UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 333-67232
XFONE, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
11-3618510
(I.R.S. Employer Identification Number)
960 High Road
London, United Kingdom N12 9RY
(Address of principal executive offices) (Zip Code)
011.44.2084469494
(Registrant's telephone number, including area code)
All Correspondence to:
Brenda Lee Hamilton, Esquire
Hamilton, Lehrer and Dargan, P.A.
2 East Camino Real, Suite 202
Boca Raton Florida 33432
561-416-8956
Registrant has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months and has been
subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practical date:
On March 31, 2003, the issuer had 5,071,539 shares of common stock outstanding,
no par value per share.
Xfone, Inc. and Subsidiary
FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31 2003.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets As of March 31, 2003 (Unaudited)
and as of December 31, 2002......................................5 - 6
Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2003 and Year end at December 31, 2002.............7
Statement of Changes in Shareholders' Equity For the Three
Months Ended March 31, 2003........................................8
Statements of Cash Flow (Unaudited) For the Three Months
Ended March 31, 2003 and Year end at December 31, 2002...........9 - 10
Notes to Consolidated Financial Statements...........................11
Item 2 - Management's Discussion and Analysis and Plan of
Operations.........................................................24
Item 3 - Controls and Procedures.....................................26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...........................................27
Item 2 - Changes in Securities and Use of Proceeds...................27
Item 3 - Default Upon Senior Securities..............................27
Item 4 - Submission of Matters to a Vote of Security Holders.........27
Item 5 - Other Information...........................................27
Item 6 - Exhibits and Reports on Form 8-K............................28
Signatures...........................................................29
2
PART I - FINANCIAL INFORMATION
Forward-Looking Statements
This quarterly report for the period ended March 31, 2003 on Form 10-QSB
contains forward looking statements. The words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements". Actual results could differ materially
from those projected in the forward looking statements as a result of a number
of risks and uncertainties. Statements made herein are as of the date of the
filing of this Form 10-QSB with the Securities and Exchange Commission and
should not be relied upon as of any subsequent date. Unless otherwise required
by applicable law, we do not undertake, and we specifically disclaim any
obligation, to update any forward-looking statements to reflect occurrences,
developments, unanticipated events or circumstances after the date of such
statement.
3
Item 1 - Financial Statements
Xfone, Inc. and Subsidiary
CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2003
CONTENTS
PAGE
Balance Sheet 5-6
Statement of Operations 7
Statement of Changes in Shareholders' Equity 8
Statement of Cash Flows 9-10
Notes to Consolidated Financial Statements 11-23
4
Xfone, Inc. and Subsidiary
BALANCE SHEET
March December March December
2003 2002 2003 2002
(Unaudited) (Unaudited)
----------- ----------- ---------- ----------
Convenience translation
into U.S.$
Current assets
Cash £ 631,645 £ 471,963 $ 994,842 $ 755,141
Accounts receivable, net 922,908 960,729 1,453,580 1,537,166
Prepaid expenses and other
receivables (Note 4) 132,863 180,585 209,260 288,936
Loan to shareholder (Note 5) 45,558 45,558 71,754 72,893
----------- ----------- ---------- ----------
Total Current Assets 1,732,975 1,658,835 2,729,435 2,654,136
----------- ----------- ---------- ----------
Loan to shareholder (Note 5) 232,666 257,572 366,449 412,115
----------- ----------- ---------- ----------
Investments (Note 6) 515 515 811 824
Fixed assets (Note 6)
Cost 597,790 559,471 941,520 895,154
Less - accumulated depreciation -321,273 (306,577) -506,005 -490,523
----------- ----------- ---------- ----------
Total fixed assets 277,032 253,409 436,326 405,454
----------- ----------- ---------- ----------
Total assets £2,242,673 £ 2,169,816 $3,532,210 $3,471,706
=========== =========== ========== ==========
5
Xfone, Inc. and Subsidiary
