly “To” or copied “CC”; (b) the sender’s name; and
(c) the subject.
|
•
|
Facsimile
to Email or Cyber Number: This service allows the user to receive
facsimile messages directly to an email address through the use of
a
personal identification number.
|
•
|
Nodal
Services: This service enables our business customers to use a small
platform located in their respective country, to establish their
own
messaging services within that country, including sending and receiving
customer facsimiles.
|
•
|
Auracall:
This is a service that was introduced in approximately March 2002,
which
permits any individual with a British Telecom line to make international
calls at a lower cost and without prepayment for setting up an account
with another carrier. The Auracall service can be accessed by any
business
or residential user through our website at www.auracall.com. When
customers need to make an international or national call they can
dial the
appropriate designed number for that country and save on calling
rates
over the current British Telecommunications published rates by gaining
access to our switch and providing savings on a per minute
basis.
|
•
|
Story
Telecom: Initiates, markets and distributes prepaid calling cards
that are
served by our switch and systems. Story supplies the prepaid calling
cards
to retail stores through its network of dealers. The calling card
enables
the holder to call anywhere in the world by dialing a toll free number
from any telephone that routes the holder’s call to our Interactive Voice
Response System that automatically asks for the holder’s private pin code,
validates the code dialed by the customer, and tells the credit balance
of
the card. The holder is then instructed to dial to his or her desired
destination, at which time our Interactive Voice Response System
tells the
holder how long he or she can speak according to the balance on the
card
and what the cost per minute is. The holder of the card can use the
card
repeatedly until the balance is zero.
|
•
|
International
Toll Free Calling Card Service: We began offering international toll
free
calling card service in approximately June 2002 from the United States,
Canada, France, Germany, Greece, Israel, Chile, Columbia, Japan,
Thailand,
Hong Kong, Indonesia, Australia, New Zealand, Belgium, Netherlands,
Austria, Italy, Switzerland, Spain, Poland, Hungary, Ireland, Norway,
Philippines, South Korea and
Sweden.
|
•
|
Internet
Based Customer Service and Billing Interface: In June 2002, we completed
the creation of our Internet based customer service and billing interface
at www.xfone.com, which includes on-line registration, full account
control, and payment and billing functions and information
retrieval.
|
•
|
We
actively recruit independent contractor agents and resellers who
purchase
telephone traffic directly from us at a discount, and who then resell
this
telephone traffic to their customers at a mark-up according to their
own
price lists;
|
•
|
We
use direct marketing, including by newspaper and radio advertisements;
|
•
|
We
utilize agents that sell our services directly to customers at our
established prices; these agents receive a commission of approximately
5%-10% of the total sale amount less any bad debts;
|
•
|
We
attend telecommunications trade shows to promote our services;
|
•
|
We
utilize the Internet as an additional distribution channel for our
services. We utilize Xfone.com as our brand name for our new e-commerce
telecommunications operations.
|
•
|
Partner
Division - Our Partner Division operates as a separate profit center
by
attempting to recruit new resellers and agents to market our products
and
services and to provide support and guidance to resellers and agents.
|
•
|
Operations
Division - Our Operations Division provides the following operational
functions to our business: (a) 24 hour/7 day a week technical support;
(b)
inter-company network; (c) hardware and software installations; and
(d)
operating switch and other platforms.
|
•
|
Administration
Division - Our Administration Division provides the billing, collection,
credit control, and customer support aspects of our
business.
|
•
|
Research
and Development - The function of our Research and Development Division
is
to develop and improve our billing system, switch and telephony platforms,
websites and special projects.
|
•
|
Retail
- Our Retail Division is responsible for our marketing and selling
campaigns that target potential and existing retail
customers.
|
•
|
Teleglobe
International - 35%
|
•
|
British
Telecommunications - 24%
|
•
|
Worldcom
- 20%
|
•
|
ITXC
Corporation - 15%
|
|
•
|
Price
competition in telephone rates;
|
|
•
|
Demand
for our services;
|
|
•
|
Individual
economic conditions in our markets;
|
|
•
|
Our
ability to market our services.
|
|
•
|
Residential
- including customers who must dial a special code to access our
switch or
acquire a box that dials automatically.
|
|
•
|
Commercial
- Smaller business are treated the same as residential customers.
Larger
businesses’ PBX (Telephony system) units are programmed to dial the
special code automatically or connect directly through a T1 (24 telephone
channels / lines).
|
|
•
|
Governmental
agencies - Including the United Nations World Economic Forum, the
Argentine Embassy, the Spanish Embassy and the Israeli Embassy.
|
|
•
|
Resellers
- We provide them with our telephone and messaging services for a
wholesale price. For WorldNet, our largest reseller, we also provide
the
billing system.
|
Name
|
Age
|
Director
Since
|
|||||
Abraham
Keinan
|
|
|
56
|
|
|
Chairman
of the Board of Directors, since our inception
|
|
|
|
|
|
|
|
|
|
Guy
Nissenson
|
|
|
31
|
|
|
Director,
since our inception
|
|
|
|
|
|
|
|
|
|
Eyal
J. Harish
|
|
|
53
|
|
|
Director,
since December 19, 2002
|
|
|
|
|
|
|
|
|
|
Shemer
S. Schwartz
|
|
|
31
|
|
|
Director,
since December 19, 2002, and is an independent director and a member
of
the Audit Committee
|
|
|
|
|
|
|
|
|
|
Arie
Czertok
|
|
|
65
|
|
|
Director,
since November 23, 2004, and is an independent director and Chairman
of
the Audit Committee
|
|
|
|
|
|
|
|
|
|
Aviu
Ben-Horrin
|
|
|
57
|
|
|
Director,
since November 23, 2004, and is an independent director and a member
of
the Audit Committee.
|
|
Annual
Compensation
|
|
Long
Term Compensation
|
|
|
||||
Name
&
Position
|
Year
|
Salary
($)
|
Bonus($)
|
Other($)
|
Restricted
Stock
Awards
|
Options($)
|
L/Tip($)
|
All
Other
|
|
Abraham
Keinan
Chairman
Guy
Nissenson
President
& Chief
Executive Officer
|
2004
2003
2002
2004
2003
2002
|
$116,510
(60,368
Pound)
$69,057(1)
(40,622
Pound)
$51,000
(30,000
Pound)
$116,510
(60,368
Pound)
$74,820(4)
(43,500
Pound)
$52,800
(33,000
Pound)
|
$9,650
(5,000
Pound)
$112,576
(63,245
Pound)
$9,588
(6,372
Pound)
----
$171,302(5)
(96,237
Pound)
|
$196,171
(7)
(101,643
Pound)
$97,900(2)
(55,000
Pound)
$67,500
(45,000
Pound)
$196,171
(8)
(101,643
Pound)
|
1,500,000
(9)
400,000(3)
0
Pound
1,500,000
(9)
200,000(6)
|
0
Pound
|
0
Pound
|
0
Pound
|
Title
of
Class
|
Name
& Address of
Beneficial
Owner
|
Amount
of Beneficial
Ownership
|
Nature
of
Ownership
|
Percent
of
Class
|
|||||
|
|
|
|
|
|||||
Common |
Abraham
Keinan
|
3,600,000
|
Direct*/****
|
46.33
|
|||||
Chairman of the Board | |||||||||
4 Wycombe Gardens | |||||||||
London
Nw11 8al
|
|||||||||
United
Kingdom
|
|||||||||
Common | Crestview Capital |
772,367
|
Direct
|
9.94**
|
|||||
Master LLC** | |||||||||
95 Revere Drive, Suite F | |||||||||
Northbrook, Illinois 60062 | |||||||||
Common
|
Guy
Nissenson
|
1,203,500
|
Direct/Indirect***/****
|
15.48
|
|||||
Chief
Executive Officer
|
|||||||||
President/Director
|
|||||||||
3A
Finchley Park
|
|||||||||
London
N12 9JS
|
|||||||||
United
Kingdom
|
|||||||||
Common
|
Eyal
Harish*****
Director
3
Moshe Dayan Street, Raanana, Israel
|
15,000
|
Direct
|
0.19
|
|||||
Common
|
Mercantile
Discount - Provident Funds******
32
Yavne Street
Tel-Aviv
65792, Israel
|
400,000
|
Direct
|
5.15
|
|||||
Total
|
5,990,867
|
77.1%
|
|||||||
|
|
Name
and
Principle
Position
|
Number
Securities
Underlying
Options
|
%
of Total
Options
Granted
To
Employees
in
2003
|
%
of Total
Options
Granted
To
Employees
in
2004
|
Exercise
Price
|
Expiration
Date
|
Abraham
Keinan
Chairman
of
the Board
Guy
Nissenson
President
&Chief
Executive
Officer
TOTAL
|
(1) 400,000
common
stock
shares
(3)1,500,000
Common
stock
shares
(2)200,000
common
stock
shares
(3)1,500,000
Common
stock
shares
|
66.7%
33.3%
100.00%
|
50%
50%
100%
|
$0.475
$3.50
$0.475
$3.50
|
August
31, 2008
5
years from the
Vesting
Date which is 12 months from the date Of Grant
August
31, 2008
5
years from the
Vesting
Date which is 12 months from the date Of
Grant
|
Name
|
Shares
Acquired
on
Exercise(#)
|
Value
Realized
($)
|
Number
of Securities Underlying
Unexercised
Options/SARs at FY-End
(#)
Exercisable/Unexercisable
|
Value
of Unexercised In-the
Money
Options/SARs at FY-End
($)
Exercisable/Unexercisable
|
||
Guy
Nissenson,
|
Not
Applicable
|
Not
Applicable
|
700,000
/ 0 (1)
|
$3,891,000
/ $0 (2)
|
||
President
& Chief Executive
|
||||||
Officer
|
Not
Applicable
|
Not
Applicable
|
1,500,000/0
(5)
|
Negative
Value / $0
|
||
Abraham
Keinan,
|
Not
Applicable
|
Not
Applicable
|
400,000
/ 0 (3)
|
$2,202,000
/ $0 (4)
|
||
Chairman
of
|
Not
Applicable
|
Not
Applicable
|
1,500,000/0
(5)
|
Negative
Value / $0
|
||
The
Board
|
|
(1)
|
Of
the 700,000 share options, 200,000 were issued to Guy Nissenson,
our Chief
Executive Officer and President, on August 21, 2003. On March 1,
2004,
these 200,000 share options were cancelled by our Board of Directors.
Campbeltown Business Ltd., a private company incorporated in the
British
Virgin Islands which is owned by Guy Nissenson and other members
of the
Nissenson family, own options to purchase 500,000 shares of our
common
stock for $0.40 per share or an aggregate of $200,000. Guy Nissenson
owns
20% of Campbeltown Business Ltd. Options to purchase shares of
our common
stock are shown in the table above as owned by Guy Nissenson due
to Guy
Nissenson’s 20% ownership of Campbeltown Business Ltd.
|
||||
|
(2)
|
Based
on the December 31, 2003 per share closing price of $5.98 and the
exercise
prices of $0.475 per share for 200,000 share options, and $0.40
per share
for 500,000 share options.
|
||||
|
(3)
|
The
options to purchase 400,000 shares of our common stock were issued
to
Abraham Keinan, our Chairman of the Board, on August 21, 2003,
and on
March 1, 2004, all 400,000 share options were cancelled by our
Board of
Directors.
|
||||
|
(4)
|
Based
on the December 31, 2003 per share closing price of $5.98, and
an exercise
price of $0.475 per share.
|
||||
|
(5)
|
Based
on the December 30, 2004 per share closing price of $2.80, and
an exercise
price of $3.50 per share.
|
TARGET
AMOUNT OF
REVENUES
PER MONTH
|
ADDITIONAL
MONTHLY BONUS
|
Less
than 125,000 Pounds (UK)
|
0
Pounds (UK)
|
Between
125,000 - 150,000 Pounds (UK)
|
1,250
Pounds (UK)
|
(approximately
$ 225,000 - $ 270,000 US)
|
(approximately
$ 2,250 US)
|
Between
150,000 - 175,000 (UK)
|
2,500
Pounds (UK)
|
(approximately
$ 270,000 - $ 315,000 US)
|
(approximately
$4,500 US)
|
Over
175,000 Pounds (UK)
|
2,750
Pounds (UK)
|
(approximately
$ 315,000 US)
|
(approximately
$ 4,950 US)
|
· |
Abraham
Keinan confirmed that all his businesses activities and initiatives
in the
field of telecommunications are conducted through Swiftnet, and would
continue for at least 18 months after the conclusion of this transaction.
|
· |
Campbeltown
declared that it is not involved in any business that competes with
Swiftnet and would not be involved in such business at least for
18 months
after this transaction is concluded. This agreement term has been
satisfied by Campbeltown.
|
· |
Campbeltown
would invest $100,000 in Swiftnet Ltd., in exchange for 20% of the
total
issued shares of Swiftnet, Ltd.;
|
· |
Campbeltown
would also receive 5% of our issued and outstanding shares following
our
acquisition with Swiftnet. In June 2000, Campbeltown Business Ltd.
invested the $100,000 in Swiftnet. We acquired Swiftnet, Ltd. and
Campbeltown received 720,336 shares of our common stock for its 20%
interest in Swiftnet, Ltd.
|
· |
Swiftnet,
Ltd., and Keinan would guarantee that Campbeltown’s 20% interest in the
outstanding shares of Swiftnet would be exchanged for at least 10%
of our
outstanding shares and that Campbeltown would have in total at least
15%
of our total issued shares after our acquisition occurred.
|
· |
Campbeltown
would have the right to nominate 33% of the members of our board
of
directors and Swiftnet’s board of directors. When Campbeltown ownership in
our common stock was less than 7%, Campbeltown would have the right
to
nominate only 20% of our board members but always at least one member.
In
the case that Campbeltown ownership in our common stock was less
than 2%,
this right would expire.
|
· |
Campbeltown
would have the right to nominate a vice president in Swiftnet and/or
our
common stock. Mr. Guy Nissenson was nominated as of the time of the
June
19, 2000 agreement. If for any reason Guy Nissenson will leave his
position, Campbeltown and Abraham Keinan will agree on another nominee.
The Vice President will be employed with suitable conditions.
|
· |
Campbeltown
has the option to purchase additional shares of Swiftnet that will
represent 10% of all issued shares after the transaction for $200,000
US.
This transaction can be executed either by Swiftnet issuing new shares,
or
by Abraham Keinan selling his private shares (as long as he has an
adequate amount of shares), as Abraham Keinan will decide. This option
will expire on Dec 31, 2005. Campbeltown can exercise this option
in
parts.
|
· |
Campbeltown
will have the right to participate under the same terms and conditions
in
any investment or transaction that involve equity rights in Swiftnet
or us
conducted by Abraham Keinan at the relative ownership
portion.
|
· |
In
the event that Swiftnet or we will seek for money in a private placement
for equity or any other rights, Campbeltown will have the right of
first
refusal on any transaction or part of it until Dec 31, 2005 or as
long as
it owns over 7% of Swiftnet equity or 4% of our common stock.
|
· |
Keinan
and Campbeltown have signed a right of first refusal agreement for
the
sale of their shares.
|
· |
Until
we conduct a public offering or are traded on a stock market, we
are not
permitted to issue any additional shares or equity rights without
a
written agreement from Campbeltown. This right expires when Campbeltown
no
longer owns any equity interest or shares in our company or our
subsidiary, Swiftnet.
|
Name
of Selling Security Holder and Position, Office or Material Relationship
with us
|
Common
Shares Owned by the Selling Security Holders
|
Warrants
(2) Owned by the Selling Security Holder
|
Stock
Underlying Stock Option Plan
|
Secured
Convertible Term Note Owned by Selling Security Holder
|
Total
Shares Registered (3)
|
Current
Total Amount in $
|
Number
of Shares (1) Owned by Selling Security Holder after Offering and
Percent
of Total Outstanding: Based on 7,772,671 Shares
Outstanding
|
(4)
Crestview Capital Master; LLC
|
285,000
(+
prior owned not included here 487,367)
|
142,500
(A & B Warrants)
|
555,750
|
712,500
|
9.94%
|
||
(5)
Burlingame Equity Investors, LP
|
131,162
|
65,581
(A & B Warrants)
|
255,766
|
327,905
|
1.69%
|
||
(6)
Burlingame Equity Investors (Offshore) Ltd
|
51,932
|
25,966
(A & B Warrants)
|
101,267
|
129,830
|
0.67%
|
||
(7)
Burlingame Equity Investors II, LP
|
16,906
|
8,453
(A & B Warrants)
|
32,967
|
42,265
|
0.22%
|
||
Mercantile
Discount-Provident Funds
|
400,000
|
200,000
(A & B Warrants)
|
780,000
|
1,000,000
|
5.15%
|
||
(8)
Laurus Master Fund
|
157,500
(G Warrants)
|
574,713
|
732,213
|
2,000,000
|
|||
(9)
Oberon Securities LLC
|
35,000
(not issued yet ***)
|
245,000
(C Warrants)
|
290,500
|
0.45%
|
|||
Elite
Financial Communications Group LLC
|
65,000
(E & F Warrants)
|
65,000
|
|||||
Yitzhak
Rosenbaum
|
10,370
(D Warrants)
|
10,370
|
|||||
Simon
Langbart
|
3,150
|
3,150
|
0.04%
|
||||
Stock
underlying stock option plan ****
|
1,282,500
|
1,282,500
|
|||||
Total
|
923,150
|
920,370
|
1,282,500
|
574,713
|
4,109,483
|
4,212,500
|
18.16%
|
· |
up
to *885,000 shares of our common stock which were issued in a private
placement completed on September 28, 2005, at $2.50 per share;
|
· |
up
to *221,250 shares of our common stock which may be issued upon the
exercise of A Warrants at $3.00 per share;
|
· |
up
to *221,250 shares of our common stock which may be issued upon the
exercise of B Warrants at $3.25 per share;
|
· |
up
to 245,000 shares of our common stock which may be issued upon the
exercise of C Warrants at $3.15 per
share;
|
· |
up
to 10,370 shares of our common stock which may be issued upon the
exercise
of D Warrants at $3.50 per share;
|
· |
up
to 32,500 shares of our common stock which may be issued upon the
exercise
of E Warrants at $5.10 per share;
|
· |
up
to 32,500 shares of our common stock which may be issued upon the
exercise
of F Warrants at $6.80 per share;
|
· |
up
to 157,500 shares of our common stock which may be issued upon the
exercise of G Warrants at $3.80 per share in connection with our
Stock
Purchase agreement September 27,
2005;
|
· |
up
to 3,150 shares of our common stock which were issued to Shimon Langbart;
|
· |
up
to ***45,500 shares of our common stock or up to $105,000 at market
price,
which have not been issued yet to Oberon Securities LLC;
|
· |
up
to 574,713 shares of our common stock issued upon conversion of a
$2,000,000 Secured Convertible Term Note dated September 27, 2005,
which
is convertible at $3.47 per share; and
|
· |
and,
up to 1,282,500 shares of our common stock underlying our stock option
plan that are issuable upon exercise at $3.50 per share of our options
granted to employees.