BALANCE SHEET, Cont'd
March December March December
2003 2002 2003 2002
(Unaudited) (Unaudited)
----------- ----------- ---------- ----------
Convenience translation
into U.S.$
Current liabilities
Dividend payable £ - £ 63,261 $ - $ 101,218
Notes payable - current portion
(Note 8) 4,000 4,000 6,300 6,400
Trade payables 1,280,262 1,176,183 2,016,413 1,881,893
Other liabilities and accrued
expenses (Note 7) 160,298 197,053 252,469 315,285
Obligations under capital
leases - current portion 21,530 21,530 33,909 34,448
----------- ----------- ---------- ----------
Total current liabilities 1,466,090 1,462,027 2,309,091 2,339,243
Deferred taxes 25,000 25,000 39,375 40,000
Notes payable (Note 8) 6,166 7,167 9,712 11,467
Obligation under capital lease 28,085 34,026 44,233 54,442
----------- ----------- ---------- ----------
Total liabilities £ 1,525,341 £ 1,528,220 $2,402,412 $2,445,152
----------- ----------- ---------- ----------
Shareholders' equity (Note 9)
Preferred stock - 50,000,000
shares authorised, none
issued
Common stock:
25,000,000 shares authorised,
£.0006896 par value;
5,071,539 issued and
outstanding 3,490 3,490 5,497 5,584
Contributions in excess
of shares 184,981 180,219 291,345 288,350
Receipt on account of shares 0
Retained earnings 528,861 457,887 832,956 732,619
----------- ----------- ---------- ----------
Total shareholders' equity 717,332 641,596 1,129,798 1,026,554
----------- ----------- ---------- ----------
Total liabilities and
shareholders' equity £ 2,242,673 £ 2,169,816 $3,532,210 $3,471,706
=========== =========== ========== ==========
6
Xfone, Inc. and Subsidiary
STATEMENT OF OPERATIONS
Three Months Three Months Year Ended Three Months Three Months Year
Ended
Ended Ended Ended Ended
Mar-03 Mar-02 Dec-02 Mar-03 Mar-02 Dec-02
----------- ----------- ------------ ------------ ------------ ------------
Convenience translation into U.S.$
Revenues £ 1,074,662 £ 913,920 £ 3,761,147 $ 1,692,593 $ 1,325,184 $6,017,835
Cost of revenues (573,975) (574,182) (2,194,792) (904,011) (832,564) (3,511,667)
----------- ----------- ------------ ------------ ------------ ------------
Gross profit 500,687 339,738 1,566,355 788,581 492,620 2,506,168
----------- ----------- ------------ ------------ ------------ ------------
Operating expenses: (Note 13)
Research and development (9,000) (7,500) (32,000) (14,175) (10,875) (51,200)
Marketing and selling (199,311) (60,448) (320,418) (313,915) (87,650) (512,669)
General and administrative (200,202) (171,081) (878,335) (315,318) (248,067) (1,405,336)
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses (408,513) (239,029) (1,230,753) (643,408) (346,592)
(1,969,205)
----------- ----------- ------------ ------------ ------------ ------------
Operating profit £ 92,174 £ 100,709 £ 335,602 $ 145,174 $146,028 $536,963
Financing expenses - net
(Note 13) (7,355) (10,366) (12,837) (11,584) (15,031) (20,539)
Other income £ 3,154 £ 1,273 £ 11,029 $ 4,968 $1,846 $17,646
Income before taxes 87,974 91,616 333,794 138,558 132,843 534,070
Taxes on income (17,000) (22,904) (92,813) (26,775) (33,211) (148,501)
----------- ----------- ------------ ------------ ------------ ------------
Net income £ 70,974 £ 68,712 £ 240,981 $ 111,783 $ 99,632 $ 385,570
=========== =========== ============ ============ ============ ============
Earnings Per Share:
Basic £ 0.01 £ 0.01 £ 0.05 $ 0.02 $ 0.01 $ 0.08
=========== =========== ============ ============ ============ ============
Diluted £ 0.01 £ 0.01 £ 0.04 $ 0.02 $ 0.01 $ 0.06
=========== =========== ============ ============ ============ ============
7
Xfone, Inc. and Subsidiary
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Number of Contributions Total
Ordinary Share in excess of Retained Shareholders'
Shares Capital par value Earnings Equity
----------- ------- ------------- --------- -------------
Balance at January 1, 2002 5,000,000 £ 3,448 £ 140,865 £ 280,167 £ 424,480
Issuance of shares 60,889 42 39,354 - 39,396
Net income - - - 240,981 240,981
Dividend payable (63,261) (63,261)
----------- ------- ------------- --------- -------------
Balance at December 31, 2002 5,060,889 £ 3,490 £ 180,219 £ 457,887 £ 641,596
=========== ======= ============= ========= =============
Balance at January 1, 2003 5,060,889 £ 3,490 £ 180,219 £ 457,887 £ 641,596
Issuance of shares 10,650 - 4,762 - 4,762
Net income - - - 70,974 70,974
Dividend payable - -
----------- ------- ------------- --------- -------------
Balance at March 31, 2003 5,071,539 £ 3,490 £ 184,981 £ 528,861 £ 717,332
=========== ======= ============= ========= =============
Convenience translation into U.S.$:
Balance at January 1, 2003 5,060,889 $ 5,584 $ 288,350 $ 732,619 $ 1,026,554
Issuance of shares 10,650 0 7,500 0 7,500
Net income - 0 0 111,784 111,784
Change of currency rates (87) (4,505) (11,447) (16,039)
Dividend payable - -
----------- ------- ------------- --------- -------------
Balance at March 31, 2003 5,071,539 $ 5,497 $ 291,345 $ 832,956 $ 1,129,799
=========== ======= ============= ========= =============
8
Xfone, Inc. and Subsidiary
STATEMENTS OF CASH FLOWS
Three months Year Three months Year
Mar-31 Dec-31 Mar-31 Dec-31
2003 2002 2003 2002
------------ ---------- ----------- ----------
Convenience translation
into U.S.$
Cash flow from operating activities
Net income £ 70,974 £ 240,981 $ 111,784 $ 385,570
Adjustments to reconcile net cash
provided by (used in) operating activities 129,207 107,169 203,502 171,470
---------- ---------- ----------- ----------
Net cash provided by operating activities 200,181 348,150 315,286 557,040
---------- ---------- ----------- ----------
Cash flow from investing activities
Investments made in year - (515) - (824)
Purchase of equipment (38,319) (152,757) (60,352) (244,411)
Net cash used in investing activities (38,319) (153,272) (60,352) (245,235)
---------- ---------- ----------- ----------
Cash flow from financing activities
Repayment of long term debt (6,942) (9,970) (10,934) (15,952)
Proceeds from issuance of long term debt - - - -
Proceeds from issuance of common stock 4,762 7,812 7,500 12,499
Net cash provided by financing activities (2,180) (2,158) (3,434) (3,453)
---------- ---------- ----------- ----------
Net increase in cash 159,682 192,720 251,501 308,352
Cash, beginning of year 471,963 279,243 743,342 446,789
Cash at end of year £ 631,645 £ 471,963 $ 994,842 $ 755,141
========== ========== =========== ==========
Supplement disclosures of cash flow information
Net cash paid during the first year for:
Income taxes £ - £ 41,723 $ - $ 66,757
========== ========== =========== ==========
Interest £ - £ 12,816 $ - $ 20,506
========== ========== =========== ==========
9
Xfone, Inc. and Subsidiary
STATEMENTS OF CASH FLOWS (Cont.)
(1) Adjustments to reconcile net income to net cash provided by operating activities
Three months Year Three months Year
Mar-31 Dec-31 Mar-31 Dec-31
2003 2002 2003 2002
------------ ---------- ----------- ----------
Convenience translation
into U.S.$
Depreciation £ 14,696 £ 58,300 $ 23,146 $ 93,280
---------- ---------- ----------- ----------
Stock issued for professional services - 31,546 - 50,474
---------- ---------- ----------- ----------
Changes in assets and liabilities:
(Increase) in trade receivables 37,820 (233,770) 59,567 (374,032)
(Increase) decrease in other receivables 47,722 (65,570) 75,162 (104,912)
(Increase) in shareholder loans 24,906 (20,783) 39,227 (33,253)
(Decrease ) In Dividend payable (63,261) - - -
Increase in trade payables 104,079 214,607 163,924 343,371
(Decrease) in other payables (36,755) 117,839 (57,889) 188,542
Increase in deferred taxes - 5,000 - 8,000
---------- ---------- ----------- ----------
Total adjustments 114,511 17,323 279,991 27,717
---------- ---------- ----------- ----------
£ 129,207 £ 107,169 $ 303,137 $ 171,470
========== ========== =========== ==========
10
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organisation and Nature of Business
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 financial statements
consolidate the operations of Xfone and Swiftnet Limited. ("Swiftnet") (the
"Predecessor"), its wholly owned U.K. subsidiary, (collectively the
"Company") from January 1, 2000 through March 31, 2003 (see Note 3).
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.
Transactions and balances denominated in Sterling are presented at their
original amounts. Transactions and balances in other currencies are
translated into Sterling in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52 of the U.S. Financial Accounting
Standards Board ("FASB"). Accordingly, items have been translated as
follows: Monetary items - at the exchange rate effective at the balance
sheet date. Revenues and expense items - at the exchange rates in effect at
the date of recognition of those items. Exchange gains and losses from the
aforementioned translation are included in financing expenses, net.