|
Name
|
Date
of Grant
|
#
of Options granted
|
#
of Options registered
|
Exercise
price
|
First
vesting
|
Expiration
Date
|
||||||
|
|
|
|
|
|
|
||||||
Abraham
Keinan
|
24.11.04
|
1,500,000
|
375,000
|
$
3.5
|
5
years from the Date of Vesting
|
|||||||
12
months from the date of Grant
|
||||||||||||
Guy
Nisenson
|
24.11.04
|
1,500,000
|
375,000
|
$
3.5
|
12
months from the date of Grant
|
5
years from the Date of Vesting
|
||||||
Eyal
J. Harish
|
24.11.04
|
75,000
|
18,750
|
$
3.5
|
12
months from the date of Grant
|
5
years from the Date of Vesting
|
||||||
Shemer
S. Schwartz
|
24.11.04
|
75,000
|
18,750
|
$
3.5
|
12
months from the date of Grant
|
5
years from the Date of Vesting
|
||||||
Arye
Czertok
|
24.11.04
|
25,000
|
6,250
|
$
3.5
|
12
months from the date of Grant
|
5
years from the Date of Vesting
|
||||||
Aviu
Ben-Horrin
|
24.11.04
|
25,000
|
6,250
|
$
3.5
|
12
months from the date of Grant
|
5
years from the Date of Vesting
|
||||||
Tommy
R. Ferguson
|
6.2.05
|
30,000
|
7,500
|
$
3.5
|
6.2.05
|
5.5
years from the Date of Grant
|
||||||
Bradley
Marcus
|
6.2.05
|
75,000
|
18,750
|
$
3.5
|
Over
4 years - 25% vested after a year and 1/16 of the options are vested
every
3 months for the following 3 years.
|
5.5
years from the Date of Grant
|
||||||
Aggelos
Kikiras
|
6.2.05
|
50,000
|
12,500
|
$
3.5
|
Over
4 years - 25% vested after a year and 1/16 of the options are vested
every
3 months for the following 3 years.
|
5.5
years from the Date of Grant
|
||||||
Nick
Matsoukis
|
6.2.05
|
50,000
|
12,500
|
$
3.5
|
Over
4 years - 25% vested after a year and 1/16 of the options are vested
every
3 months for the following 3 years.
|
5.5
years from the Date of Grant
|
||||||
Bosmat
Houston
|
6.2.05
|
150,000
|
37,500
|
$
3.5
|
Over
4 years - 25% vested after a year and 1/16 of the options are vested
every
3 months for the following 3 years.
|
5.5
years from the Date of Grant
|
||||||
Rafael
Dick
|
6.2.05
|
300,000
|
75,000
|
$
3.5
|
Over
4 years - 25% vested after a year and 1/16 of the options are vested
every
3 months for the following 3 years.
|
5.5
years from the Date of Grant
|
||||||
Alon
Reisser
|
6.2.05
|
75,000
|
18,750
|
$
3.5
|
Over
4 years - 25% vested after a year and 1/16 of the options are vested
every
3 months for the following 3 years.
|
5.5
years from the Date of Grant
|
||||||
Wade
Spooner
|
10.3.05
|
600,000
|
150,000
|
(*)
|
||||||||
Ted
Parsons
|
10.3.05
|
300,000
|
75,000
|
(*)
|
||||||||
Alon
Mualem
|
8.6.05
|
300,000
|
75,000
|
$
3.5
|
12
months from the date of Grant
|
5.5
years from the Date of Grant
|
||||||
|
|
|||||||||||
5,130,000
|
1,282,500
|
|||||||||||
|
|
|||||||||||
(*)
10% above the closing price of stock on the date of issue of the
Options.
|
Report
of Registered Public Accounting Firm
|
F-1
|
Balance
Sheets as of December 31, 2004
|
F-2
- F-3
|
Statements
of Operations for the Year Ended December 31, 2004 and
2003
|
F-
4
|
Statements
of Changes in Shareholders' Equity for the Year Ended December
31, 2004
and 2003
|
F-5
|
Statements
of Cash Flows for the Year Ended December 31, 2004 and
2003
|
F-6
- F-7
|
Notes
to the Consolidated Financial Statements
|
F-8
- F-37
|
Chaifetz
& Schreiber, P.C.
BY:
/s/ Chaifetz & Schreiber, P.C
.——————————————
Chaifetz
& Schreiber, P.C.
21
Harbor Park Drive N.
Port
Washington, NY 11050
March
31, 2005
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
|
Current
assets
|
|||||||
Cash
|
£797,097
|
$
|
1,538,397
|
||||
Accounts
receivable, net
|
2,271,448
|
4,383,895
|
|||||
Prepaid
expenses, other receivables
|
693,524
|
1,338,501
|
|||||
Loan
to shareholder
|
123,965
|
239,252
|
Total
Current Assets
|
3,886,034
|
7,500,045
|
Loan
to shareholder
|
123,966
|
239,254
|
Investments
|
20,885
|
40,308
|
Fixed
assets
|
|||||||
Cost
|
1,516,854
|
2,927,528
|
|||||
Less
- accumulated depreciation
|
(261,561
|
)
|
(504,813
|
)
|
Total
fixed assets
|
1,255,293
|
2,422,715
|
Other
assets
|
57,106
|
110,215
|
Total
assets
|
£5,343,284
|
$
|
10,312,537
|
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
Current
liabilities
|
||||||||
Notes
payable - current portion
|
£
|
72,041
|
$
|
139,039
|
||||
Trade
payables
|
2,035,368
|
3,928,260
|
||||||
Other
liabilities and accrued expenses
|
224,032
|
432,382
|
||||||
Obligations
under capital leases - current portion
|
147,988
|
285,617
|
Total
current liabilities
|
2,479,429
|
4,785,298
|
||||||
Deferred
taxes
|
52
|
101
|
||||||
Notes
payable
|
509,867
|
984,043
|
||||||
Obligation
under capital leases
|
141,944
|
273,952
|
Total
liabilities
|
£
|
3,131,292
|
$
|
6,043,394
|
Commitments
and Contingencies
|
||||||||
Shareholders'
equity
|
||||||||
Preferred
stock - 50,000,000 shares authorized, none issued
|
||||||||
Common
stock:
|
||||||||
25,000,000
shares authorized,(pound).0006896 par value;
|
||||||||
6,220,871
issued and outstanding
|
4,290
|
8,279
|
||||||
Foreign
currency translation adjustment
|
1,210
|
2,335
|
||||||
Contributions
in excess of par value
|
1,373,556
|
2,650,963
|
||||||
Retained
earnings
|
832,936
|
1,607,566
|
Total
shareholders' equity
|
2,211,992
|
4,269,143
|
Total
liabilities and shareholders' equity
|
£
|
5,343,284
|
$
|
10,312,537
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Revenues
|
£11,330,116
|
£7,282,181
|
$
|
21,867,124
|
$
|
14,054,609
|
|||||||
Cost
of revenues
|
(7,991,375
|
)
|
(4,468,420
|
)
|
(15,423,353
|
)
|
(8,624,051
|
)
|
Gross
profit
|
3,338,741
|
2,813,761
|
6,443,771
|
5,430,558
|
Operating
expenses:
|
|||||||||||||
Research
and development
|
(25,945
|
)
|
(44,553
|
)
|
(50,074
|
)
|
(85,987
|
)
|
|||||
Marketing
and selling
|
(1,626,288
|
)
|
(1,091,012
|
)
|
(3,138,736
|
)
|
(2,105,653
|
)
|
|||||
General
and administrative
|
(1,573,726
|
)
|
(1,011,829
|
)
|
(3,037,291
|
)
|
(1,952,830
|
)
|
Total
operating expenses
|
(3,225,959
|
)
|
(2,147,394
|
)
|
(6,226,101
|
)
|
(4,144,470
|
)
|
Operating
profit
|
112,782
|
666,367
|
217,670
|
1,286,087
|
|||||||||
Financing
expenses - net
|
(83,403
|
)
|
(44,283
|
)
|
(160,968
|
)
|
(85,466
|
)
|
|||||
Other
income
|
21,128
|
15,817
|
40,777
|
30,527
|
Income
before taxes
|
50,507
|
637,901
|
97,480
|
1,231,148
|
|||||||||
Equity
in income of affiliated company
|
20,885
|
--
|
40,308
|
--
|
Income
before taxes
|
71,392
|
637,901
|
137,788
|
1,231,148
|
|||||||||
Taxes
on income
|
(31,518
|
)
|
(216,456
|
)
|
(60,830
|
)
|
(417,760
|
)
|
Net
income
|
£39,874
|
£421,445
|
$
|
76,958
|
$
|
813,388
|
Ernings
Per Share:
|
|||||||||||||
Basic
|
£0.007
|
£0.080
|
$
|
0.013
|
$
|
0.154
|
Diluted
|
£0.005
|
£0.080
|
$
|
0.009
|
$
|
0.154
|
|
|
|
Number
of
Ordinary Shares |
|
|
Share
Capital |
|
|
Contributions
in excess of par value |
|
|
Foreign
Currency
translation adjustments |
|
|
Retained
Earnings |
|
|
Total
Shareholders' Equity |
|
Balance
at January 1, 2003
|
5,060,889
|
£3,490
|
£180,219
|
--
|
£457,887
|
£641,596
|
|||||||||||||
Issuance
of shares
|
56,795
|
40
|
13,295
|
--
|
--
|
13,335
|
|||||||||||||
Net
income
|
--
|
--
|
--
|
--
|
421,445
|
421,445
|
|||||||||||||
Dividend
payable
|
--
|
--
|
--
|
--
|
(86,270
|
)
|
(86,270
|
)
|
Balance
at December 31, 2003
|
5,117,684
|
£3,530
|
£193,514
|
--
|
£793,062
|
£990,106
|
Balance
at January 1, 2004
|
5,117,684
|
£3,530
|
£193,514
|
--
|
£793,062
|
£990,106
|
|||||||||||||
Issuance
of shares
|
1,103,187
|
760
|
1,180,042
|
--
|
--
|
1,180,802
|
|||||||||||||
Currency
translation
|
--
|
--
|
--
|
1,210
|
--
|
1,210
|
|||||||||||||
Net
income
|
--
|
--
|
--
|
--
|
39,874
|
39,874
|
|||||||||||||
Dividend
payable
|
--
|
--
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|||||||||||||
Balance
at December 31, 2004
|
6,220,871
|
£4,290
|
£1,373,556
|
£1,210
|
£832,936
|
£2,211,992
|
Convenience
translation into U.S.$:
|
|
|
|
|
|
|
|||||||||||||
Balance
at January 1, 2004
|
5,117,684
|
$
|
6,495
|
$
|
356,066
|
--
|
$
|
1,459,234
|
1,821,795
|
||||||||||
Issuance
of shares
|
1,103,187
|
1,467
|
2,277,481
|
--
|
--
|
2,278,948
|
|||||||||||||
Currency
translation
|
--
|
--
|
--
|
2,335
|
--
|
2,335
|
|||||||||||||
Net
income
|
--
|
--
|
--
|
--
|
76,957
|
76,957
|
|||||||||||||
Change
of currency rates
|
--
|
317
|
17,416
|
--
|
71,375
|
89,108
|
|||||||||||||
Dividend
payable
|
--
|
--
|
--
|
--
|
--
|
--
|
Balance
at December 31, 2004
|
6,220,871
|
$
|
8,279
|
$
|
2,650,963
|
$
|
2,335
|
$
|
1,607,566
|
$
|
4,269,143
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Cash
flow from operating activities
|
|||||||||||||
Net
income
|
£39,874
|
£421,445
|
$
|
76,957
|
$
|
813,389
|
|||||||
Adjustments
to reconcile net income to net
|
|||||||||||||
cash
(used in) provided by operating activities
|
(1,011,980
|
)
|
298,159
|
(1,953,121
|
)
|
575,447
|
Net
cash (used in) provided by operating activities
|
(972,106
|
)
|
719,604
|
(1,876,164
|
)
|
1,388,836
|
Cash
flow from investing activities
|
|||||||||||||
Purchase
of other assets
|
(57,816
|
)
|
--
|
(111,585
|
)
|
--
|
|||||||
Purchase
of equipment
|
(635,905
|
)
|
(108,270
|
)
|
(1,227,297
|
)
|
(208,961
|
)
|
|||||
Proceeds
from sale of fixed assets
|
--
|
3,500
|
--
|
6,755
|
Net
cash used in investing activities
|
(693,721
|
)
|
(104,770
|
)
|
(1,338,882
|
)
|
(202,206
|
)
|
Cash
flow from financing activities
|
|||||||||||||
Proceeds
from long term loans from banks and others
|
578,741
|
(4,001
|
)
|
1,116,970
|
(7,722
|
)
|
|||||||
Repayment
of capital lease obligation
|
(187,357
|
)
|
(55,862
|
)
|
(361,599
|
)
|
(107,814
|
)
|
|||||
Proceeds
from issuance of common stock
|
1,180,802
|
13,335
|
2,278,948
|
25,737
|
|||||||||
Dividend
paid
|
(86,270
|
)
|
(63,261
|
)
|
(166,501
|
)
|
(122,094
|
)
|
Net
cash provided by (used in) financing activities
|
1,485,916
|
(109,789
|
)
|
2,867,818
|
(211,893
|
)
|
Net
(decrease) increase in cash
|
(179,911
|
)
|
505,045
|
(347,227
|
)
|
974,737
|
|||||||
Cash,
beginning of year
|
977,008
|
471,963
|
1,885,625
|
910,889
|
Cash,
at end of year
|
£797,097
|
£977,008
|
$
|
1,538,397
|
$
|
1,885,626
|
Supplemental
disclosures of cash flow information:
|
|||||||||||||
Net
cash paid during the year for:
|
|||||||||||||
Income
taxes
|
£261,896
|
£14,044
|
$
|
505,459
|
$
|
27,105
|
Interest
|
£30,347
|
£11,213
|
$
|
58,570
|
$
|
21,641
|
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Acquired
equipment under capital lease obligation
|
£319,953
|
£86,316
|
$
|
617,509
|
$
|
166,590
|
|||||||
Issuance
of shares of common stock for
|
|||||||||||||
Compensation
for professional services
|
--
|
--
|
|||||||||||
Number
of shares
|
37,500
|
--
|
37,500
|
--
|
|||||||||
Amount
|
£60,120
|
--
|
$
|
116,032
|
--
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Depreciation
and amortization
|
£124,200
|
£89,592
|
$
|
239,706
|
$
|
172,913
|
|||||||
Bad
debt expense
|
125,333
|
109,532
|
241,894
|
211,397
|
|||||||||
Stock
issued for professional services
|
--
|
--
|
--
|
--
|
249,533
|
199,124
|
481,600
|
384,310
|
Changes
in assets and liabilities:
|
|||||||||||||
Increase
in trade receivables
|
(1,132,957
|
)
|
(412,627
|
)
|
(2,186,608
|
)
|
(796,370
|
)
|
|||||
Increase
in other receivables
|
(352,580
|
)
|
(160,359
|
)
|
(680,479
|
)
|
(309,493
|
)
|
|||||
Decrease
in shareholder loans
|
38,805
|
16,394
|
74,894
|
31,640
|
|||||||||
Equity
in earnings of investments
|
(20,885
|
)
|
--
|
(40,308
|
)
|
--
|
|||||||
Decrease
in trade payables
|
397,938
|
461,247
|
768,020
|
890,207
|
|||||||||
Decrease
(increase) in other payables
|
(155,777
|
)
|
183,271
|
(300,650
|
)
|
353,713
|
|||||||
Increase
(decrease) in deferred taxes
|
(36,057
|
)
|
11,109
|
(69,590
|
)
|
21,440
|
(1,261,513
|
)
|
99,035
|
(2,434,721
|
)
|
191,137
|
Total
adjustments
|
£(1,011,980
|
)
|
£298,159
|
$
|
(1,953,121
|
)
|
$
|
575,447
|
|||||
A.
|
Xfone,
Inc. (“Xfone”) was incorporated in Nevada, U.S.A. in September, 2000 and
is a provider of long distance voice and data telecommunications
services,
primarily in the United Kingdom.
|
The
Company’ s holdings in subsidiaries are as follows:
Swiftnet
Limited (“Swiftnet”) – wholly owned U.K. subsidiary
Xfone
U.S.A. Inc. (“Xfone U.S.A.”) located in Mississippi – wholly owned
subsidiary.
Xfone
018 Ltd. formerly Xfone Communication Ltd., and Israeli company
("Xfone
Israel") - in which the Company holds a 74% ownership
share.
|
The
Company entered into an agreement to acquire WS Telecom Inc.
a Mississippi
corporation, that provides telecommunication services in the
southeastern
United States. Xfone U.S.A. is managing WS Telecom Inc. under
a management
agreement (see Note 19). The financial statements consolidate
the
operations of Xfone, Swiftnet Limited, Xfone Israel and Xfone
U.S.A. –
(collectively the “Company”).
|
B.
|
The
financial statements of the Company have been prepared in Sterling
(“£”)
since this is the currency of the prime economic environment,
the U.K., in
which the operations of the Company are conducted.
|
C.
|
The
financial statements have been translated into U.S. dollars using
the rate
of exchange of the U.S. dollar at December 31, 2004. The translation
was
made solely for the convenience of the readers. It should be
noted that
the £ figures do not necessarily represent the current cost amounts
of the
various elements presented and that the translated U.S. dollar
figures
should not be construed as a representation that the £ currency amounts
actually represented, or could be converted into, U.S. dollars.
The
representative rate of exchange of the £ at December 31, 2004 was £1 =
1.93 U.S.$.
|
The
financial statements are prepared in accordance with generally
accepted
accounting principles in the United States of America. The significant
accounting policies followed in the preparation of the financial
statements, applied on a consistent basis, are as follows:
|
A.
|
Principles
of Consolidation and Basis of Financial Statement Presentation
|
The
consolidated financial statements have been prepared in conformity
with
accounting principles generally accepted in the United States
of America
(GAAP) and include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company balances and transactions
have
been eliminated in consolidation.
|
A
|
minority
interest in the loss of a subsidiary will cease to be recorded
when it’s
respective equity interest is reduced to zero and below. Such
unrecorded
minority losses will only be recorded as the respective subsidiary’s
future profits exceed cumulative unrecorded losses.
|
B.
|
Accounts
Receivable
|
Accounts
receivable are recorded at net realizable value consisting of
the carrying
amount less the allowance for uncollectible accounts.
|
The
Company uses the allowance method to account for uncollectible
accounts
receivable balances. Under the allowance method, an estimate
of
uncollectible customer balances is made using factors such as
the credit
quality of the customer and the economic conditions in the market.