C. The financial statements have been translated into U.S. dollars using the
rate of exchange of the U.S. dollar at December 31, 2002 and March 31,
2003. 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
December 31, 2002 was £1 = 1.60 U.S.$, and at March 31, 2003 was £1 = 1.575.
11
Xfone, Inc. and Subsidiary
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
subsidiary. All significant inter-company balances and transactions have
been eliminated in consolidation.
B. Allowance for Doubtful Accounts
The allowance is determined based upon management's evaluation of
receivables doubtful of collection on a specific basis. Such allowances for
doubtful accounts are as follows:
£
December 31,2002 190,550
March 31,2003 61,274
C. 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 4 years
Furniture and fixtures reducing balance 4 years
Motor vehicles reducing balance 4 years
D. 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.
12
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 2 - Significant Accounting Policies (Cont.)
E. Revenue Recognition (cont.)
Management believes that the Company's revenue recognition policies are in
accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101).
F. Use of Estimated
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 reports amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
G. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143 "Accounting For Asset Retirement Obligations2 which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs; SFAS No. 141 "Business Combinations", which addresses the
financial accounting and reporting for business combinations; SFAS No. 142
"Goodwill and Other Intangible Assets", which addresses the financial
accounting and reporting of acquired goodwill and other intangible assets.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
of Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets. The adoption of these
statements are not expected to have a material effect on the Company's
financial condition, results of operations or cash flows.
H. Earnings Per Share
Earnings per share are calculated and reported in accordance with Statement
of Financial Accounting Standards No. 128, Earning Per Share ("EPS") ("SFAS
128"). Basic 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 that then shared in the earnings of the
entity.
13
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 2 - Significant Accounting Policies (Cont.)
I. Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which is an asset and
liability approach that requires the recognition of deferred tax assets for
the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns.
Note 3 - Pooling of Interests
On October 4, 2000 Xfone acquired Swiftnet Ltd. ("Swiftnet") in a business
combination accounted for as a pooling of interests. Swiftnet, which engages in
the telecommunications industry, became a wholly owned subsidiary of Xfone
through the exchange of 2,400,000 shares of the Company's common stock for all
of the outstanding stock of Swiftnet. From September 7, 2000, date of formation,
through October 4, 2000, date of combination, the Company had minimal operating
activity. The accompanying financial statements for 2000 are based on the
assumption that the companies were combined for the full year and financial
statements of prior years have been restated to give effect to the combination.
14
Xfone, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 4 - Prepaid Expenses and Other Receivables
March 31, March 31,
2003 2003
---------- --------------------
Convenience
translation into US$
Due from Swiftglobal, Ltd.
(non-affiliated entity) £ 54,775 $ 86,270
Other prepaid expenses 66,127 104,150
Others receivables 11,961 18,839
£ 132,863 $ 209,260
========== ===========
Note 5 - Loan to Shareholders
The Company has a non-interest bearing demand loan of £45,558 due from
shareholders. In addition, the Company has a non-interest bearing loan of
£232,666 due from such shareholders which has been classified as due in
over one year.
15
Xfone, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Mar-31 Mar-31
2003 2003
---------- --------------------
Note 6 - Fixed Assets Convenience
translation into US$
Cost
Machinery and equipment £ 298,637 $ 470,353
Office furniture and equipment 68,083 107,230
Motor vehicle 35,000 55,125
Development costs 32,060 50,495
Property held under capital lease - -
Switching equipment 164,011 258,317
---------- --------------
£ 597,790 $ 941,520
Accumulated Depreciation
Machinery and equipment 211,935 333,797
Office furniture and equipment 48,931 77,067
Motor vehicle 24,617 38,772
Development costs 10,019 15,780
Property held under capital lease - -
Switching equipment 25,771 40,590
---------- --------------
£ 321,273 $ 506,005
========== =============
Note 6 - Investments
Holdings of more than 20%
The company holds more than 20% of the share capital of the following
companies:
Company Country of Incorporation Class Shares held %
Auracall Limited England and Wales Ordinary 47
Story Telecom Limited England and Wales Ordinary 40
16
Xfone, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
March March
2003 2003
--------- -----------
Note 7 - Other Liabilities and Accrued Expenses
Corporate taxes £ 85,000 $ 133,876
Professional fees 41,375 65,166
Payroll and other taxes 15,644 24,639
Others 18,279 28,789
--------- -----------
£160,298 $ 252,469
========= ===========
Note 8 - Notes Payable
March March
2003 2003
--------- -----------
Convenience
translation
into US$
First National Finance - maturity 2005,
annual interest rate 7.16% £ 5,500 $ 8,662
Newcourt - maturity 2005, annual
interest rate 7.16% 4,667 7,350
--------- -----------
10,167 16,012
Less: current portion (4,000) (6,300)
--------- -----------
Notes payable - non current £ 6,167 $ 9,712
========= ===========
17
Xfone, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 8 - Notes Payable (cont.)