Accounts are considered past due once the unpaid balance is 90
days or
more outstanding, unless payment terms are extended. When an
account
balance is past due and attempts have been made to collect the
receivable
through legal or other means, the amount is considered uncollectible
and
is written off against the allowance balance.
|
At
December 31, 2004 the accounts receivable are presented net of
an
allowance for doubtful accounts of £268,326.
|
C.
|
Investments
|
Investments
in affiliates over which we have a significant influence, but
not a
controlling interest, are accounted for using the equity method
of
accounting. All equity investments are periodically reviewed
to determine
if declines in fair value below cost basis are other than temporary.
If
the decline in fair value is determined to be other than temporary,
an
impairment loss is recorded and the investment is written down
to a new
carrying value. In case of losses the equity of such investments
is
reduced to zero.
|
D.
|
Equipment
|
Equipment
is stated at cost. Depreciation is calculated by the declining
balance
method over the estimated useful lives of the assets. Annual
rates of
depreciation are as follows:
|
Method | Useful Life | |||||||
Switching
equipment
|
straight
line
|
10
years
|
||||||
Machinery
and equipment
|
reducing
balance and straight line
|
3-4
years
|
||||||
Furniture
and fixtures
|
reducing
balance and straight line
|
4-14
years
|
||||||
Motor
vehicles
|
reducing
balance
|
4
years
|
E.
|
Other
Intangible Assets
|
Other
intangible assets with determinable lives consist of license
for
communication services and are amortized over the 20 year term
of the
license.
|
F.
|
Long-Lived
Assets
|
We
periodically evaluate the recoverability of the carrying amount
of
long-lived assets (including property, plant and equipment, and
intangible
assets with determinable lives) whenever event or changes in
circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate events or changes in circumstances based
on a
number of factors including operating results, business plans
and
forecasts, general and industry trends and, economic projections
and
anticipated cash flows. An impairment, if any, is assessed when
the
undiscounted expected future cash flows derived from an asset
are less
than its carrying amount. Impairment losses are measured as the
amount by
which the carrying value of an asset exceeds its fair value and
are
recognized in earnings. We also continually evaluate the estimated
useful
lives of all long-lived assets and periodically revise such estimates
based on current events.
|
G.
|
Revenue
Recognition
|
The
Company’s source of revenues results from charges to customers for the
call minutes they use while on the Company’s telecommunications system.
Such revenues are recognized at the time this service is rendered.
Amounts
prepaid by customers are deferred and recorded as a liability
and then
recorded as revenue when the customer utilizes the service. Messaging
services customers are being charged on a per minute basis, per
fax page
or email. Commissions to agents are accounted as marketing costs
for the
Company.
|
H.
|
Reclassification
|
Certain
reclassification of 2003 amounts have been made to conform to
the 2004
presentation.
|
I.
|
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 revenues and
expenses
during the reported period. Actual results could differ from
those
estimates.
|
J.
|
Earnings
Per Share
|
Basic
earning per share (EPS) is computed by dividing income available
to common
stockholders by the weighted average number of common shares
outstanding
for the period. Diluted EPS reflects the potential dilution that
could
occur if securities or other contracts to issue common stock
were
exercised or converted into common stock or resulted in the issuance
of
common stock that then shared in the earnings of the entity.
|
K.
|
Income
Taxes
|
Deferred
tax liabilities or assets reflect temporarily differences between
amounts
of assets and liabilities for financial and tax reporting and
are
adjusted, as appropriate, to reflect changes in tax rates expected
to be
in effect when the temporary differences reverse.
|
L.
|
Stock-Based
Compensation
|
The
Company accounts for equity-based compensation arrangements in
accordance
with the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations,
and complies with the disclosure provisions of SFAS No. 123,
“Accounting
for Stock-Based Compensation.” All equity-based awards to non-employees
are accounted for at their fair value in accordance with SFAS
No. 123.
Under APB No. 25, compensation expense is based upon the difference,
if
any, on the date of grant, between the fair value of the Company’s stock
and the exercise price. Pro forma information (see Note 12) regarding
the
Company’s net income and net earnings per share is required by SFAS No.
123 and has been determined as if the Company had accounted for
its
employee stock options under the fair value method prescribed
by SFAS No.
123.
|
M.
|
Foreign
Currency Translation
|
Assets
and liabilities of subsidiaries operating outside United Kingdom
with a
functional currency other than Pound are translated into Pounds
using year
end exchange rates, costs and expenses are translated at the
average
exchange rate effective during the year. Foreign currency translation
gains and losses are included in the shareholders equity section.
|
N.
|
Recent
Accounting Pronouncements G.
|
In
December 2004, the FASB issued statement of financial Accounting
Standards
No. 123 (revised) ” Share based payments (revised 2004)” (SFAS 123R)
requiring that the compensation cost relating to share based
payment
transactions be recognized in financial statements. The cost
is to be
measured based on the fair value of the equity or liability instruments
issued. SFAS 123R is effective as of the first interim or annual
reporting
period beginning after December 15, 2005. We currently expect
that the
adoption of SFAS 123R will reduce 2005 diluted earnings by £.08 to £.09
per share.
|
In
January 2003, the FASB issued FIN 46, which provides guidance
on
consolidation of variable interest entities. In December 2003,
the FASB
referred the effective date of FIN 46 for certain variable interest
entities (non special purpose entities) until the first quarter
of 2004.
The provisions of FIN 46 do not have effect on the consolidated
financial
statements.
|
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
Prepaid
acquisition costs
|
£130,143
|
$
|
251,176
|
||||
Other
prepaid expenses
|
184,781
|
356,627
|
|||||
Due
from Swiftglobal, Limited (nonaffiliated entity)
|
24,363
|
47,021
|
|||||
Due
from Story Ltd. (affiliated entity)
|
15,960
|
30,803
|
|||||
Due
from WS Telecom Inc.
|
142,429
|
274,888
|
|||||
Other
receivables
|
195,848
|
377,986
|
£693,524
|
$
|
1,338,501
|
The
Company has a non-interest bearing loan of £247,931 due from shareholders.
Which has been classified as noncurrent and is to be repaid as
follows.:
|
Convenience
translation into US$
|
||||||||
2005
|
£
|
123,965
|
$
|
239,252
|
||||
2006
|
123,966
|
239,254
|
£
|
247,931
|
$
|
478,506
|
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
Prepaid
acquisition costs
|
£130,143
|
$
|
251,176
|
||||
Cost
|
|||||||
Equipment
held under capital lease
|
£656,781
|
$
|
1,267,587
|
||||
Office
furniture and equipment
|
46,187
|
89,141
|
|||||
Development
costs
|
92,815
|
179,133
|
|||||
Compuer
equipment
|
721,071
|
1,391,667
|
£1,516,854
|
$
|
2,927,528
|
Accumulated
Depreciation under capital lease
|
|||||||
Equipment
held under capital lease
|
£125,630
|
$
|
242,466
|
||||
Office
furniture and equipment
|
14,693
|
28,358
|
|||||
Development
costs
|
35,226
|
67,986
|
|||||
Computer
equipment
|
86,012
|
166,003
|
£261,561
|
$
|
504,813
|
The
Company has investments in two business ventures as follows:
47 1/2% of
Auracall Limited (“Auracall”) and 40% of Story Telecom Ltd. (“Story”),
both start up entities in the U.K. Through December 31, 2004,
the
cumulative net loss of Story has exceeded the Company’s investments
therein, Accordingly, such investments have been reduced to zero.
Story
and Auracall Limited buy their telecommunications services they
resell,
from the Company.
|
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
Prepaid
acquisition costs
|
£
|
130,143
|
$
|
251,176
|
||||||
Cost
|
£
|
57,816
|
$
|
111,585
|
||||||
Accumulated
amortization
|
710
|
1,370
|
£
|
57,106
|
$
|
110,215
|
During
2004, the Company acquired a communication license for operating
Xfone
Israel at a cost of £57,816, which is being amortized over 20 year term of
the license.
|
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
Prepaid
acquisition costs
|
£
|
130,143
|
$
|
251,176
|
||||||
Corporate
taxes
|
£
|
81,412
|
$
|
157,125
|
||||||
Professional
fees
|
85,226
|
164,487
|
||||||||
Payroll
and other taxes
|
17,901
|
34,549
|
||||||||
Others
|
39,493
|
76,221
|
£
|
224,032
|
$
|
432,382
|
|
|
|
|
December
31, 2004
|
|
|
December
31,
2004 Convenience translation into U.S.$ |
Prepaid
acquisition costs
|
£130,143
|
$
|
251,176
|
||||
First
National Finance - maturity 2005, annual
|
£2,000
|
$
|
3,860
|
||||
Interest
rate 7.16%
|
|||||||
Newcourt
- maturity 2004-5, annual interest rate 7.16%
|
1,167
|
2,252
|
|||||
Bank
Hapoalim - maturity, October 2009
|
|||||||
annual
interest of the bank's prime rate
|
|||||||
plus
1%, payable in 58 equal payments of
|
|||||||
Pound
7,654 including interest
|
380,497
|
734,359
|
|||||
Shareholder
(minority interest holder) due and payable, November 2008
|
|||||||
annual
interest at Israeli consumer price index plus 4%
|
198,244
|
382,611
|
581,908
|
1,123,082
|
||||||
Less
current portion
|
72,041
|
139,039
|
£509,867
|
$
|
984,043
|
Five
years maturity of long term debts is as follows:
|
Convenience
translation into US$ |
December
31,
|
||||||||||
2005
|
£
|
72,041
|
$
|
139,039
|
||||||
2006
|
73,560
|
141,971
|
||||||||
2007
|
78,564
|
151,629
|
||||||||
2008
|
282,153
|
544,555
|
||||||||
2009
|
75,590
|
145,888
|
£
|
581,908
|
$
|
1,123,082
|
The
Company is the lessee of switching and other equipment under
capital
leases expiring in various years through 2007. The assets and
liabilities
under capital leases are recorded at the lower of the present
value of the
minimum lease payments or the fair value of the asset. The assets
are
depreciated over their estimated productive lives. Depreciation
of assets
under capital leases is included in depreciation expense for
2004.
|
Minimum
future lease payments under capital leases as of December 31,
2004 for
each of the next four years are:
|
Convenience
translation into US$ |
December
31,
|
|||||||
2005
|
£164,079
|
$
|
316,672
|
||||
2006
|
117,961
|
227,665
|
|||||
2007
|
33,674
|
64,991
|
Total
minimum lease payments
|
315,714
|
609,328
|
|||||
Less:
amount representing interest
|
(25,782
|
)
|
(49,759
|
)
|
Present
value of net minimum lease payment
|
£289,932
|
$
|
559,569
|
|
Interest
rates on capitalized leases vary up to 9.6%, per annum.
|
The
|
Company
does not file consolidated tax returns.
|
The
|
following
table reflects the Company’s deferred tax assets and (liabilities) at
December 31, 2004:
|
Convenience
translation into US$ |
Defered
tax liabilities:
|
£27,103
|
$
|
52,309
|
||||
Accelerated
tax writeoff of fixed assets
|
|||||||
Deferred
tax assets:
|
|||||||
Allowance
for doubtful debts
|
27,051
|
52,208
|
Net
deferred taxes liabilities
|
£52
|
$
|
101
|
The
provision for income taxes differs from the amount computed by
applying
the statutory income tax rates to income before taxes as follows:
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Income
tax computed at statutory rate
|
£17,969
|
£160,550
|
$
|
34,680
|
$
|
309,862
|
|||||||
Effect
of tax authority adjustments
|
11,601
|
12,435
|
22,390
|
24,000
|
|||||||||
Other
|
--
|
1,638
|
--
|
3,161
|
|||||||||
Effect
of permanent differences (including
|
--
|
||||||||||||
effect
of nonconsolidated tax filings)
|
1,948
|
42,656
|
3,760
|
82,326
|
|||||||||
Utilization
of net operating loss
|
--
|
(823
|
)
|
--
|
(1,589
|
)
|
Provision
for income taxes
|
£31,518
|
£216,456
|
$
|
60,830
|
$
|
417,760
|
Xfone
entered into an agreement with an investor in Israel, whereby
the later
purchased 26% interest in Xfone Israel owned by an existing shareholder
through providing a bank guarantee of £1,203,731 ($2,321,116) to the
Ministry of Communications of the State of Israel which replaced
an
existing bank guarantee given by the Company. As part of the
agreement,
the Company agreed to indemnify the investor for any damage caused
to him
due to the forfeiture of the bank guarantee with the Ministry
of
Communications on account of any act and/or omission of Xfone,
provided
that the said act or omission is performed against the opinion
of the
investor or without his knowledge. Further, the Company agreed
that if at
the end of the first two years of Xfone Israel business activity,
its
revenues shall be less than £1,037,200 ($2,000,000), or if it shall cease
business activity (at any time), the Company shall secure the
return of
the bank guarantee to the investor.
|
In
connection with a Stock Purchase Agreement, clarified on July
30, 2001,
Campbeltown Business Limited (“Campbeltown”), an entity owned by the
Nissenson family including the Company’s President and Chief Executive
Officer, a shareholder, holds options from the Company and one
of its
directors to purchase 500,000 additional shares of the Company
for the
amount of $200,000. This transaction can be executed either by
the Company
issuing new shares, or by the director selling his private shares
as long
as he has an adequate amount of shares, as the director will
decide. This
option will expire on December 31, 2005.
|
The
holders of common stock are entitled to one vote for each share
held of
record on all matters submitted to a vote of the stockholders.
The common
stock has no pre-emptive or conversion rights or other subscription
rights. There are no sinking fund provisions applicable to the
common
stock.
|
During
January 2004, the Company issued 17,500 shares and 17,500 Warrants
A, and
17,500 Warrants B for consulting services. In addition the Company
granted
100,000 Warrants A for legal services. During February 2004,
the Company
granted 50,000 Warrants A for consulting services.
|
On
February 12, 2004, the Company closed an offering of 986,737
restricted
shares of common stock, with 1,136,737 Warrants A and 986,737
Warrants B.
The Company sold 969,237 shares of common stock with a Warrants
A and B
attached for aggregate proceeds of £1,580,278. Costs associated with this
funding were £433,051 from the proceeds of the offering and an additional
150,000 Warrant A, valued at 33,179. Each Warrant A, which is
not freely
transferable, entitles the owner to purchase one share, until
not later
than January/February 2009 at an exercise price of $5.50. Each
Warrant B,
which is not freely transferable, entitles the owner to purchase
one
share, until not later than until the earlier of 10 days after
our common
stock is traded on the NASDAQ Small Cap or the American Stock
Exchange.
The Warrants B are exercisable at an exercise price of $3.50.
Warrants B
were expired on November 2004 according to the warrants terms.
The Company
sold shares with attached Warrants A and B to a total of 16 persons
and 8
entities.
|
The
offering agreement requires the Company is issue additional shares
for nil
consideration to the participants of the offering under certain
conditions, as defined. Accordingly, on November 17, 2004, the
Company
issued 109,716 shares according to this agreement.
|
The
following restricted stock was issued, in Pounds during 2004:
|
Month Issued
|
|
|
Number
of Shares
|
|
|
Price
Per Share
|
|
|
Share
Capital
|
|
|
Contributions
in
excess of par Value |
|
|
Total
issue
Price |
|
February
|
986,737
|
1.628
|
£680.00
|
£1,605,728
|
£1,606,408
|
|||||||||||
Cost
of issuance in February
|
(433,051
|
)
|
(433,051
|
)
|
||||||||||||
May
|
3,000
|
1.618
|
2
|
4,852
|
4,854
|
|||||||||||
July
|
3,734
|
0.694
|
2
|
2,589
|
2,591
|
|||||||||||
November
|
109,716
|
76
|
(76
|
)
|
0
|
1,103,187
|
£760.00
£1,180,042
|
£1,180,802
|
Stock
Option Plan
|
In
November 2004, the Company’s board of directors approved the adoption of
the principal items forming the Company’s 2004 stock option plan (The
“Plan”) for the benefit of employees, officers, directors, consultants
and
subcontractors of the Company including it’s subsidiaries.
|
The
purpose of the Plan is to enable the Company to attract and retain
the
best available personnel for positions of substantial responsibility,
to
,provide an incentive to such persons presently engaged with
the Company
and to promote the success of the Company business.
|
The
Plan will provide for the grant of options an aggregate of 5,500,000
shares of the Company’s common stock. The Plan shall be administered by
the board to determine the persons to whom options are granted,
the number
of options that are granted, the number of shares to be covered
by each
option, the options may be exercised and whether the options
is an
incentive or non-statutory option.
|
At
November 24, 2004 3,200,000 options were granted under the plan
described
above according to the following terms:
|
Option
exercise price — $3.5, vesting date – 12 month from the date of grant,
expiration date – 5 years from the vesting date.
|
Stock
Option Plan (cont..)
|
Transactions
related to the above Plan during the period ending December 31,
2004 were
as follows:
|
|
|
|
|
2004
|
Exercise Price | |||
Options
outstanding at the beginning of the period
|
--
|
--
|
||||||
Granted
|
3,200,000
|
$
|
3
|
.50
|
||||
Forfeited
|
--
|
--
|
||||||
Options
outstanding at the end of the period
|
3,200,000
|
$
|
3
|
.50
|
||||
Exercised
at end of the period
|
--
|
--
|
||||||
Weighted
average fair value of options granted
|
--
|
$
|
0
|
.427
|
The
following table summarize information about options outstanding
and
exercisable at December 31, 2004:
|
|
Price
range
|
|
|
|
Number
outstanding 12.31.2004 |
|
|
Average
remaining life (years) |
|
Average
exercise price |
|
$
|
3.50
|
3,200,000
|
6
|
$
|
3
|
.50
|
Stock
Option Plan (cont.)
|
The
Company accounts for stock options plan grants to employees and
directors
in accordance with Accounting Principles Board Opinion No. 25,
“Accounting
for Stock Issued to Employees” (APB No. 25). Under APB No. 25, there is no
compensation cost recognized for the Company’s stock option plan, because
the options granted under the plan have an exercise price greater
than the
market value of the underlying stock at the grant date. Statement
of
Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), as amended, allows, but does not require
companies to record compensation cost for fixed stock option
plans using a
fair value based method. As permitted by SFAS No. 123, the Company
elected
to account for compensation cost for the stock option plan using
the
intrinsic value based method under APB No. 25. See Recent Accounting
Pronouncements section of this Note for discussion of recently
issued
rules regarding accounting for share-based payments. The following
table
sets forth pro forma information as if compensation cost had
been
determined consistent with the requirements of SFAS No. 123.