B. Maturities of notes payable are as follows
Convenience
translation into U.S.$
----------------------
March 31
--------
Year 1 £ 4,000 $ 6,300
Year 2 4,000 6,300
Year 3 1,167 1,838
------- ----------
£ 9,167 $ 14,438
======= ==========
Note 9 - Capital Lease Obligations
The Company is the lessee of switching equipment under capital leases expiring
in various years through 2005. 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 expenses for 2002.
Minimum future lease payments under capital leases as of March 31, 2003 for each
of the next five years are:
Convenience
translation
into U.S.$
March 31 -----------
--------
Year 1 £ 25,529 $ 40,208
Year 2 25,529 40,208
Year 3 9,920 15,624
-------- --------
Total minimum lease payments 60,978 96,040
Less: amount representing interest (9,943) (15,660)
-------- --------
Present value of net minimum lease payment £ 51,035 $ 80,380
======== ========
Interest rates on capitalized leases vary up to 9.6%
18
Xfone, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 10 - Income Taxes
The Company accounts for income taxes under the provisions of SFAS 109. SFAS No.
109 requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statement and tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax loss and tax credit carryforward. SFAS 109, additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
The following table reflects the Company's deferred tax assets and (liabilities)
at March 31, 2003:
Convenience
translation
into U.S.$
-----------
Accelerated tax writeoff of fixed assets £ 25,000 $ 39,375
-------- --------
Net deferred liability £ 25,000 $39,375
======== ========
19
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 11 - Capital Structure
Campbeltown Business Ltd., a shareholder, has the option from the Company and
one of its directors to purchase 500,000 additional shares of Xfone for the
amount of $200,000. This transaction can be executed either by Xfone issuing new
shares, or by the director selling his private shares as long as he has an
adequate amount of shares, as the director will decide. This option will expire
on December 31, 2005.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The common stock
has no pre-emptive or conversion rights or other subscription rights. There are
no sinking fund provisions applicable to the common stock.
During November 2001, the Company issued 105,000 shares of common stock to its
attorneys as compensation for services rendered in connection with the
successful initial registration and offering of the Company's shares which was
effective December 28, 2001. The value of the stock at the time of its issuance
was charged to professional fees. During July 2001, the Company issued 95,000
shares of common stock to the Swiftnet Management Fund to be distributed by such
fund at will.
20
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 12 - Earnings Per Share
2002
Weighted Average
--------------------------------------------------------
Income Shares Per Share Per Share
(Numerator) (Denominator) Amounts Amounts
--------------------------------------------------------
Convenience
translation
into U.S.$
--------------------------------------------------------
Net Income £ 240,981
Basic EPS:
Income available to common stockholders 240,981 5,033,444 £ 0.05 $0.08
Effect of dilutive securities:
Options - 500,000
Basic EPS:
Income available to common stockholders £ 240,981 5,533,444 £ 0.04 $0.07
2001
Weighted Average
--------------------------------------------------------
Income Shares Per Share Per Share
(Numerator) (Denominator) Amounts Amounts
--------------------------------------------------------
Convenience
translation
into U.S$
--------------------------------------------------------
Net Income £ 145,606
Basic EPS:
Income available to common stockholders 145,606 4,848,333 £ 0.03 $0.05
Effect of dilutive securities:
Options - 500,000
Basic EPS:
Income available to common stockholders £ 145,606 5,348,333 £ 0.03 $0.04
21
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 13 - Selected Statement of Operations Data
Three Months Ended Year Ended Three Months Ended Year Ended
31-Mar 31-Dec 31-Mar 31-Dec
2003 2002 2003 2002
------------------ --------------- ------------------ --------------
Convenience translation into U.S.$
-----------------------------------
A. Marketing & Selling:
Distribution costs £ - £ - $ - $ -
Salaries & benefits - - - -
Advertising 5,086 22,401 8,010 35,842
Consultancy 11,570 59,372 18,222 94,995
Commissions 182,655 174,835 287,682 279,736
Others - 63,810 - 102,096
------------------ --------------- ------------------ --------------
£ 199,311 £ 320,418 $ 313,915 $ 512,669
================== =============== ================== ==============
B. General & Administrative:
Salaries & benefits £ 65,908 268,884 $ 103,806 $ 430,214
Rent & maintenance 22,314 90,916 35,144 145,466
Communications 8,534 11,539 13,442 18,462
Professional fees 55,532 142,863 87,462 228,581
Bad debts - 226,984 - 363,174
Depreciation 14,697 58,300 23,147 93,280
Others 33,217 78,849 52,317 126,158
------------------ --------------- ------------------ --------------
£ 200,202 £ 878,335 $ 315,318 $ 1,405,336
================== =============== ================== ==============
22
Xfone, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 13 - Selected Statement of Operations Data (cont.)
Three Months Ended Year Ended Three Months Ended Year Ended
31-Mar 31-Dec 31-Mar 31-Dec
2003 2002 2003 2002
------------------ --------------- ------------------ --------------
Convenience translation into U.S.$
-----------------------------------
C. Financing Expenses, Net:
Bank interest & charges £ 4,121 £ 1,607 $ 6,593 $ 2,571
Hire purchase interest 968 8,476 1,549 13,562
Foreign currency exchange (3,219) 21 (5,150) 34
Other interest and charges 5,485 2,733 8,776 4,373
------------------ --------------- ------------------ --------------
£ 7,355 £ 12,837 $ 11,767 $ 20,539
================== =============== ================== ==============
Note 14 - Related Party Transactions
Three Months Ended Year Ended Three Months Ended Year Ended
31-Mar 31-Dec 31-Mar 31-Dec
2003 2002 2003 2002
------------------ --------------- ------------------ --------------
Convenience translation into U.S.$
-----------------------------------
Shareholders' salaries £ 15,000 £ 42,000 $ 23,625 $ 67,200
Shareholders' pensions - -
Campbeltown Business Ltd.
Consulting fees £ 23,717 £ 59,372 $ 37,354 $ 94,995
Note 15 - Financial Commitments
The Company has annual rent commitments under a non-cancellable operating lease
of £38,200, which terminates in 2012.
23
Item 2 - Management's Discussion and Analysis and Plan of Operations
The following and analysis provides information that we believe is relevant to
our results of operations and an assessment of our financial condition, and
should be read in conjunction with our financial statements and related notes
appearing elsewhere in the Form 10-QSB. This discussion and analysis contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections overview. The words or phrases "believe," "expect,"
"may," "anticipates," or similar expressions are intended to identify "forward-
looking statements." Actual results could differ materially from those projected
in the forward-looking statements as as result of a number of risks and
uncertainties pertaining to our long distance, voice and data communications
services business. The terms "Company," "we," "our" or "us" are used in this
discussion to refer to Xfone, Inc. and its wholly owned subsidiary, Swiftnet.
Three Months Ended March 31, 2003 and 2002
Consolidated Statement of Operations
Revenues. Revenues for the three months ended March 31, 2003 increased by 18% to
£1,074,662 ($1,692,593) from £913,920 ($1,439,424) for the same period in 2002.
The increase in revenues is attributed mainly to growth in revenues generated
from our voice telephony services.
Cost of Revenues. Cost of revenues consists primarily of traffic time purchased
from telephone companies and other related charges. Cost of revenues was not
materially changed, with £573,975 ($904,011) for the three months ended
March 31, 2003 and £574,182 ($904,337) for the three months ended March 31, 2002,
representing 53.4% and 62.8% of the total revenues for the three months ended
March 31, 2003 and March 31, 2002, respectively. The absence of any material
change in the cost of revenues is attributable to lower rates that the Company
negotiated and concluded with its largest suppliers.
Gross Profit. Gross profit is total revenues less cost of revenues. Gross profit
excludes general corporate expenses, finance expenses and income tax. For the
three months ended March 31, 2003 and 2002, respectively, gross profit was
£500,687 ($788,581) and £339,738 ($535,087), which represents a 47% increase.
The gross profit as a percentage of revenues increased to 46.6% for the three
months ended March 31,2003, from 37.2% for the three months ended March 31,
2002. The increase of the gross profit as a percentage of revenues is attributed
to the lower rates that the Company paid in the three months ended March 31,
2003.
Research and Development. Research and development expenses were £9,000
($14,175) and £7,500 ($11,812) for the three month ended March 31, 2002
and 2001, respectively, representing 0.8% and 0.8% of revenues of the three
months ended March 31, 2003 and 2002, respectively. The expenses consist of
labor costs of the research and development manager and other related costs.
Main developments relate to the development of the Xfone web site and its
interconnections, the upgrade of software for our telephone platforms, billing
systems, messaging services, and the resellers support package.