The fair
value of the options granted was estimated on the date of grant
using
Black-Scholes option pricing model.
|
Proforma
reporting based on the fair value method
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Proforma
|
Period
Ended December 31,
2004
|
Cost
of compensation - net
|
£
--
|
£
708,615
|
|||||
Net
income (loss) for the period
|
39,874
|
(668,741
|
)
|
||||
Basic
net earnings (loss) per share
|
0.007
|
(0.111
|
)
|
||||
Diluted
net earning (loss) per share
|
0.005
|
(0.077
|
)
|
Year
Ended December 31, 2004
|
|
|
|
||||
|
Income
(Numerator) |
Shares
(Denominator) |
Weighted
Average
Per Share Amount |
Per
Share
Amounts |
|||
Convenience
translation into U.S. $
|
Net
Income
|
£39,874
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
£39,874
|
5,998,252
|
£
0.00
|
$
0.013
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Options
and warrants
|
--
|
2,634,698
|
--
|
--
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
£39,874
|
8,632,950
|
£
0.00
|
$
0.009
|
Year
Ended December 31, 2004
|
|
|
|
||||
|
Income
(Numerator) |
Shares
(Denominator) |
Weighted
Average
Per Share Amounts |
Per
Share
Amounts |
|||
Convenience
translation into U.S. $
|
Net
Income
|
£421,445
|
|
|
|
|||||||||
Basic
EPS:
|
|
|
|
|
|||||||||
Income
available to common stockholders
|
£421,445
|
5,098,286
|
£0.08
|
$
|
0.154
|
||||||||
|
|
|
|
|
|||||||||
Effect
of dilutive securities:
|
|
|
|
|
|||||||||
Options
and warrants
|
--
|
500,000
|
--
|
--
|
|||||||||
Diluted
EPS:
|
|
|
|
|
|||||||||
Income
available to common stockholders
|
£421,445
|
5,598,286
|
£0.08
|
$
|
0.154
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
A
Marketing
& Selling:
|
|
|
|
|
|||||||||||
Advertising
|
£
60,363
|
£25,365
|
116,500
|
$
|
48,954
|
||||||||||
Consultancy
|
75,471
|
83,970
|
145,659
|
162,062
|
|||||||||||
Commissions
|
1,408,860
|
964,623
|
2,719,099
|
1,861,723
|
|||||||||||
Others
|
81,594
|
17,054
|
157,474
|
32,914
|
|||||||||||
£1,626,288
|
£1,091,012
|
$
|
3,138,732
|
$
|
2,105,653
|
||||||||||
B
General
& Administrative:
|
|
|
|
|
|||||||||||
Salaries
& benefits
|
£
835,495
|
£410,024
|
$
|
1,612,505
|
$
|
791,346
|
|||||||||
Rent
& maintenance
|
233,196
|
84,121
|
450,068
|
162,354
|
|||||||||||
Communications
|
23,005
|
4,830
|
44,400
|
9,322
|
|||||||||||
Professional
fees
|
149,911
|
224,087
|
289,328
|
432,488
|
|||||||||||
Bad
debts
|
125,333
|
109,532
|
241,893
|
211,397
|
|||||||||||
Depreciation
|
51,376
|
89,592
|
99,156
|
172,913
|
|||||||||||
Others
|
155,410
|
130,124
|
299,941
|
251,138
|
|||||||||||
£1,573,726
|
£1,052,310
|
$
|
3,037,291
|
$
|
2,030,958
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Financing
Expenses, Net:
|
|||||||||||||
Bank
charges
|
£33,420
|
£
31,013
|
$
|
64,501
|
$
|
59,854
|
|||||||
Interest
on capital leases
|
17,581
|
9,578
|
33,931
|
18,486
|
|||||||||
Foreign
currency exchange
|
31,027
|
2,305
|
59,882
|
4,449
|
|||||||||
Other
interest and charges
|
1,375
|
1,387
|
2,654
|
2,677
|
£83,430
|
£
44,283
|
$
|
160,968
|
$
|
85,466
|
Refer
to notes 4 and 13 for additional related party activity
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Shareholder's
salaries
|
£
120,736
|
£
147,407
|
$
|
233,020
|
$
|
284,496
|
|||||||
Bonus
|
£
5,000
|
£
-0
|
$
|
9,650
|
$
|
--
|
|||||||
Cambeltown
Business Limited:
|
|||||||||||||
Fees
|
£
57,000
|
£
55,000
|
$
|
110,010
|
$
|
106,150
|
|||||||
Consultancy
|
£
44,643
|
£
41,237
|
$
|
86,161
|
$
|
79,587
|
|||||||
Due
to Campbeltown
|
£
6,950
|
£
6,950
|
$
|
13,414
|
$
|
13,414
|
|||||||
Accrued
expenses
|
£
18,243
|
£
-
|
$
|
35,209
|
$
|
--
|
|||||||
Vision
Consulatants Limited:
|
|||||||||||||
Fees
|
£
101,643
|
£
55,000
|
$
|
196,171
|
$
|
106,150
|
|||||||
Story
Telecom Limited:
|
|||||||||||||
*
Revenues
|
£
4,778,564
|
£
2,715,231
|
$
|
9,222,629
|
$
|
5,240,396
|
|||||||
Trade
payable
|
£
-
|
£
22,771
|
$
|
--
|
$
|
43,948
|
|||||||
Commissions
|
£
296,339
|
£
38,930
|
$
|
571,934
|
$
|
75,135
|
|||||||
*Due
from Story Telecom - net
|
£
1,137,863
|
£
413,644
|
$
|
2,196,076
|
$
|
798,333
|
|||||||
*Directly
and indirectly through Global VOIP Ltd.
|
|||||||||||||
Auracall
Limited:
|
|||||||||||||
**Revenues
|
£
909,007
|
£
318,774
|
$
|
1,754,384
|
$
|
615,234
|
|||||||
Commissions
|
£
496,822
|
£
171,234
|
$
|
958,866
|
$
|
330,482
|
|||||||
Due
to Auracall - net
|
£
86,097
|
£
4,533
|
$
|
166,167
|
$
|
8,749
|
|||||||
Trade
payable
|
£
-
|
£
18,040
|
$
|
--
|
$
|
34,817
|
|||||||
**
Resulting from Auracall sales
|
|||||||||||||
Dionysos
Limited:
|
$
|
--
|
$
|
--
|
|||||||||
Fees
|
£
16,274
|
£
-
|
$
|
31,409
|
$
|
--
|
|||||||
The
Company has annual rent commitments under a non-cancellable operating
lease of £38,200, which terminates in December 2012. Rent expense for the
two years ended December 31, 2004 and 2003, were £51,026 and £49,500,
respectively.
|
The
Company has a performance based incentive agreement with its
Chairman of
the Board and Campbeltown which provides to each person/entity
1% of the
Company’s revenues exclusive of revenues from Story.
|
The
Company has an 18 month renewable consulting agreement with Campbeltown,
which was renewed on November 2004. Under this agreement Campbeltown
agrees to provide (a) analysis of proposed acquisitions; (b)
such markets
for the Company’s telecommunications services in additional countries; (c)
formulate strategies for the Company’s future growth plans; and (d)
introduce potential customers to the Company’s business. The Company is
obligated to pay Campbeltown £2,000 ($3,860) per month plus an additional
performance bonus based upon monthly revenue targets as follows:
|
Target
Monthly Revenue
|
|
|
Monthly
Bonus
|
|
|
|
Convenience Translation US$ | ||||
Up
to£125,000
|
£
--
|
$
|
--
|
||||||||
From£125,000
to£150,000
|
£1,250
|
$
|
2,413
|
||||||||
From£150,000
to£175,000
|
£2,500
|
$
|
4,825
|
||||||||
Over£175,000
|
£2,750
|
$
|
5,308
|
The
Company has commission agreements with various resellers that
are entitled
to 10% of the revenues that they generate.
|
The
Company anticipates annual maintenance of equipment to be
approximately£50,000 ($96,500).
|
Approximately,
42% and 22% of total 2004 revenues were derived, respectively,
from two
customers and approximately 36% and 18% of total 2003 revenues
were
derived, respectively, from two customers.
|
Approximately,
48% and 21% of the total accounts receivable at 2004 were due
from two
customers.
|
Approximately,
20%, 20%, 20% and 12% of the Company’s purchases are from four suppliers
for the year ended December 31, 2004, and 31%, 24%, 20% and 15%
are from
two suppliers for the year ended December 31, 2003.
|
The
Company may periodically maintain cash balances at a commercial
bank
within the countries that it operates which are in excess of
respective
government insurance limits.
|
The
percentage of the Company’s revenues is derived from the following
segments.
|
Years
Ended
December 31, |
|||||||
|
|
|
2004
|
|
|
2003
|
|
Telephone
minute billing plus
|
|||||||
messaging
services,
|
|||||||
including
facsimilie, nodal, and
|
|||||||
e-mail
related services
|
52
|
%
|
55
|
%
|
|||
Mobile
phone service
|
4
|
%
|
7
|
%
|
|||
Calling
cards
|
44
|
%
|
38
|
%
|
100
|
%
|
100
|
%
|
The
Company has four major types of customers:
|
•
|
Residential
– These customers either must dial “dial 1 service” or acquire a box that
dials automatically.
|
•
|
Commercial
– Smaller business are treated the same as residential customers.
Larger
businesses’ PBX units are programmed.
|
•
|
Governmental
agencies – Include the United Nations World Economic Forum, the Argentine
Embassy and the Israeli Embassy.
|
•
|
Resellers,
such as WorldNet and Vsat – We provide them with our telephone and
messaging services. For WorldNet we also provide the billing
system.
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Revenues
|
|||||||||||||
Telephone
& messaging
|
£5,930,541
|
£3,996,732
|
$
|
11,445,945
|
$
|
7,713,692
|
|||||||
Mobile
|
480,451
|
503,475
|
927,270
|
971,707
|
|||||||||
Calling
Cards
|
4,919,124
|
2,781,974
|
9,493,909
|
5,369,210
|
Total
Revenues
|
£11,332,116
|
£7,282,184
|
$
|
21,867,124
|
$
|
14,054,609
|
Direct
Operating Expenses
|
|||||||||||||
Telephone
& Messaging
|
£4,789,133
|
£2,370,941
|
$
|
9,243,027
|
$
|
4,575,916
|
|||||||
Mobile
|
375,598
|
416,918
|
724,904
|
804,652
|
|||||||||
Calling
Cards
|
4,578,359
|
2,604,703
|
8,836,233
|
5,027,077
|
Total
Direct Operating Expenses
|
£9,743,090
|
£5,392,562
|
£18,804
|
10,407,645
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Direct
Operating Profit
|
|||||||||||||
Telephone
& Messaging
|
£
1,141,408
|
£
1,625,791
|
$
|
2,202,918
|
$
|
3,137,776
|
|||||||
Mobile
|
104,853
|
86,557
|
202,366
|
167,055
|
|||||||||
Calling
Cards
|
340,765
|
177,271
|
657,676
|
342,133
|
Total
Profits
|
£
1,587,026
|
£
1,889,619
|
$
|
3,062,960
|
$
|
3,646,964
|
Corporate
and common operating expenses
|
£
1,474,244
|
£
1,223,252
|
£2,845,290
|
$
|
2,360,875
|
||||||||
Operating
Profit
|
£
112,782
|
£
666,367
|
$
|
217,670
|
$
|
1,286,089
|
The
assets of the Company are for common usage for all reportable
segments.
|
Years
Ended
December 31, |
|
Years
Ended
December 31, |
|||||||||||
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
Convenience
translation into
U.S.$
|
Revenues
|
|||||||||||||
England
|
£9,722,528
|
£7,282,181
|
$
|
18,764,479
|
$
|
14,054,609
|
|||||||
United
States
|
1,598,344
|
--
|
3,084,804
|
--
|
|||||||||
Israel
|
9,244
|
--
|
17,841
|
--
|
Total
revenues
|
£11,330,116
|
£7,282,181
|
$
|
21,867,124
|
$
|
14,054,609
|
Direct
Operating Expenses
|
|||||||||||||
England
|
£8,841,441
|
£5,392,562
|
$
|
17,063,981
|
$
|
10,407,645
|
|||||||
United
States
|
882,908
|
--
|
1,704,012
|
--
|
|||||||||
Israel
|
18,741
|
--
|
36,170
|
--
|
Total
direct operating expenses
|
£9,743,090
|
£5,392,562
|
£18,804,163
|
£10,407,645
|
Direct
Operating Profit (Loss)
|
|||||||||||||
England
|
£881,087
|
£1,889,619
|
$
|
1,700,498
|
$
|
3,646,964
|
|||||||
United
States
|
715,436
|
--
|
1,380,792
|
--
|
|||||||||
Israel
|
(9,497
|
)
|
--
|
(18,329
|
)
|
--
|
£1,587,026
|
£1,889,619
|
£3,062,961
|
£3,646,964
|
Corporate
and common operating expenses
|
|||||||||||||
England
|
£805,285
|
£1,223,252
|
$
|
1,554,200
|
$
|
2,360,875
|
|||||||
United
States
|
584,186
|
--
|
1,127,479
|
--
|
|||||||||
Israel
|
84,773
|
--
|
163,612
|
--
|
£1,474,244
|
£1,223,252
|
£2,845,291
|
£2,360,875
|
Operating
Profit
|
|||||||||||||
England
|
£75,802
|
£666,367
|
$
|
146,298
|
$
|
1,286,089
|
|||||||
United
States
|
131,250
|
--
|
253,313
|
--
|
|||||||||
Israel
|
(94,270
|
)
|
--
|
(181,941
|
)
|
--
|
Operating
Profit
|
£112,782
|
£666,367
|
£217,670
|
£1,286,089
|
On
July 1, 2004, in conjunction with this acquisition (see Note
21), Xfone
USA also entered into a management agreement with WS Telecom.
The
management agreement provides that WS Telecom hires and appoints
Xfone USA
as manager to be responsible for the operation and management
of all of WS
Telecom’s business operations, including:
|
•
|
Personnel
– Supervising the current employees and independent contractors
of WS
Telecom with the authority to hire, discharge and direct personnel
for the
conduct of the business;
|
•
|
Accounting
- Supervision and administration of all accounting and the maintenance
of
all books and records for the business;
|
•
|
Contracts
– Maintain all existing contracts necessary for the operation
of the
business and the authority to enter into or renew contract in
WS Telecom’s
name;
|
•
|
Policies
and procedures - Preparation of all policies and procedures for
the
operation of the business; and
|
•
|
Budgets
– Preparation of all operating, capital or other budgets.
|
In
consideration of these management services, WS Telecom has assigned
and
transferred as of July 1, 2004 to Xfone USA all revenues generated
from
the operations of the business and Xfone USA has agreed to pay
from the
revenues the normal operating, maintenance, administrative and
similar
expenses of the business. Further, WS Telecom designates Xfone
USA as the
controlling party of the current operating accounts of the business.
In
addition, Xfone USA, in its discretion, will have the right to
make
advances or loans to WS Telecom payable on demand (or if no demand
payable
in equal quarterly installments of principal and interest) for
an amount
up to $500,000, with interest at 7% per annum from the date advanced
until
paid for the payment of any amounts due during the term of the
management
agreement for any of the “special liabilities” as defined in the
management agreement. Two senior executives of WS Telecom have
jointly and
severally, unconditionally guaranteed the prompt payment when
due of these
manager loans.
|
|
For
the Six months ended
December 31, 2004 |
|
Convenience
translation into US$
|
||||
Revenue
|
£1,598,344
|
$
|
3,084,804
|
||||
Cost
of sales
|
882,908
|
1,704,012
|
|||||
Gross
profit
|
715,436
|
1,380,792
|
|||||
Selling,
general and administration
|
665,902
|
1,285,191
|
|||||
Taxes
on income
|
17,719
|
34,198
|
|||||
Net
income after tax expenses
|
£31,815
|
$
|
61,403
|
A.
|
In
March 2005, Xfone Communications Ltd. officially changed its
name to Xfone
018 Ltd.
|
B.
|
OnJanuary
31, 2005 the Company transferred a 5% ownership share in Xfone
Israel to
an unrelated party.
|
C.
|
The
Company granted to certain employees on February 6, 2005 a total
of
730,000 options subject to the principles of the stock option
plan of the
Company and according to the following terms: The “Vesting Date” of the
options will be over a period of 4 years as follows: 25% of the
options
are vested after a year from the Date of Grant. Thereafter, 1/16
of the
options are vested every 3 months for the following 3 years.
Expiration
date for all abovementioned options is 5.5 years from the Date
of Grant.
|
D.
|
On
March 10, 2005, the Company consummated its merger with WS Telecom,
Inc.,
d/b/a/ eXpeTel Communications, Inc., a Mississippi corporation
and its
subsidiaries (“eXpeTel”) through Xfone, Inc.‘s subsidiary Xfone USA, Inc.
In connection with this acquisition and according to the agreement,
the
Company is committed to issue 663,650 restricted shares of its
common
stock representing a market value of $2,200,000. The Company
also is
committed to issue a number of warrants with a value of $1,300,000,
the
value of which will be calculated as of the date the Company
and WS
Telecom Inc. enter into a Management Operating Agreement, assuming
90%
volatility of the underlying share of common stock of the Company
in
accordance with the Black Scholes option – pricing model.
|
The
Company anticipates that this acquisition will require, approximately
$1,000,000 for working capital.
|
The
following proforma information has been prepared assuming the
acquisition
had occurred as of December 31, 2004 for balance sheet purposes
and as of
January 1, 2004 for statement of operations purposes:
|
Xfone
Inc.
Consolidated |
WS
Telecom Inc.
d/b/a eXpeTel (Unaudited) |
Proforma
Adjustments (Unaudited) |
Proforma
Combined (Unaudited) |
Proforma
Combined Convenience translation into US$ (Unaudited) |
Current
Assets
|
£
3,886,034
|
£463,352
|
(180,561)
|
£
4,168,825
|
$8,045,832
|
Loan
to shareholder
|
123,966
|
--
|
--
|
123,966
|
239,254
|
Investments
|
20,885
|
--
|
--
|
20,885
|
40,308
|
Fixed
Assets
|
1,255,293
|
588,079
|
--
|
1,843,372
|
3,557,708
|
Excess
of costs over for value
|
--
|
|
|
|
|
of
net assets acquired
|
--
|
--
|
1,900,002
|
1,900,002
|
3,667,005
|
Other
Assets
|
57,106
|
70,051
|
--
|
127,157
|
245,413
|
Total
Assets
|
£
5,343,284
|
£1,121,482;
|
£1,719,441
|
£8,184,207
|
$15,795,520
|
Currnt
Liabilities
|
2,479,429
|
1,084,597
|
(180,561)
|
3,383,465
|
6,530,087
|
Long
Term Liabilities
|
651,863
|
121,787
|
--
|
773,650
|
1,493,145
|
Shareholders
Equity
|
2,211,992
|
(84,902)
|
1,900,002
|
4,027,092
|
7,772,288
|
Total
liabilities and
|
|
|
|
|
|
Shareholders'
Equity
|
£
5,343,284
|
£1,121,482
|
£1,719,441
|
£8,184,207
|
$15,795,520
|
Xfone
Inc.