Marketing and Selling Expenses. Marketing and selling expenses increased to
£199,311 ($313,915) from £60,448 ($95,206) for the three months ended March
31, 2003 and 2002, respectively. Marketing and selling expenses as percentage of
revenues were 18.5% and 6.6% for the three months ended March 31, 2003 and 2002,
respectively. The increase in marketing expenses is attributable to the
increasing revenues derived from commission related activities.
General and Administrative Expenses. General and administrative expenses
increased to £200,202 ($315,318) for the three months ended March 31,
2003, from £171,081 ($269,452) for the three months ended March 31,2002.
As a percentage of revenues General and administrative expenses remained
essentially unchanged at 18.6% for the three months ended March 31, 2003 and
18.7% for the three months ended March 31, 2002.
Financing Expenses. Financing expenses, net, increased to £7,355 ($11,584)
for the three months ended March 31, 2003 from £10,366 ($16,326) for the
year ended December 31, 2002.
24
Income Before Taxes. Income before taxes for the three months ended March 31,
2003 decreased by 4% to £87,974 ($138,558) from £91,616 ($144,295) for the three
months ended March 31, 2002. The decrease of the income before taxes is
attributable primarily to the increase of our marketing costs and currency
fluctuation. Income before taxes as a percentage of revenues was 10% for the
three months ended March 31, 2003 and 9.4% for the three months ended March 31,
2002.
Taxes on Income. Taxes on income for the three months March 31, 2003 amounted to
£17,000 ($26,775), which represents 16% of the income before taxes as compared
with £22,904 ($36,073) for the three months ended March 31, 2002.
Net Income. Net income for the three months ended March 31, 2002 amounted to
£70,974 ($111,783) and represents 6.6% of the revenues, as compared with
£68,712 ($108,221) for the three months ended March 31, 2001 that represent
7.5% of the revenues.
Earning per share
The earning per share for the three months ended March 31, 2003 was £0.014
($0.02) for the basic 5,071,539 Shares and £0.013 ($0.02) for diluted
number of shares including the option to buy 500,000 shares.
Balance Sheet
Current Assets. Current Assets amounted to £1,920,083 ($3,024,130) as of
March 31, 2003 as compared to £1,658,835 ($2,612,665) as of December 31,
2002. This increase in our current assets is mainly attributable to the growth
in our revenues and cash positions.
Loan to shareholder. Loan to shareholder, Mr. Abraham Keinan, our chairman of
the board, amounted to £278,224 ($438,202) as of March 2003, as compared to
£303,130 ($477,429) as of December 31,2002. As of March 31, 2003
£45,558 ($72,893) of the loan is classified as a current asset.
Fixed assets. Fixed assets after accumulated depreciation increased to
£277,032 ($436,326) as of March 31, 2003 as compared with £252,894
($398,308) as of December 31, 2002.
Current Liabilities. As of March 31, 2003 Current Liabilities increased by
£4,063 ($6,399) to £1,466,090 ($2,309,091) as compared with
£1,462,027 ($2,302,692) as of December 31, 2002.
Liquidity and Capital resources March 31 2003.
Net cash provided by operating activities for the three months ended March 31,
2003 was £200,181 ($315,286). The cash provided by operating activities
was primarily attributable to our increase in trade payables and our net income.
Cash at March 31, 2003 amounted to £631,645 ($994,842) an increase of
£159,682 ($239,701) since December 31,2001.
Our commitments for capital expenditures as of December 31, 2002 were
£46,149 ($66,916). The purpose of the commitment was buying equipment.
We shall continue to finance our operations and fund the commitments for capital
expenditures mainly from the cash provided from operating activities. We believe
that our future cash flow from operations together with our current cash will be
sufficient to finance our activities through the years 2003 and 2004. We plan
to raise money through a public or private placement to fund the implementation
of an expanding operational plan.
25
Impact of Inflation and Currency Fluctuations.
As of March 31, 2003 we deal with only two currencies, British Pounds and United
States Dollars. Even when we do business in other countries rather than the
United Kingdom or the United States we sell and buy in either U.K. Pounds or
U.S. Dollars.
Most of our revenues and Current Assets are in British Pounds, the long-term
loan to a shareholder is all in U.K. Pounds.
Our Cost of Revenues is all in British Pounds, most of our liabilities,
operating and financing expenses are in British Pounds. The remainder of the
Assets, Liabilities, Revenues and expenditures are in U.S. Dollars.