Consolidated |
WS
Telecom Inc.
d/b/a eXpeTel (Unaudited) |
Proforma
Adjustments (Unaudited) |
Proforma
Combined (Unaudited) |
Proforma
Combined Convenience translation into US$ (Unaudited) |
Revenues
|
£
11,330,1£
|
1,597,697
|
£--
|
£
12,927,813
|
$24,950,679
|
Cost
of Revenues
|
(7,991,375)
|
(883,422)
|
--
|
(8,874,797)
|
(17,128,358)
|
Gross
Profit
|
3,338,741
|
714,275
|
--
|
4,053,016
|
7,822,321
|
Operating
expenses
|
(3,225,959)
|
(663,261)
|
--
|
(3,889,220)
|
(7,506,195)
|
Operating
profit
|
112,782
|
51,014
|
--
|
163,796
|
316,126
|
Financing
expenses - net
|
(83,403)
|
(23,338)
|
--
|
(106,741)
|
(206,010)
|
Other
income
|
21,128
|
(43,400)
|
--
|
(22,272)
|
(42,985)
|
Income
before taxes
|
50,507
|
(15,724)
|
--
|
34,783
|
67,131
|
Equity
in income of affiliated
|
|
|
|
|
|
Company
|
20,885
|
--
|
--
|
20,885
|
40,308
|
Income
before taxes
|
71,392
|
(15,724)
|
--
|
55,668
|
107,439
|
Taxes
on income
|
(31,518)
|
--
|
--
|
(31,518)
|
(60,830)
|
Net
income
|
£
39,874
|
£
15,724
|
£
-
|
£
24,150
|
£
46,609
|
Earning
per Share:
|
|
|
|
|
|
Basic
|
£
0.007
|
|
|
£
0.004
|
$
0.008
|
Diluted
|
£
0.005
|
|
|
£
0.003
|
$
0.006
|
Xfone, Inc. and
Subsidiaries
|
CONSOLIDATED FINANCIAL
STATEMENTS
|
September 30, 2005
|
Unaudited
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
||
September
30, 2005
|
||
Unaudited
|
CONTENTS |
PAGE
|
F-3
|
|
F-5
|
|
F-6
|
|
F-7
|
|
F-9
|
Xfone,
Inc. and Subsidiaries
|
||||||||||
September
30,
|
December
31,
|
September
30,
|
||||||||
2005
|
2004
|
2005
|
||||||||
Unaudited
|
Audited
|
Unaudited
|
||||||||
Convenience
translation into U.S.$
|
||||||||||
Current
assets
|
||||||||||
Cash
|
£ |
1,598,897
|
£ |
797,097
|
$
|
2,811,660
|
||||
Accounts
receivable, net
|
3,113,272
|
2,271,448
|
5,474,688
|
|||||||
Prepaid
expenses and other receivables
|
959,143
|
693,524
|
1,686,654
|
|||||||
Loan
to shareholder
|
123,965
|
123,965
|
217,992
|
|||||||
Total
Current Assets
|
£ |
5,795,277
|
£ |
3,886,034
|
$
|
10,190,994
|
||||
Loan
to shareholder
|
123,966
|
123,966
|
217,994
|
|||||||
Investments
|
64,728
|
20,885
|
113,824
|
|||||||
Fixed
assets
|
||||||||||
Cost
|
2,460,478
|
1,516,854
|
4,326,751
|
|||||||
Less
- accumulated depreciation
|
(446,574
|
)
|
(261,561
|
)
|
(785,300
|
)
|
||||
Total
fixed assets, net
|
2,013,904
|
1,255,293
|
3,541,451
|
|||||||
Other
Assets, net
|
2,523,958
|
57,106
|
4,438,380
|
|||||||
Total
assets
|
£ |
10,521,833
|
£ |
5,343,284
|
$
|
18,502,643
|
||||
The
accompanying notes are an integral part of these consolidated
financial
statements
|
Xfone,
Inc. and Subsidiaries
|
||||||||||
BALANCE
SHEETS
|
||||||||||
September
30,
|
|
December
31,
|
|
September
30,
|
|
|||||
|
|
2005
|
|
2004
|
|
2005
|
|
|||
|
|
Unaudited
|
|
Audited
|
|
Unaudited
|
|
|||
|
|
|
|
|
|
Convenience
translation into U.S.$
|
||||
Current
liabilities
|
||||||||||
Bank
Credit and current portion of Note payables
|
£ |
415,336
|
£ |
72,041
|
$
|
730,368
|
||||
Trade
payables
|
3,062,604
|
2,035,368
|
5,385,591
|
|||||||
Other
liabilities and accrued expenses
|
900,028
|
224,032
|
1,582,697
|
|||||||
Obligations
under capital leases - current portion
|
138,723
|
147,988
|
243,944
|
|||||||
Total
current liabilities
|
£ |
4,516,691
|
£ |
2,479,429
|
$
|
7,942,600
|
||||
Deferred
taxes
|
35,942
|
52
|
63,204
|
|||||||
Notes
payable
|
546,000
|
509,867
|
960,140
|
|||||||
Severance
Pay
|
7,011
|
-
|
12,329
|
|||||||
Obligations
under capital lease
|
66,793
|
141,944
|
117,455
|
|||||||
Convertible
Notes
|
1,074,341
|
-
|
1,889,229
|
|||||||
Total
liabilities
|
£ |
6,246,778
|
£ |
3,131,292
|
$
|
10,984,957
|
||||
Shareholders'
equity
|
||||||||||
Preferred
stock - 50,000,000 shares authorised, none issued
|
||||||||||
Common
stock:
|
||||||||||
25,000,000
shares authorized,
£.000677 par value;
|
||||||||||
6,887,671
issued and outstanding
|
||||||||||
(December
31, 2004 - 6,220,871)
|
4,660
|
4,290
|
8,195
|
|||||||
Foreign
currency translation adjustment
|
134,850
|
1,210
|
237,134
|
|||||||
Contributions
in excess of shares
|
3,318,079
|
1,373,556
|
5,834,842
|
|||||||
Retained
earnings
|
817,467
|
832,936
|
1,437,515
|
|||||||
Total
shareholders' equity
|
4,275,056
|
2,211,992
|
7,517,686
|
|||||||
Total
liabilities and shareholders' equity
|
£ |
10,521,833
|
£ |
5,343,284
|
$
|
18,502,643
|
||||
The
accompanying notes are an integral part of these consolidated
financial
statements
|
STATEMENTS
OF OPERATIONS
|
|||||||||||||||||||
Convenience
translation into U.S.$
|
|||||||||||||||||||
|
|
Three
months Ended
|
|
Nine
months Ended
|
|
Three
months Ended
|
|
Nine
months Ended
|
|
||||||||||
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
||||||||||
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2005
|
|
||||||
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|||||||
Revenues
|
£ |
3,419,183
|
£ |
2,704,934
|
£ |
9,912,515
|
£ |
7,244,644
|
$
|
6,012,634
|
$
|
17,431,158
|
|||||||
Cost
of revenues
|
(2,326,743
|
)
|
(2,004,086
|
)
|
(6,662,272
|
)
|
(5,181,121
|
)
|
(4,091,578
|
)
|
(11,715,605
|
)
|
|||||||
Gross
profit
|
1,092,440
|
700,848
|
3,250,243
|
2,063,523
|
1,921,056
|
5,715,553
|
|||||||||||||
Operating
expenses:
|
|||||||||||||||||||
Research
and development
|
(5,625
|
)
|
(13,890
|
)
|
(15,625
|
)
|
(33,890
|
)
|
(9,892
|
)
|
(27,477
|
)
|
|||||||
Marketing
and selling
|
(334,742
|
)
|
(427,858
|
)
|
(991,802
|
)
|
(1,114,656
|
)
|
(588,644
|
)
|
(1,744,084
|
)
|
|||||||
General
and administrative
|
(678,594
|
)
|
(364,540
|
)
|
(2,098,173
|
)
|
(786,188
|
)
|
(1,193,307
|
)
|
(3,689,637
|
)
|
|||||||
Total
operating expenses
|
(1,018,961
|
)
|
(806,288
|
)
|
(3,105,600
|
)
|
(1,934,734
|
)
|
(1,791,842
|
)
|
(5,461,197
|
)
|
|||||||
Operating
profit
(loss)
|
73,479
|
(105,440
|
)
|
144,643
|
128,789
|
129,214
|
254,356
|
||||||||||||
Financing
expenses - net
|
(26,928
|
)
|
(33,596
|
)
|
(68,203
|
)
|
(26,368
|
)
|
(47,353
|
)
|
(119,935
|
)
|
|||||||
Equity
in income of affiliated company
|
(3,689
|
)
|
-
|
43,843
|
-
|
(6,487
|
)
|
77,098
|
|||||||||||
Loss
from hurricane Katrina
|
(181,055
|
)
|
-
|
(181,055
|
)
|
-
|
(318,385
|
)
|
(318,385
|
)
|
|||||||||
Other
income
|
4,312
|
41,438
|
17,452
|
48,459
|
7,583
|
30,689
|
|||||||||||||
Income
before minority interest and taxes
|
(133,881
|
)
|
(97,598
|
)
|
(43,320
|
)
|
150,880
|
(235,428
|
)
|
(76,177
|
)
|
||||||||
Minority
Interest
|
5,592
|
-
|
59,584
|
-
|
9,834
|
104,779
|
|||||||||||||
Income
Before taxes
|
(128,288
|
)
|
(97,598
|
)
|
16,265
|
150,880
|
(225,594
|
)
|
28,602
|
||||||||||
Taxes
on income
|
9,485
|
24,719
|
(31,734
|
)
|
(49,831
|
)
|
16,679
|
(55,804
|
)
|
||||||||||
Net
(loss) income
|
£ |
(118,803
|
)
|
£ |
-72,879
|
£ |
(15,469
|
)
|
£ |
101,049
|
($208,915
|
)
|
($27,202
|
)
|
|||||
(Loss)
Earnings Per Share:
|
|||||||||||||||||||
Basic
|
£ |
-0.017
|
£ |
-0.010
|
£ |
-0.002
|
£ |
0.020
|
-$0.030
|
-$0.004
|
|||||||||
Diluted
|
£ |
-0.017
|
£ |
-0.010
|
£ |
-0.002
|
£ |
0.010
|
-$0.030
|
-$0.004
|
|||||||||
The
accompanying notes are an integral part of these consolidated
financial
statements
|
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||
|
|
|
|
Other
Comprehensive
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|||||||
|
|
Number
of
|
|
|
|
Contributions
|
|
Foreign
currency
|
|
|
|
|
|
Total
|
|
|||||||
|
|
Ordinary
|
|
Share
|
|
in
excess of
|
|
translation
|
|
Retained
|
|
Comprehensive
|
|
Shareholders'
|
|
|||||||
|
|
Shares
|
|
Capital
|
|
par
value
|
|
adjustments
|
|
Earnings
|
|
income
|
|
Equity
|
||||||||
Balance
at January 1, 2004
|
5,117,684
|
£ |
3,530
|
£ |
193,514
|
£ |
-
|
£ |
793,062
|
£ |
-
|
£ |
990,106
|
|||||||||
Issuance
of shares
|
1,103,187
|
760
|
1,180,042
|
-
|
-
|
1,180,802
|
||||||||||||||||
Currency
Translation
|
-
|
-
|
-
|
1,210
|
-
|
1,210
|
1,210
|
|||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
39,874
|
39,874
|
39,874
|
|||||||||||||||
Balance
at December 31, 2004
|
6,220,871
|
£ |
4,290
|
£ |
1,373,556
|
£ |
1,210
|
£ |
832,936
|
£ |
41,084
|
£ |
2,211,992
|
|||||||||
Unaudited
|
||||||||||||||||||||||
Balance
at January 1, 2005
|
6,220,871
|
4,290
|
1,373,556
|
1,210
|
832,936
|
£ |
-
|
£ |
2,211,992
|
|||||||||||||
Stock
issued during the
|
||||||||||||||||||||||
period
(See note 5)
|
666,800
|
370
|
1,188,201
|
-
|
-
|
1,188,571
|
||||||||||||||||
Warrants
issued during the
|
||||||||||||||||||||||
period
(See note 5)
|
-
|
-
|
756,322
|
-
|
-
|
756,322
|
||||||||||||||||
Currency
Translation
|
-
|
-
|
-
|
133,640
|
133,640
|
133,640
|
||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(15,469
|
)
|
(15,469
|
)
|
(15,469
|
)
|
||||||||||||
Balance
at September 30, 2005
|
6,887,671
|
£ |
4,660
|
£ |
3,318,079
|
£ |
134,850
|
£ |
817,467
|
£ |
118,171
|
£ |
4,275,056
|
|||||||||
Unaudited
|
||||||||||||||||||||||
Convenience
translation into U.S.$:
|
||||||||||||||||||||||
Balance
at January 1, 2005
|
6,220,871
|
7,545
|
2,415,398
|
2,128
|
1,464,717
|
$
|
-
|
3,889,788
|
||||||||||||||
Stock
issued during the
|
||||||||||||||||||||||
period
(See note 5)
|
666,800
|
650
|
2,089,452
|
-
|
-
|
2,090,102
|
||||||||||||||||
Warrants
issued during the
|
||||||||||||||||||||||
period
(See note 5)
|
-
|
-
|
1,329,992
|
-
|
-
|
1,329,992
|
||||||||||||||||
Currency
Translation
|
-
|
-
|
-
|
235,006
|
235,006
|
235,006
|
||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(27,202
|
)
|
(27,202
|
)
|
(27,202
|
)
|
||||||||||||
Balance
at September 30, 2005
|
6,887,671
|
$
|
8,195
|
$
|
5,834,842
|
$
|
237,134
|
$
|
1,437,515
|
$
|
207,804
|
$
|
7,517,686
|
|||||||||
The
accompanying notes are an integral part of these consolidated
financial
statements
|
Xfone,
Inc. and Subsidiaries
|
||||||||||
STATEMENTS
OF CASH FLOWS
|
||||||||||
|
|
|
|
|
|
|||||
|
|
Nine
months Ended
|
|
Nine
months Ended
|
|
|||||
|
|
September
30 ,
|
|
September
30 ,
|
|
|||||
|
|
2005
|
|
2004
|
|
2005
|
|
|||
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
|||
|
|
|
|
|
|
Convenience
translation into U.S.$
|
||||
Cash
flow from operating activities
|
||||||||||
Net
(loss) income
|
£ |
(15,469
|
)
|
£ |
101,049
|
$ |
(27,202
|
)
|
||
Adjustments
to reconcile net cash
|
||||||||||
used
in operating activities
|
503,935
|
(881,235
|
)
|
886,169
|
||||||
Net
cash provided by (used in) operating activities
|
488,466
|
(780,186
|
)
|
858,967
|
||||||
Cash
flow from investing activities
|
||||||||||
Purchase
of other assets
|
(117,348
|
)
|
(11,063
|
)
|
(206,356
|
)
|
||||
Purchase
of equipment
|
(253,743
|
)
|
(712,900
|
)
|
(446,207
|
)
|
||||
Net
cash acquired through purchase of WS Telecom
|
76,594
|
-
|
134,691
|
|||||||
Acquisition
of Ws Telecom
|
(244,208
|
)
|
-
|
(429,440
|
)
|
|||||
Net
cash used in investing activities
|
(538,705
|
)
|
(723,963
|
)
|
(947,312
|
)
|
||||
Cash
flow from financing activities
|
||||||||||
Repayments
of long term loans from banks and others
|
(257,336
|
)
|
(23,885
|
)
|
(452,526
|
)
|
||||
Repayment
of capital lease obligation
|
(124,274
|
)
|
0
|
(218,536
|
)
|
|||||
Proceeds
from short term loans from banks
|
217,937
|
221,849
|
383,242
|
|||||||
Dividend
paid
|
-
|
(86,270
|
)
|
-
|
||||||
Proceeds
from issuance of convertable notes
|
1,015,713
|
1,786,131
|
||||||||
Proceeds
from issuance of common stock
|
-
|
1,376,889
|
-
|
|||||||
Net
cash provided by financing activities
|
852,040
|
1,488,583
|
1,498,311
|
|||||||
Net
Increase (Decrease) in cash
|
801,800
|
(15,566
|
)
|
1,409,966
|
||||||
Cash,
beginning of year
|
797,097
|
977,008
|
1,401,694
|
|||||||
Cash
at end of period
|
£ |
1,598,897
|
£ |
961,442
|
$
|
2,811,660
|
||||
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||||
For
the period ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months Ended
|
|
|
Nine
months Ended
|
|
||||
|
|
September
30 ,
|
|
|
September
30 ,
|
|
||||
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
Convenience
translation into U.S.$
|
|||||||||
Acquisition
of WS Telecom
|
£ |
1,862,000
|
-
|
$
|
3,274,327
|
|||||
Acquiring
equipment under capital
|
||||||||||
lease
obligation
|
157,660
|
|||||||||
Granting
of shares of common stock
|
||||||||||
and
warrants for professional services:
|
||||||||||
Number
of shares and warrants
|
19,819
|
52,500
|
19,819
|
|||||||
Amount
|
£ |
22,675
|
£ |
28,533
|
$
|
39,874
|
||||
The
accompanying notes are an integral part of these consolidated
financial
statements
|
Xfone,
Inc. and Subsidiaries
|
|||||||||||||
STATEMENTS
OF CASH FLOWS (Cont.)
|
|||||||||||||
(1)
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities
|
|
||||||||||||
Nine
months Ended
|
|
Nine
months Ended
|
|
||||||||||
|
|
|
|
September
30,
|
|
September
30,
|
|
||||||
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
||||
|
|
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
||||
|
|
|
|
|
|
|
|
Convenience
translation into U.S.$
|
|||||
Depreciation
and amortization
|
£ |
226,271
|
£ |
79,216
|
$
|
397,898
|
|||||||
Bad
debt expense
|
231,822
|
9,274
|
407,658
|
||||||||||
Severance
pay
|
7,011
|
12,329
|
|||||||||||
Equity
in earnings of investments
|
(43,843
|
)
|
-
|
(77,098
|
)
|
||||||||
Minority
interest
|
(59,584
|
)
|
-
|
(104,778
|
)
|
||||||||
Stock
issued for professional services
|
22,675
|
-
|
39,874
|
||||||||||
384,352
|
88,490
|
675,883
|
|||||||||||
Changes
in assets and liabilities:
|
|||||||||||||
Increase
in trade receivables
|
(594,147
|
)
|
(748,959
|
)
|
(1,044,807
|
)
|
|||||||
Increase
in other receivables
|
(227,630
|
)
|
(514,186
|
)
|
(400,287
|
)
|
|||||||
Increase
in trade payables
|
815,643
|
51,721
|
1,434,308
|
||||||||||
Increase
(Decrease) in other payables
|
89,827
|
241,699
|
157,960
|
||||||||||
Increase
in deferred taxes
|
35,890
|
-
|
63,112
|
||||||||||
Total
adjustments
|
119,583
|
(969,725
|
)
|
210,286
|
|||||||||
|
£ | 503,935 | £ |
(881,235
|
)
|
$
|
886,169
|
||||||
The
accompanying notes are an integral part of these consolidated
financial
statements
|
Xfone,
Inc.
and
Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
Note
1 -
|
Organization
and Nature of Business
|
|
A.
|
Xfone,
Inc. ("Xfone") was incorporated in Nevada, U.S.A. in September,
2000 and
is a provider of voice
|
|
and data telecommunications services, primarily in the United Kingdom. | ||
Xfone’s
holdings in subsidiaries are as follows:
|
||
Swiftnet
Limited("swiftnet") - wholly owned U.K subsidiary
|
||
Xfone
U.S.A Inc("Xfone U.S.A") located in Mississippi- wholly
owned
subsidiary,
|
||
Xfone
018 Ltd, an Israeli company("Xfone 018")- in which Xfone
holds a 69%
ownership share.
|
||
On
April 15, 2004, we established an Israel based subsidiary,
Xfone
Communication Ltd. (which changed its name to Xfone 018
Ltd. in March 2005). On July 4, 2004, the Ministry of Communications
of
the State of Israel granted Xfone 018 a license
to provide international telecom services in Israel. We
started providing
services in Israel through Xfone 018 as of mid-December
2004. Headquartered
in Petach Tikva, Israel, Xfone 018 Ltd. is a telecommunications
service
provider that owns
and operates its own facilities-based telecommunications
switching system.
|
||
Xfone
entered into an agreement to acquire WS Telecom Inc. a
Mississippi
corporation, that
provides telecommunication services in the southeastern
United
States.Xfone U.S.A managed WS Telecom Inc. under
a management agreement until March 10, 2005 (See note 8
and note 9
).
|
||
The
financial statements consolidate the operations of Xfone,
Swiftnet , Xfone
018 and Xfone U.S.A - (collectively the
"Company").
|
||
B.
|
The
financial statements of the company have been prepared
in Sterling ("£")
since this is the currency of the
|
|
prime economic environment, the U.K., in which the majority of the operations of the Company are conducted. | ||
C.
|
The
financial statements have been translated into U.S. dollars
using the rate
of exchange of the U.S. dollar at
|
|
September
30, 2005. The translation was made solely for the convenience
of the
readers. It should be noted that the £
|
||
figures
do not necessarily represent the current cost amounts of
the various
elements presented and that the translated
|
||
U.S.
dollars figures should not be construed as a representation
that the £
currency amounts actually represented, or
|
||
could
be converted into, U.S. dollars. The representative rate
of exchange of
the £ at September 30, 2005 was £1 =
|
||
1.7585
U.S.$.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
2 -
|
Significant
Accounting Policies
|
|
The
financial statements are prepared in accordance with generally
accepted
accounting principles in the United States. The
|
||
significant
accounting policies followed in the preparation of the financial
statements, applied on a consistent basis, are as
|
||
follows:
|
||
A.
|
Principles
of Consolidation and Basis of Financial Statement Presentation
- The
consolidated financial statements have been
|
|
prepared
in conformity with accounting principles generally accepted
in the United
States of America (GAAP) and include the
|
||
accounts
of the Company and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been
|
||
eliminated
in consolidation.
|
||
A
minority interest in the loss of a subsidiary will be recorded
according
to the respective equity interest
|
||
of
the minority and up to it's exposure and/or legal obligation
to cover the
subsidiary losses in case of equity reduced
|
||
to
zero or below.
|
||
B.
|
Accounts
Receivable
|
|
Accounts
receivable are recorded at net realizable value consisting
of the carrying
amount less the allowance for uncollectible
|
||
accounts.
|
||
The
Company uses the allowance method to account for uncollectible
accounts
receivable balances. Under the allowance method,
|
||
estimate
of uncollectible customer balances is made using factors such
as the
credit quality of the customer and the economic
|
||
conditions
in the market. Accounts are considered past due once the unpaid
balance is
90 days or more outstanding, unless payment terms
|
||
are
extended. When an account balance is past due and attempts
have been made
to collect the receivable through legal or other means
the
|
||
amount
is considered uncollectible and is written off against the
allowance
balance.
|
||
|
||
At
September 30, 2005 the accounts receivable are presented net
of an
allowance for doubtful accounts
|
||
of
£414,860
|
||
C.
|
Investments
|
|
Investments
in affiliates over which we have a significant influence, but
not a
controlling interest, are accounted for using the equity
|
||
method
of accounting. All equity investments are periodically reviewed
to
determine if declines in fair value below
|
||
cost
basis are other than temporary. If the decline in fair value
is determined
to be other than temporary,
|
||
an
impairment loss is recorded and the investment is written down
to a new
carrying value.
|
||
In
case of losses the equity of such investments is reduced to
zero.
|
||
D.
|
Equipment
|
|
Equipment
is stated at cost. Depreciation is calculated by the declining
balance
method over the estimated useful lives
of
|
Methods
|
Useful
Life
|
|
Switching
equipment
|
straight
line
|
10
years
|
Machinery
and equipment
|
reducing
balance and straight line
|
3-4
years
|
Furniture
and fixtures
|
reducing
balance and straight line
|
4-14
years
|
Motor
vehicles
|
reducing
balance
|
4
years
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
2 -
|
Significant
Accounting Policies (Cont.)
|
|
E.
|
Other
intangible assets
|
|
Other
intangible assets with determinable lives consist of license
for
communication services and are
|
||
amortized
over the 20 year term of the license.
|
||
F.
|
Long
-Lived Assets
|
|
The
management periodically evaluate the recoverability of the
carrying amount
of long-lived assets (including property,
|
||
plant
and equipment, and intangible assets with determinable lives)
whenever
event or changes in circumstances indicate
|
||
that
the carrying amount of an asset may not be fully recoverable.
The
management evaluate events or changes in circumstances based
on
|
||
a
number of factors including operating results, business plans
and
forecasts, general and industry trends and, economic
|
||
projections
and anticipated cash flows. An impairment, if any, is assessed
when the
undiscounted expected future cash flows
|
||
derived
from an asset are less than its carrying amount. Impairment
losses are
measured as the amount by which the
|
||
carrying
value of an asset exceeds its fair value and are recognized
in earnings.
|
||
The
management also continually evaluate the estimated useful
lives of all
long-lived assets and periodically revise
|
||
such
estimates based on current events.
|
||
G.
|
Revenue
Recognition
|
|
The
Company's source of revenues results from charges to customers
for the
call minutes they use while on the Company's
|
||
telecommunications
system. Such revenues are recognized at the time this service
is rendered.
Amounts prepaid by customers are
|
||
deferred
and recorded as a liability and then recorded as revenue
when the customer
utilizes the service. Messaging
|
||
services
customers are being charged on a per minute basis, per fax
page or email.
Commissions to agents are accounted as
|
||
marketing
costs for the Company.
|
||
H.
|
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 revenues and expenses during the
|
||
reported
period. Actual results could differ from those
estimates.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
2 -
|
Significant
Accounting Policies (Cont.)
|
|
I.
|
Earnings
Per Share
|
|
Basic
earning per share (EPS) is computed by dividing income
available to common
stockholders by the weighted average number of
|
||
common
shares outstanding for the period. Diluted EPS reflects
the potential
dilution that could occur if securities or
|
||
other
contracts to issue common stock were exercised or converted
into common
stock or resulted in the issuance of
|
||
common
stock that then shared in the earnings of the entity.
|
||
J.
|
Income
Taxes
|
|
Deferred
tax liabilities or assets reflect temporarily differences
between amounts
of assets and liabilities for financial and tax reporting
|
||
and
are adjusted, as appropriate, to reflect changes in tax
rates expected to
be in effect when the
|
||
temporary
differences reverse.
|
||
K.
|
Stock-Based
Compensation
|
|
The
Company accounts for equity-based compensation arrangements
in accordance
with the provisions of Accounting Principles Board
|
||
("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related
interpretations, and complies with the disclosure
|
||
provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation."
All
equity-based awards to non-employees are
|
||
accounted
for their fair value in accordance with SFAS No. 123. Under
APB No. 25,
compensation expense is based upon the difference,
|
||
if
any, on the date of grant, between the fair value of the
Company's stock
and the exercise price.
|
||
Pro
forma information (See note 5) regarding the Company's
net income (loss)
and net earnings (loss) per share is required by SFAS No
123 and has been
|
||
determined
as if the Company had accounted for its employee stock
options under the
fair value method prescribed by SFAS No. 123
|
||
L.
|
Foreign
currency translation
|
|
Assets
and liabilities of subsidiaries operating outside United
kingdom with a
functional currency other then Pound are translated
|
||
into
Pounds, the reporting currency, using year end exchange
rates. Sales
,costs and expenses are translated at the average exchange
rate effective
during the period.
|
||
Foreign
currency translation gains and losses are included in the
shareholders'
equity section.
|
||
M.
|
Goodwill
and Indefinite-Lived Purchased Intangible Assets
|
|
In
accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets",
goodwill acquired in business combination is assigned
to
|
||
reporting
units that are expected to benefit from the synergies of
the combination
as of the acquisition date. The company assesses
|
||
goodwill
and indefinite-lived intangible assets for impairment annually
at the end
of each year and more frequently if events and
|
||
circumstances
indicate impairment may have occurred in accordance with
SFAS No.
142.
|
||
SFAS
142 also requires that the fair value of indefinite-lived
purchased
intangible assets be estimated and compared to the carring
value.
|
||
The
company recognizes an impairment loss when the estimated
fair value of the
indefinite-lived purchased intangible assets is less than
the
|
||
carrying
value.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
2 -
|
Significant
Accounting Policies (Cont.)
|
|
N.
|
Recent
Accounting Pronouncements
|
|
In
December 2004, the FASB issued statement of financial Accounting
Standards
No.123 (revised)"Share based payments(revised 2004)"
|
||
(SFAS
123R) requiring that the compensation cost relating to share
based payment
transactions be recognized in financial
|
||
statements.
The cost is to be measured based on the fair value of the
equity or
liability instruments issued. SFAS 123R is
|
||
effective
as of the first interim or annual reporting period beginning
after
December 15, 2005.
|
||
In
December 2003, the Financial Accounting Standards Board revised
statement
of Financial Accounting Standards No. 132, 'Employers'
Disclosures
|
||
about
Pensions and Postretirement Benefits". This Statement requires
additional
disclosures about the assets, obligations, cash flows and
net periodic
|
||
benefit
cost of defined benefit pension and other postretirement
plans. SFAS 132R
had no effect on the consolidated financial statement.
|
||
On
March 9, 2004, the United States Securities and Exchange
Commission issued
Staff Accounting Bulletin No. 105, "Application of
|
||
Accounting
Principles to Loan Commitments". SAB 105 summarizes the views
of the SEC
staff regarding the application of generally
|
||
accepted
accounting principles to loan commitments accounted for as
derivative
instruments. adoption of SAB 105 do not have a material
|
||
impact
on the Company's consolidated results of operations or financial
position.
|
||
In
March 2004, the Emerging Issues Task Force reached a consensus
on the
application of EITF Issue 03-1, " The Meaning of
Other-Than-
|
||
Temporary
Impairment and Its Application to Certain Investments," in
determining
when an investment is impaired, whether the
|
||
impairment
is other than temporary and the measurement of the impairment
loss. The
Company does not believe that the application
|
||
of
EITF Issue 03-1 will have a material impact on the Company's
consolidated
financial statements.
|
||
In
January 2003, the FASB issued FIN 46 , which provides guidance
on
consolidation of variable interest entities. In
december
|
||
2003
, the FASB referred the effective date of FIN 46 for certain
variable
interest entities( Non special purpose entities)
|
||
until
the first quarter of 2004. Our adoption of the provisions
of FIN 46 and
FIN 46R did not have effect on our consolidated
|
||
financial
statements.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
3 - Other Assets, net
|
As
of September 30,
|
|
Convenience
translation into
|
|
||||
|
|
2005
|
|
US$
|
|
||
|
|
Unaudited
|
|
Unaudited
|
|||
Goodwill
in connection with
|
|||||||
the
purchase of WS Telecom
|
£ |
2,174,008
|
$
|
3,822,993
|
|||
Other
tangible assets
|
231,104
|
$
|
406,396
|
||||
Deferred
Notes expenses
|
118,846
|
$
|
208,991
|
||||
|
£ |
2,523,958
|
$
|
4,438,380
|
The
Company recongnizes an impairment loss when the estimated
fair value of
the indefinite-lived purchased intangible assets is
less than
its
|
||||||||
carrying
value, based on the guidelines of SFAS 142 (See also
note
2M.)
|
||||||||
Note
3 - Loan to the Sharholder
|
||||||||
The
Company has a non-interest bearing loan totaling £247,931 due from its
Chairman of the Board. These loans are to be repaid
on the following
schedule:
|
||||||||
2,005
|
£ |
123,965
|
||
2,006
|
123,966
|
|||
£ |
247,937
|
Note
4 - Long-Term Debt and Capital Lease
Obligations
|
|||||
The
Company leases certain switching equipment in the
United Kingdom, the
United States
|
|||||
and
Israel under capital leases expiring in various years
through 2007. The
assets and
|
|||||
liabilities
under these capital leases are recorded at the lower
of the
present
|
|||||
value
of the minimum lease payments or the fair value of
the asset. The
assets
|
|||||
are
depreciated over their estimated productive lives.
The effective
interest
|
|||||
rates
on these capital leases vary up to 9.6%.
|
|||||
Minimum
future lease payments under capital leases as of
September 30,
2005
|
|||||
through
maturity of the capital leases are:
|
|||||
Year
1
|
£ |
138,723
|
||
Year 2 | £ |
66,793
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
4 - Long-Term Debt and Capital Lease Obligations-
continue
|
|
The
company has notes payable bearing interest varying from
4%
to 7.16% annualy.
|
|
Five
years maturity of long term debts is as follows:
|
|
Year
1
|
£ |
415,336
|
||
Year
2
|
£ |
175,960
|
||
Year
3
|
£ |
105,328
|
||
Year
4
|
£ |
250,137
|
||
Year
5
|
£ |
14,575
|
The
minority shareholders loan to Xfone 018 is presented
net of
minority
|
|
interest
£ 59,584 which
reflects the minority part of the loss for the
period.
|
Our
Israeli based subsidiary, Xfone 018 Ltd. has received
credit facilities
from Bank Hapoalim B.M. in Israel to finance its
|
|
start-up
activities. The credit facility includes a revolving
credit line of
1,000,000 New Israeli Shekels ("NIS") and a short-
|
|
term
credit line of 850,000 NIS. In addition, the bank made
available to Xfone
018 a long-term facility of 3,150,000 NIS to
|
|
procure
equipment. The credit facilities are secured with:
(a) a floating charge
on Xfone 018 assets; (b) a fixed charge on its
|
|
telecommunication
equipment (including switches); (c) subordination of
a Term Note of
$800,000 (in favor of the
|
|
Company);
(d) assignment of rights by way of pledge on
the Partner
Communications Company Ltd. contract and the Credit
|
|
companies
contracts with Xfone 018; (e) personal collateral by
Abraham Keinan and
Guy Nissenson, which includes a
|
|
stock
pledge. The
Company agreed to indemnify Abraham Keinan and/or Guy
Nissenson on account
of any damage and/or
|
|
loss
and/or expense (including legal expenses) that they
may incur in
connection with the stock pledge and/or any other
|
|
obligation
made by them to Bank Hapoalim in connection with the
collateral;
(f) The Company and
|
|
Swiftnet
Limited issued a Letter of Guarantee, unlimited in
amount, in favor of the
bank, guaranteeing all debt and
|
|
indebtedness
of Xfone 018 towards the bank.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
5 — Capital Structure, Stock Options
|
||
During
2005, the Company granted 14,550 shares to employees, agents
and
subcontructors from it's
|
||
compensation
fund stock pool. The shares value as of the granting day was
£18,171
|
||
In
addition the Company granted 8,419 warrants for consulting
services,
valued £4,504
according to
|
||
Black-Scholes
option pricing model. Each Warrant is valid for 5 years and
exercisable
into one share
|
||
of
restricted common stock at an exercise price of $5.50 per
share.
|
||
In
connection with the acquisition of W S Telecom, the Company
issued 663,650
restricted shares
|
||
of
its common stock representing a market value of £
1,170,400, and 561,216 warrants with a value
|
||
£691,600
(see also Note 9). Each Warrant is valid for 5 years and exercisable
into
one share with a strike
|
||
price
that is 10% above the closing price of the Company's common
stoch at the
date of the acquisition.
|
||
In
connection with our September 28, 2005 financing transaction
with Laurus
Master Fund, Ltd. the Company issued 157,500 warrants
|
||
with
a value of £ 60,612 (see also Note 10). Each warrant is valid for 5 years
and exercisable into one share of common stock
|
||
at
$3.80 per share.
|
||
Stock
Option Plan
|
||
In
November 2004, the Company’s board of directors approved the adoption of
the principal items forming the Company’s 2004 stock
|
||
option
plan (The “Plan”) for the benefit of employees, officers, directors,
consultants and subcontractors of the Company
|
||
including
it’s subsidiaries.
|
||
The
purpose of the Plan is to enable the Company to attract and
retain the
best available personnel for positions of substantial
|
||
responsibility,
to ,provide an incentive to such persons presently engaged
with the
Company and to promote the success
|
||
of
the Company business.
|
||
The
Plan provides for the grant of options in an aggregate of 5,500,000.
The
Plan is administered
|
||
by
the board to determine the persons to whom options are granted,
the number
of options that are granted, the number of shares
|
||
to
be covered by each option, when the options may be exercised
and whether
the options are an incentive or non-statutory options.
|
||
The
Company granted 5,130,000 options out of this plan, of which
1,930,000
options were granted in 2005.
|
||
The
Company accounts for stock options plan grants to employees
and directors
in accordance with Accounting Principles Board Opinion No.