A devaluation of the U.K. Pound in relation to the U.S. Dollar will have the
effect of decreasing the Dollar value of all assets or liabilities that are in
U.K. Pounds.
Conversely, any increase in the value of the U.K. Pound in relation to the
Dollar has the effect of increasing the Dollar value of all U.K. Pounds assets
and the Dollar amounts of any U.K. liabilities and expenses.
Inflation would affect our operational results if we shall not be able to match
our Revenues with our expenses.
If rate of inflation will cause a raise in salaries or other expenses and the
market conditions will not allow us to raise prices proportionally, it will have
a negative effect on the value of our assets and on our profitability.
Item 3. Controls and Procedures
As of March 31, 2003, the end of the period covered by this report, an
evaluation was performed under the supervision and with the participation of our
management, including our Principal Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including our
Principal Executive Officer and Principal Financial Officer, concluded that our
disclosure controls and procedures were effective as of March 31, 2003.
There have been no significant changes in our internal control over financial
reporting during the last quarter, which ended March 31, 2003, that have
materially affected or are reasonably likely to materially affect, our internal
control over financial reporting.
26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits
Exhibit
Number Description
------- -----------
2. Agreement and plan or reorganization between Xfone, Inc. and Swiftnet
Ltd. dated September 20, 2000*
3.1 Articles of Incorporation of Xfone, Inc.*
3.2 Bylaws of Xfone, Inc.*
3.3 Articles of Incorporation of Swiftnet Ltd.*
3.4 Bylaws of Swiftnet Ltd.*
4. Specimen Stock Certificate*
10.1 Agreement between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000*
10.2 Employment Agreement with Bosmat Houston dated January 1, 2000*
10.3 Loan Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated
August 5, 2000*
10.4 Promissory Note executed between Xfone and Swiftnet Ltd. dated
September 29, 2000*
10.5 Stock Purchase Agreement between Swiftnet Ltd, Abraham Keinan, and
Campbeltown Business, Ltd. dated September 19, 2000*
10.6 Consulting Agreement between Swiftnet Ltd. and Campbeltown Business,
Ltd. dated May 5, 2000*
10.7 Agreement with Campbeltown Business Ltd. dated July 30, 2001*
10.8 Contract with WorldCom International Ltd. dated September 20, 1998*
10.9 Contract with VoiceNet Inc. dated April 11, 2000*
10.10 Contract with InTouchUK.com Ltd. dated April 25, 2000*
10.11 Letter of Understanding from Campbeltown Business Ltd. to Xfone, Inc.
dated July 30, 2001**
10.12 Agreement between Adar International, Inc./Mr. Sidney J. Golub and
Swiftnet Ltd. dated April 6, 2000**
10.13 Lease Agreement between Elmtree Investments, Ltd. and Swiftnet Ltd.
dated December 4, 1991**
10.14 Lease Agreement between Postwick Property Holdings Limited and Swiftnet
Ltd. dated October 8, 2001**
21. List of Subsidiaries*
23. Consent of Chaifetz & Schreiber, P.C.***
24. Consent of Hamilton, Lehrer & Dargan, P.A. included in Exhibit 5*
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Denotes previously filed exhibits: filed on August 10, 2001 with Xfone,
Inc.'s SB-2 Registration Statement, File # 333-67232, hereby
incorporated by reference.
** Denotes previously filed exhibits: filed on October 16, 2001 with
Xfone, Inc.'s SB-2/Amendment 1 Registration Statement, File #
333-67232, hereby incorporated by reference.
*** Denotes previously filed exhibit: filed on November 28, 2001 with
Xfone, Inc.'s SB-2/Amendment 2 Registration Statement, File #
333-67232, hereby incorporated by reference.
We hereby incorporate the following additional documents by reference: (a) our
Forms 10-KSB for the year ended December 31, 2001 which was filed on March 27,
2002, and for the year ended December 31, 2002 which was filed on March 31,
2003; (b) our Registration Statement on Form SB-2 and all amendments thereto
which was filed on August 10, 2001 and amended on October 16, 2001, November 28,
2001, December 27, 2001, December 28, 2001, February 4, 2002, March 3, 2003, and
April 8, 2003; (c) our Forms 10-QSB for the periods ended March 31, 2002 which
was filed on May 14, 2002, June 30, 2002 which was filed on August 13, 2002 and
amended on August 20, 2002, and September 30, 2002 which was filed on November
14, 2002.
b) Reports on Form 8-K
None
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 20, 2004 XFONE, INC.
By: /s/ Guy Nissenson
Guy Nissenson, President/Chief
Executive Officer