25,
|
||
“Accounting
for Stock Issued to Employees” (APB No. 25). Under APB No. 25, there is no
compensation cost recognized for the
|
||
Company’s
stock option plan, because the options granted under the plan
have an
exercise price greater than the market value of
|
||
the
underlying stock at the grant date. Statement of Financial
Accounting
Standards No. 123, “Accounting for Stock-Based
|
||
Compensation”
(SFAS No. 123), as amended, allows, but does not require companies
to
record compensation cost for fixed stock
|
||
option
plans using a fair value based method. As permitted by SFAS
No. 123, the
Company elected to account for compensation
|
||
cost
for the stock option plan using the intrinsic value based method
under APB
No. 25. See Recent Accounting Pronouncements
|
||
section
of this Note for discussion of recently issued rules regarding
accounting
for share-based payments. The following table sets
|
||
forth
pro forma information as if compensation cost had been determined
consistent with the requirements of SFAS No. 123.
|
||
The
fair value of the options granted was estimated on the date
of grant using
Black-Scholes option pricing model.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|
|||||||||
Note
5 — Capital Structure, Stock Options
-(Cont.)
|
|||||||||
Weighted
average fair value of options granted during the quarter
was £
0.61
|
|||||||||
Proforma
reporting based on the fair value method:
|
Three
months
|
|
Nine
months
|
|||||
Ended
|
Ended
|
||||||
September
30,
|
September
30,
|
||||||
2005
|
2005
|
||||||
Unaudited
|
Unaudited
|
||||||
Net
(loss) income as reported
|
(£118,803
|
)
|
(£15,469
|
)
|
|||
compensation
expense determined under
|
|||||||
fair
value method
|
(£74,028
|
)
|
(£213,229
|
)
|
|||
Pro
forma net (loss) income
|
(£192,831
|
)
|
(£228,698
|
)
|
|||
Pro
forma basic net (loss) income per share
|
(£0.028
|
)
|
(£0.034
|
)
|
|||
Pro
forma diluted net (loss) income per share
|
(£0.028
|
)
|
(£0.034
|
)
|
Note
6 — Economic Dependency And Credit Risk
|
||||||||
Approximately
23% of total revenues in the three month period ended
September
30,
|
||||||||
2005
and 25% for the nine months period ended September 30,
2005 , and 36% of
total
|
||||||||
accounts
receivable as of September 30, 2005 are derived from
a related
entity.
|
||||||||
In
addition, 36% of total accounts receivable as of September
30, 2005 are
derived
|
||||||||
from
a related entity.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
7 — Segments information
|
|||||||||||||||
The
percentage of the Company's revenues is derived from
the following
segments:
|
For
the 3 months
|
For
the 3 months
|
For
the 9 months
|
For
the 9 months
|
||||||||||
Period
Ended
|
Period
Ended
|
Period
Ended
|
Period
Ended
|
||||||||||
September
30, 2005
|
September
30, 2004
|
September
30, 2005
|
September
30, 2004
|
||||||||||
Unaudited
|
Unaudited
|
Unaudited
|
Unaudited
|
||||||||||
Telephone
minute billing plus data and messaging
|
|||||||||||||
services,including
facsimile, nodal, and e-mail
|
|||||||||||||
related
services
|
71
|
%
|
40
|
%
|
69
|
%
|
43
|
%
|
|||||
Mobile
phone services
|
2
|
%
|
4
|
%
|
3
|
%
|
5
|
%
|
|||||
Calling
cards
|
27
|
%
|
56
|
%
|
28
|
%
|
52
|
%
|
|||||
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
The
Company has four major types of customers:
|
|||||||||||||||
o
Residential - including customers who must dial
a special code to access
our switch or acquire a box that dials automatically.
|
|||||||||||||||
o
Commercial - Smaller business are treated the
same as residential
customers. Larger businesses’ PBX (Telephony system) units
are
|
|||||||||||||||
programmed to dial the special code automatically or connect directly through a T1 (24 telephone channels / lines). | |||||||||||||||
o
Governmental agencies - Including the United
Nations World Economic Forum,
the Argentine Embassy, the Spanish Embassy and
|
|||||||||||||||
the Israeli embassy. | |||||||||||||||
o
Resellers - We provide them with our telephone
and messaging services for
a wholesale price. For WorldNet our largest reseller,
we
|
|||||||||||||||
also provide the billing system. | |||||||||||||||
For
the 3 months
|
|
For
the 3 months
|
|
For
the 9 months
|
|
For
the 9 months
|
|
For
the 3 months
|
|
For
the 9 months
|
|
||||||||
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
||||||
|
|
September
30, 2005
|
|
September
30, 2004
|
|
September
30, 2005
|
|
September
30, 2004
|
|
September
30, 2005
|
|
September
30, 2005
|
|
||||||
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Convenience
translation into US$
|
|||||||||
Revenues:
|
|||||||||||||||||||
Telephone
& Messaging
|
£ |
2,424,609
|
£ |
1,085,187
|
£ |
6,808,991
|
£ |
3,132,265
|
$
|
4,263,676
|
$
|
11,973,612
|
|||||||
Mobile
|
57,654
|
114,434
|
312,653
|
378,759
|
101,384
|
549,799
|
|||||||||||||
Calling
cards
|
936,920
|
1,505,313
|
2,790,871
|
3,733,620
|
1,647,573
|
4,907,747
|
|||||||||||||
3,419,183
|
£ |
2,704,934
|
£ |
9,912,515
|
£ |
7,244,644
|
$
|
6,012,634
|
$
|
17,431,158
|
|||||||||
Direct
Operating Profit:
|
|||||||||||||||||||
Telephone
& Messaging
|
1,012,210
|
£ |
251,171
|
£ |
3,009,203
|
£ |
1,740,074
|
$
|
1,779,972
|
$
|
5,291,685
|
||||||||
Mobile
|
5,603
|
49,888
|
50,542
|
95,698
|
9,852
|
88,878
|
|||||||||||||
Calling
cards
|
74,627
|
399,789
|
190,498
|
227,751
|
131,231
|
334,990
|
|||||||||||||
1,092,440
|
£ |
700,848
|
£ |
3,250,243
|
£ |
2,063,523
|
1,921,056
|
5,715,553
|
|||||||||||
Corporate
common
|
|||||||||||||||||||
operating
expenses
|
1,018,961
|
£ |
806,288
|
£ |
3,105,600
|
£ |
1,934,734
|
1,791,842
|
5,461,198
|
||||||||||
Operating
profit (loss)
|
£ |
73,479
|
£ |
(105,440
|
)
|
£ |
144,643
|
£ |
128,789
|
$
|
129,214
|
$
|
254,356
|
||||||
The
company maintains operations in the United
Kihgdom, The United States and
Israel:
|
|
For
the 3 months
|
|
For
the 3 months
|
|
For
the 9 months
|
|
For
the period
|
|
For
the 3 months
|
|
For
the 9 months
|
|
|||||||
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
||||||
|
|
September
30, 2005
|
|
September
30, 2004
|
|
September
30, 2005
|
|
September
30, 2004
|
|
September
30, 2005
|
|
September
30, 2005
|
|
||||||
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Convenience
translation into US$
|
|||||||||
Revenues:
|
|||||||||||||||||||
United
Kingdom
|
£ |
2,105,968
|
£ |
2,704,934
|
£ |
6,304,092
|
£ |
7,244,644
|
$
|
3,703,346
|
$
|
11,085,747
|
|||||||
United
States
|
862,631
|
0
|
2,625,530
|
0
|
1,516,937
|
4,616,995
|
|||||||||||||
Israel
|
450,584
|
0
|
982,893
|
0
|
792,351
|
1,728,417
|
|||||||||||||
|
£ | 3,419,183 | £ |
2,704,934
|
£ |
9,912,515
|
£ |
7,244,644
|
$
|
6,012,634
|
$
|
17,431,158
|
|||||||
|
|
||||||||||||||||||
Long-lived
assets
|
As
of September 30, 2005
|
|
|
As
of December 31, 2004
|
|
|
|
|
|
As
of September
30,
2005 Convenience translation |
|||||||||
United
Kingdom
|
£ |
488,891
|
£ |
610,741
|
$
|
859,715
|
|||||||||||||
United
States
|
3,121,845
|
0
|
5,489,765
|
||||||||||||||||
Israel
|
927,126
|
701,658
|
1,630,351
|
||||||||||||||||
|
£ | 4,537,862 | £ |
1,312,399
|
$
|
7,979,831
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
8 - Management Agreement with W.S Telecom
|
||||||||
On
July 1, 2004, in conjunction with this acquisition
(see Note 9), Xfone USA
also entered into a management agreement with WS
Telecom.
|
||||||||
The
management agreement provides that WS Telecom hires
and appoints Xfone USA
as manager to be responsible for the operation and
management
|
||||||||
of
all of WS Telecom’s business operations, including:
|
||||||||
•
|
Personnel
- Supervising the current employees and independent
contractors of WS
Telecom with the authority to hire, discharge
|
|||||||
and
direct personnel for the conduct of the business;
|
||||||||
•
|
Accounting
- Supervision and administration of all accounting
and the maintenance of
all books and records for the business;
|
|||||||
•
|
Contracts
- Maintain all existing contracts necessary for the
operation of the
business and the authority to enter into or renew
contract in WS Telecom’s
name;
|
|||||||
•
|
Policies
and procedures - Preparation of all policies and
procedures for the
operation of the business; and
|
|||||||
•
|
Budgets
- Preparation of all operating, capital or other
budgets.
|
|||||||
In
consideration of these management services, WS Telecom
has assigned and
transferred as of July 1, 2004 to Xfone USA all revenues
generated
|
||||||||
from
the operations of the business and Xfone USA has
agreed to pay from the
revenues the normal operating, maintenance,
|
||||||||
administrative
and similar expenses of the business. Further, WS
Telecom designates Xfone
USA as the controlling party of the current
|
||||||||
operating
accounts of the business. In addition, Xfone USA,
in its discretion, will
have the right to make advances or loans to
|
||||||||
WS
Telecom payable on demand (or if no demand payable
in equal quarterly
installments of principal and interest) for an amount
|
||||||||
up
to $500,000, with interest at 7% per annum from the
date advanced until
paid for the payment of any amounts due during
|
||||||||
the
term of the management agreement for any of the “special liabilities” as
defined in the management agreement.
|
||||||||
Two
senior executives of WS Telecom have jointly and
severally,
unconditionally guaranteed the prompt payment
|
||||||||
when
due of these manager loans.
|
||||||||
The
management agreement was terminated on March 10,
2005, upon the
consummation of the merger.
|
||||||||
As
of March 10, 2005 included in the consolidated statements
of operations is
the following :
|
||||||||
For
the period
|
|
Convenience
translation
|
|
||||||||||
|
|
Ended
|
|
into
US$ as of
|
|
||||||||
|
|
March
10, 2005
|
|
March
10, 2005
|
|
||||||||
|
|
Unaudited
|
|
Unaudited
|
|||||||||
Revenue
|
£ |
762,086
|
$ |
1,432,722
|
|||||||||
Cost
of sales
|
418,634
|
787,032
|
|||||||||||
Gross
profit
|
343,452
|
645,690
|
|||||||||||
Selling,general
and administration
|
300,892
|
565,677
|
|||||||||||
|
|
||||||||||||
Net
income
|
£ |
42,560
|
$ |
80,013
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
9 — Acquisition of W S Telecom
|
||||||||
On
March 10, 2005, the Company consummated its merger
with WS Telecom, Inc.,
d/b/a/ eXpeTel Communications,
|
||||||||
Inc.,
a Mississippi corporation and its subsidiaries through
the company's
subsidiary Xfone USA.
|
||||||||
Accordingly
, the results of operations for WS Telecom have been
included in the
accompanying consolidated
|
||||||||
financials
statements from that date forward.
|
||||||||
The
aggregate acquisition price was £
2,106,208, which included cash in the amount
|
||||||||
of
£
244,208 and the Company issued 663,650 restricted
|
||||||||
shares
of its common stock representing a market value of
£
1,170,400.
|
||||||||
The
value of the stock was determined based on the weighed
average price of
the share
|
||||||||
over
the ten trading days preceding the trading immediately
proir to the date
the company
|
||||||||
entered
into the management operating agreement.
|
||||||||
The
Company also issued 561,216 warrants with a value
of £691,600,
|
||||||||
the
value of which was calculated as of the date the
Company and WS Telecom
Inc. enter into a
|
||||||||
management
operating Agreement, assuming 90% volatility of the
underlying share of
common stock of the
|
||||||||
company
in accordance with the Black Scholes option - pricing
model.
|
||||||||
Following
is a condensed balance sheet showing the fair values
of the assets
acquired and the
|
||||||||
liabilities
assumed as of the date of acquisition:
|
|
|
As
of March 10 2005 |
|
Convenience
translation into US$ as of March 10, 2005 |
|
||||||||
|
Unaudited
|
|
Unaudited
|
||||||||||
Current
Assets
|
£ |
594,082
|
$
|
1,116,874
|
|||||||||
Property
and equipment
|
697,462
|
1,311,229
|
|||||||||||
Intengible
assets
|
70,693
|
132,903
|
|||||||||||
Goodwill
arising in the acquisition
|
2,054,680
|
3,862,798
|
|||||||||||
Current
Liabilities
|
1,110,622
|
2,087,969
|
|||||||||||
Long
term debts
|
160,229
|
301,231
|
|||||||||||
Other
long term obligations
|
39,858
|
74,933
|
|||||||||||
Net
Assets acquired
|
£ |
2,106,208
|
$
|
3,959,671
|
|||||||||
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
9 — Acquisition of W S Telecom- (cont.)
|
|||||||
Out
of the £
70,693 of intangible assets acquired, £
15,104 has been assigned to deposits,
|
|||||||
which
are not being amortized.The £
55,589 balance of acquired intangibles
|
|||||||
is
being amortized over 2 to 20 years.
|
|||||||
On
March 10, 2005, the Company consummated its
merger with WS Telecom, Inc.,
d/b/a/ eXpeTel Communications,
|
|||||||
Results
of operations for WS Telecom are included in
the consolidated financials
statements
|
|||||||
Following
are the pro forma amounts for the 9 months
ended September 30, 2005
assuming that the acquisition was made
|
|||||||
on
January 1, 2004:
|
|
|
For
the 9 months Period EndedSeptember
30, 2005
|
|
Convenience translation
into |
|
||
|
|
Unaudited
|
|
Unaudited
|
|||
Net
sales
|
£ |
9,912,515
|
$
|
17,431,158
|
|||
Net
loss
|
£ |
(15,469
|
)
|
$ |
(27,202
|
)
|
|
Loss
per share:
|
|||||||
Basic
|
£ |
-0.002
|
$ |
-0.004
|
|||
Diluted
|
£ |
-0.002
|
$ |
-0.004
|
|||
|
|
For
the 9 months Period Ended September
30, 2004
|
|
Convenience translation
into |
|
||
|
|
Unaudited
|
|
Unaudited
|
|||
Net
sales
|
£ |
9,607,879
|
$
|
16,895,454
|
|||
Net
income
|
£ |
17,033
|
$
|
29,953
|
|||
Earnings
per share:
|
|||||||
Basic
|
£ |
0.003
|
$
|
0.005
|
|||
Diluted
|
£ |
0.002
|
$
|
0.004
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
10 — Convertible Notes
|
||
On
September 27, 2005, a Securities Purchase Agreement
was entered for a
$2,000,000 financial
|
||
transaction
by and among the Company, Xfone USA, Inc.,
eXpeTel Communications, Inc.,
Gulf
|
||
Coast
Utilities, Inc. and Laurus Master Fund, Ltd.
The investment, which takes
the form of a
|
||
convertible
note secured by the Company’s United States assets, has a 3 -year term
and
bears
|
||
interest
at a rate equal to prime plus 1.5% per annum.
The Note is convertible,
under certain
|
||
conditions,
into shares of the Company’s common stock at an initial price equal to
$3.48 per share.
|
||
The
closing of the financing was on September 28,
2005. Net proceeds from the
financing are
|
||
mainly
to be used for procurement of capital equipment
and general working
capital purposes for
|
||
the
Company and Xfone USA, Inc., eXpeTel Communications,
Inc. and Gulf Coast
Utilities, Inc.
|
||
Note
11 — Subsequent Events
|
||
a.
Equity
Financing:
|
||
On
September 28, 2005, a Securities Purchase Agreement
was entered for a
$2,212,500
|
||
financial
transaction by and among the Company, Crestview
Capital Master, LLC,
|
||
Burlingame
Equity Investors and Mercantile Discount -
Provident Funds. Upon the
closing
|
||
of
the financial transaction on October 31, 2005,
the Company issued to the
investors an
|
||
aggregate
of 885,000 shares of common stock at a purchase
price of $2.50 per share
together
|
||
with,
221,250 warrants at $3.00 per share and 221,250
warrants at $3.25 per
share. Upon the
|
||
closing
of the financial transaction on October 31,
2005, we issued to the
investors an
|
||
aggregate
amount of 885,000 shares of common stock.
|
||
The
net proceeds of the financing are expected
to be used for general working
capital and/or
|
||
investment
in equipment and/or for acquisitions and/or
business
development.
|
||
b.
Agreement
and Plan of Merger to acquire I-55 Internet
Services,
Inc:
|
||
On
August 18, 2005, the Company entered into an
Agreement and Plan of Merger
to acquire
|
||
I-55
Internet Services, Inc., a Louisiana corporation
(the “Merger Agreement”). On
|
||
September
13, 2005, the Company filed a Form 8-K discussing
the impact of Hurricane
|
||
Katrina
on the transaction contemplated by the Merger
Agreement. On October 10,
2005,
|
||
the
Company entered into a First Amendment to the
Merger Agreement, by and
among I-55
|
||
Internet
Services, the Company, Xfone USA, Inc., the
Company’s wholly-owned United
|
||
States
subsidiary and Hunter McAllister and Brian
Acosta, key employees of I-55
Internet
|
||
Services,
in order to induce the Company and Xfone USA
not to terminate the Merger
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
11 — Subsequent Events (cont.)
|
||
Agreement
due to a material adverse effect that Hurricane
Katrina has had on the
assets and
|
||
business
of I-55 Internet Services. As part of the
amendment and since the merger
of I-55
|
||
Internet
Services with and into Xfone USA has not
been consummated yet, in the
interim,
|
||
the
parties agreed and entered into on October
11, 2005 a Management Agreement
(the
|
||
"Management
Agreement") that provides that I-55 Internet
Services hires and appoints
|
||
Xfone
USA as a manager to be responsible for the
operation and management of all
of I-55
|
||
Internet
Services business operations, including among
other things personnel,
accounting,
|
||
contracts,
policies and budget. In consideration of
the management services to be
provided
|
||
under
the Management Agreement, I-55 Internet Services
assigns and transfers to
Xfone
|
||
USA,
Inc. all revenues generated and expenses
incurred in the ordinary course
of business
|
||
during
the term of the Management Agreement. The
term of the Management Agreement
|
||
commenced
on October 11, 2005 and shall continue until
the consummation of the
|
||
Merger,
provided that the Management Agreement may
be terminated by either party
at any
|
||
time
after March 1, 2006 upon 30 days prior notice.
The completion of the
merger is subject
|
||
to
the satisfaction of certain conditions, including
shareholders
approval.
|
||
c.
Agreement
and Plan of Merger to acquire I-55 Telecommunications,
L.L.C.
|
||
On
August 26, 2005, the Company entered into
an Agreement and Plan of Merger
(the
|
||
“Merger
Agreement”) to acquire I-55 Telecommunications, LLC,
, a Louisiana
corporation
|
||
(“I-55
Telecommunications”). On September 13, 2005, the Company filed
a Form 8-K
|
||
discussing
the impact of Hurricane Katrina on the transaction
contemplated by the
Merger
|
||
Agreement.
To date, the merger of I-55 Telecommunications
with and into Xfone USA has
|
||
not
been consummated yet. In the interim, and
demonstrative of the Company’s
intention to
|
||
continue
on with the transaction contemplated by the
Merger Agreement, the Company
and
|
||
I-55
Telecommunications executed on October 12,
2005 a Management Agreement
(the
|
||
“Management
Agreement”), providing that I-55 Telecommunications
hires and appoints
|
||
Xfone
USA as manager to be responsible for the
operation and management of all
of I-55
|
||
Telecommunication’s
business operations. In consideration of
the management services to
|
||
be
provided under the Management Agreement,
I-55 Telecommunications assigns
and
|
||
transfers
to Xfone USA all revenues generated and expenses
incurred in the ordinary
course
|
||
of
business during the term of the Management
Agreement. The term of the
Management
|
||
Agreement
commenced on October 12, 2005 and shall continue
until the consummation
|
||
of
the Merger, provided that the Management
Agreement may be terminated by
either party
|
||
at
any time after March 1, 2006 upon 30 days
prior notice. The completion of
the merger is
|
||
subject
to the satisfaction of certain conditions,
including shareholders approval
and
|
||
regulatory
approvals.
|
Xfone,
Inc. and Subsidiaries
|
||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
|
Note
11 — Subsequent Events (cont.)
|
||
d.
Contingencies
|
||
The
Company’s wholly-owned UK based subsidiary, Swiftnet
Limited was served
with a
|
||
claim
on October 14, 2005 that was filed by MCI
Worldcom Limited (“MCI”) in an
English
|
||
court
for the sum of English Sterling Pounds of
1,732,756.74, including interest
(although
|
||
interest
will continue to accrue on a daily basis),
for telecommunication services
MCI claims
|
||
it
provided to Swiftnet. Swiftnet has been in
dispute with MCI regarding
amounts due to
|
||
MCI
for telecommunications services provided
by MCI to Swiftnet and has been
conducting
|
||
discussions
and negotiations with MCI concerning this
matter for the last few months.
|
||
Swiftnet
alleges that the disputed charges were improperly
billed by MCI to its
account for a
|
||
long
time and therefore MCI should credit Swiftnet
for a certain amount of the
claim.
|
||
Swiftnet
intends to vigorously defend the suit and
believes that it has a meritous
defense in
|
||
relation
to a significant portion of the amount claimed.
|
||
The
Company's financial statements have for some
time carried the full amount
due to MCI
|
||
based
on the invoices issued by MCI, as well as
an appropriate provision for the
credit the
|
||
company
is claiming.
|
Expenses:
|
$ Dollar
amount
|
Securities
and Exchange Commission Registration Fee
|
$1,588.56
|
Edgarization,
Printing and Engraving
|
$10,000
|
Accounting
Fees
|
$10,000
|
Legal
Fees
|
$36,000
|
Miscellaneous
|
$17,411.44
|
TOTAL
|
$75,000
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Mr. Holm had a preexisting relationship with Guy Nissenson, our
Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Stern and Company had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
WEC Partners had a preexisting relationship with Guy Nissenson,
our Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Platinum Management LLC had a preexisting relationship with Guy
Nissenson,
our Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Countrywide Partners had a preexisting relationship with Guy Nissenson,
our Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Arik Ecker had a preexisting relationship with Guy Nissenson, our
Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Zwi Ecker had a preexisting relationship with Guy Nissenson, our
Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Simon Langbart had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Robert Langbart had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Michael Derman had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Errol Derman had a preexisting relationship with Guy Nissenson,
our Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Yuval Haim Sobel had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Zvi Sobel had a preexisting relationship with Guy Nissenson, our
Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Tenram Investments, Ltd. had a preexisting relationship with Guy
Nissenson, our Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Michael Zinn had a preexisting relationship with Guy Nissenson,
our Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Hamilton, Lehrer & Dargan, P.A. had a preexisting relationship with
Guy Nissenson, our Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Michael Weiss had a preexisting relationship with Guy Nissenson,
our Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Southridge Partners, LP had a preexisting relationship with Guy
Nissenson,
our Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Adam Breslawsky had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Joshua Lobel had a preexisting relationship with Guy Nissenson,
our Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Joshua Kazam had a preexisting relationship with Guy Nissenson,
our Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
the Oberon Group, LLC had a preexisting relationship with Guy Nissenson,
our Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
the Oberon Group had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Simon
Langbart had a preexisting relationship with Guy Nissenson, our
Chief
Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Laurus
Master Fund Ltd, had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Crestview
Capital Mater, LLC
had a preexisting relationship with Guy Nissenson, our Chief Executive
Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Burlingame
Equity Investors, LP
had a preexisting relationship with Guy Nissenson, our Chief Executive
Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Burlingame
Equity Investors II, LP
had a preexisting relationship with Guy Nissenson, our Chief Executive
Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Burlingame
Equity Investors (offshore) Ltd
had a preexisting relationship with Guy Nissenson, our Chief Executive
Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Mercantile
Discount-Provident Funds
had a preexisting relationship with Guy Nissenson, our Chief Executive
Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Oberon
Securities
LLC had a preexisting relationship with Guy Nissenson, our Chief
Executive
Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Yitzhak Rosenbaum had a preexisting relationship with Guy Nissenson,
our
Chief Executive Officer and President.
|
i.
|
the offer and sale did not involve a public offering;
|
ii.
|
all certificates were marked with restrictive legends;
|
iii.
|
each investor represented they were sophisticated enough to evaluate
the
merits of the investment; and
|
iv.
|
Elite
Financial Communications Group, LLC.had a preexisting relationship
with
Guy Nissenson, our Chief Executive Officer and President.
|
|
|
2.
|
Agreement
and plan or reorganization between Xfone, Inc. and Swiftnet Ltd.
dated
September 20, 2000 (1)
|
3.1
|
Articles
of Incorporation of Xfone, Inc. (1)
|
3.2a
|
Bylaws
of Xfone, Inc. (1)
|
3.2b
|
Amended
Bylaws of Xfone, Inc. (4)
|
3.3
|
Articles
of Incorporation of Swiftnet, Ltd. (1)
|
3.4
|
Bylaws
of Swiftnet, Ltd. (1)
|
3.5
|
Amended
bylaws of Xfone, Inc. (3)
|
3.6
|
By-Laws
of Xfone USA, Inc. (7)
|
3.7
|
Office
of the Mississippi Secretary of State, Articles of Merger or Share
Exchange Profit Corporation (7)
|
4.
|
Specimen
Stock Certificate (1)
|
5.
|
Opinion
of Gersten Savage LLP.
|
10.1
|
Agreement
between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000
(1)
|
10.2
|
Employment
Agreement with Bosmat Houston dated January 1, 2000 (1)
|
10.3
|
Loan
Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated
August
5, 2000 (1)
|
10.4
|
Promissory
Note executed between Xfone and Swiftnet Ltd. dated September 29,
2000
(1)
|
10.5
|
Stock
Purchase Agreement between Swiftnet, Ltd, Abraham Keinan, and Campbeltown
Business, Ltd.
|
|
dated
June 19, 2000 (1)
|
10.6
|
Consulting
Agreement between Swiftnet, Ltd. and Campbeltown Business, Ltd. dated
May
11, 2000 (1)
|
10.7
|
Agreement
with Campbeltown Business Ltd. dated July 30, 2001 (1)
|
10.8
|
Contract
with WorldCom International, Ltd. dated June 20, 1998
(1)
|
10.9
|
Contract
with VoiceNet Inc. dated April 11, 2000 (1)
|
10.10
|
Contract
with InTouchUK.com Ltd. dated April 25, 2000 (1)
|
10.11
|
Letter
of Understanding from Campbeltown Business, Ltd. to Xfone, Inc. dated
July
30, 2001 (2)
|
10.12
|
Agreement
between Adar International, Inc./Mr. Sidney J. Golub and Swiftnet
dated
April 6, 2000
(2)
|
10.13
|
Lease
Agreement between Elmtree Investments, Ltd. and Swiftnet, Ltd. dated
December 4, 1991 (2)
|
10.14
|
Lease
Agreement between Postwick Property Holdings Limited and Swiftnet,
Ltd.
dated October 8, 2001.(2)
|
10.15
|
Agreement
between Xfone, Inc., Swiftnet, Ltd., and Nir Davison dated September
30,
2002 (5)
|
10.16
|
As
to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant
A, Warrant B
|
|
and
Registration Rights Agreement of Selling Shareholders Platinum Partners
Value
|
|
Arbitrage
Fund LP, Countrywide Partners LLC and WEC Partners LLC. [3 investors]
(6)
|
10.17
|
As
to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant
A, Warrant B
|
|
and
Registration Rights Agreement of Selling Shareholders Simon Langbart,
Robert Langbart,
|
|
Arik
Ecker, Zwi Ecker, Michael Derman, Errol Derman,Yuval Haim Sobel,
Zvi
Sobel, Tenram
|
|
Investment
Ltd., Michael Zinn, Michael Weiss. [11 investors] (6)
|
10.18
|
As
to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant
A, Warrant B
|
|
and
Registration Rights Agreement of Selling Shareholders Southridge
Partners
LP and
|
|
Southshore
Capital Fund Ltd. [2 investors] (6)
|
10.19
|
As
to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant
A, Warrant B
|
|
and
Registration Rights Agreement of Selling Shareholders Crestview Capital
Master LLC. [1 investors] (6)
|
10.20
|
As
to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant
A, Warrant B
|
|
and
Registration Rights Agreement of Selling Shareholders Adam Breslawsky,
Oded Levy,
|
|
Michael
Epstein, Steven Frank, Joshua Lobel, Joshua Kazan and The Oberon
Group
LLC. [7 investors] (6)
|
10.21
|
Newco
(Auracall Limited) Formation Agreement. (6)
|
10.22
|
Agreement
with ITXC Corporation (6)
|
10.23
|
Agreement
with Teleglobe International (6)
|
10.23.1
|
Amendment
to Agreement with Teleglobe International (6)
|
10.24
|
Agreement
with British Telecommunications (6)
|
10.25
|
Agreement
with Easyair Limited (OpenAir) (6)
|
10.26
|
Agreement
with Worldnet (6)
|
10.27
|
Agreement
with Portfolio PR (6)
|
10.28
|
Agreement
with Stern and Company (6)
|
10.29
|
December
31, 2003 letter to Xfone from A. Keinan (6)
|
||
10.30
|
Agreement
between Swiftnet, Ltd. and Dan Kirschner (8)
|
||
10.31
|
Agreement
and Plan of Acquisition (7)
|
||
10.32
|
Escrow
Agreement (7)
|
||
10.33
|
Release
Agreement (7)
|
||
10.34
|
Employment
Agreement between WS Telecom, Inc. and Wade Spooner (7)
|
||
10.35
|
Employment
Agreement between WS Telecom, Inc. and Ted Parsons (7)
|
||
10.36
|
First
Amendment to Agreement and Plan of Merger (WS Telecom, Inc./Xfone,
Inc./Xfone USA, Inc.) (11)
|
||
10.37
|
Finders
Agreement with The Oberon Group, LLC (11)
|
||
10.38
|
Agreement
with The Oberon Group, LLC (11)
|
||
10.39
|
Management
Agreement (WS Telecom, Inc. and Xfone USA, Inc.) (8)
|
||
10.40
|
Engagement
Letter to Tommy R. Ferguson, Confidentiality Agreement, and Executive
Inventions Agreement dated August 19, 2004 (11)
|
||
10.41
|
Voting
Agreement dated September 28, 2004 (11)
|
||
10.42
|
Novation
Agreement executed September 27, 2004 (11)
|
||
10.43
|
Novation
Agreement executed September 28, 2004 (11)
|
||
10.44
|
Ilan
Shoshani Investment Agreement dated August 26, 2004
(12)
|
||
10.44.1
|
Addendum
and Clarification to the Ilan Shoshani Investment Agreement dated
September 13, 2004 (12)
|
||
10.45
|
Elite
Financial Communications Group Agreement (13)
|
||
10.46
|
Dionysos
Investments (1999) Ltd. Financial Services and Business Development
Consulting Agreement (13)
|
||
10.47
|
Agreement
and Plan of Merger to acquire I-55 Internet Services, Inc.
dated August
18, 2005 (14)
|
||
10.48
|
Agreement
and Plan of Merger to acquire I-55 Telecommunications, LLC
dated August
26, 2005 (15)
|
||
10.49
|
|
Securities
Purchase Agreement, dated September 27, 2005, by and between the
Registrant and Laurus Master Fund, Ltd. (16)
|
|
10.50
|
|
Secured
Convertible Term Note, dated September 27, 2005, by the Registrant
in
favor of Laurus Master Fund, Ltd.; Adjustment Provision Waiver
Agreement,
dated September 27, 2005, by and between the Registrant and Laurus
Fund,
Ltd. (16)
|
|
10.51
|
|
Common
Stock Purchase Warrant, dated September 27, 2005, by the Registrant
in
favor of Laurus Master Fund, Ltd. (16)
|
|
10.52
|
|
Registration
Rights Agreement, dated September 27, 2005, by and between the
Registrant
and Laurus Master Fund, Ltd. (16)
|
|
10.53
|
|
Master
Security Agreement, dated September 27, 2005, by and between the
Registrant, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf
Coast
Utilities, Inc., and Laurus Master Fund, Ltd. (16)
|
|
10.54
|
|
Stock
Pledge Agreement, dated September 27, 2005, by and between the
Registrant,
Xfone USA, Inc., and Laurus Master Fund, Ltd. (16)
|
|
10.55
|
|
Subsidiary
Guarantee dated September 27, 2005, by Xfone USA, Inc., eXpeTel
Communications, Inc. and Gulf Coast Utilities, Inc. in favor of
Laurus
Master Fund, Ltd. (16)
|
|
10.56
|
|
Funds
Escrow Agreement, dated September 27, 2005, by and between the
Registrant,
Laurus Master Fund, Ltd. and Loeb & Loeb LLP; Disbursement Letter,
dated September 27, 2005 (16)
|
|
10.57
|
|
Incremental
Funding Side Letter, dated September 27, 2005, by and between the
Registrant and Laurus Master Fund, Ltd. (16)
|
|
10.58
|
|
Securities
Purchase Agreement, dated September 28, 2005, by and between the
Registrant and the Purchasers (16)
|
|
10.59
|
|
Registration
Rights Agreement, dated September 28, 2005, by and between the
Registrant
and the Purchasers (16)
|
|
10.60
|
|
Common
Stock Purchase Warrant, dated September 28, 2005, by the Registrant
in
favor of the Purchasers (16)
|
|
10.61
|
|
Escrow
Agreement, dated September 28, 2005, by and between the Registrant,
the
Purchasers and Feldman Weinstein LLP (16)
|
|
10.62 | Management Agreement dated October 11, 2005 (17) | ||
10.63 | First Amendment to the Agreement and Plan of Merger to acquire I-55 Internet Services, Inc., dated October 10, 2005 (17) | ||
10.64
|
Letter
Agreement with MCG Capital Corporation dated
October 10, 2005 (17)
|
||
21.1
|
List
of Subsidiaries (Amended) (8)
|
||
23
|
Consent
of Chaifetz & Schreiber, P.C.
(13)
|
|
(1)
|
Denotes
previously filed exhibits: filed on August 10, 2001 with Xfone, Inc.'s
SB-2 registration statement, file # 333-67232.
|
|
(2)
|
Denotes
previously filed exhibits: filed on October 16, 2001 with Xfone,
Inc.'s
SB-2/Amendment 1 registration statement, file #
333-67232.
|
|
(3)
|
Denotes
previously filed exhibit: filed on November 28, 2001 with Xfone,
Inc.'s
SB-2/Amendment 2 registration statement, file #
333-67232.
|
|
(4)
|
Denotes
previously filed exhibit: filed on December 5, 2002 with Xfone, Inc.'s
Form 8-K.
|
|
(5)
|
Denotes
previously filed exhibit: filed on March 3, 2003 with Xfone, Inc.'s
SB-2/Post Effective Amendment No. 2 registration statement, file
#
333-67232
|
|
(6)
|
Denotes
previously filed exhibit: filed on April 15, 2004 with Xfone's, Inc.SB-2
Amendment 1 Registration Statement, file # 333-113020.
|
|
(7)
|
Denotes
previously filed exhibit: filed on June 1, 2004 with Xfone, Inc.'s
Form
8-K
|
|
(8)
|
Denotes
previously filed exhibit: filed on June 7, 2004 with Xfone, Inc.'s
SB-2/Amendment 2 Registration Statement, file #
333-113020.
|
|
(9)
|
Denotes
previously filed exhibit: filed on August 11, 2004 with Xfone's,
Inc.SB-2
Amendment 3 Registration Statement, file # 333-113020.
|
|
(10)
|
Denotes
previously filed exhibit: filed on September 13, 2004 with Xfone's,
Inc.SB-2 Amendment 4 Registration Statement, file #
333-113020.
|
|
(11)
|
Denotes
previously filed exhibits: filed on October 4, 2004 with Xfone, Inc.‘s
Form 8-K
|
|
(12)
|
Denotes
previously filed exhibits: filed on November 29, 2004 with Xfone,
Inc.‘s
Form 8-K.
|
|
(13)
|
Denotes
previously filed exhibits; filed on March 31, 2005 with Xfone, Inc.‘s Form
10-KSB.
|
|
(14)
|
Denotes
previously filed exhibit: filed on August 22, 2005 with Xfone, Inc.‘s Form
8-K.
|
|
(15)
|
Denotes
previously filed exhibit: filed on August 31, 2005 with Xfone, Inc.‘s Form
8-K.
|
|
(16)
|
Denotes
previously filed exhibits: filed on October 3, 2005 with Xfone, Inc.‘s
Form 8-K.
|
|
(17)
|
Denotes
previously filed exhibits: filed on October 11, 2005 with Xfone,
Inc.‘s
Form 8-K/A #1.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/Guy
Nissenson
|
|
Chief
Executive Officer, President and Director
|
|
November
18, 2005
|
Guy
Nissenson
|
|
|
|
|
|
|
|
|
|
/s/
Alon Mualem
|
|
Chief
Financial Officer
|
|
November
18, 2005
|
Alon
Mualem
|
|
|
|